International Business Concepts 1-25 PDF

International business Volume I: Concepts 1 to 25 on Strategy Concept 1: 5 steps in strategy 1) Define purpose with stakeholders 2) External analysis: external elements will change your strategy 3) Internal analysis 4) Define strategy: you take a couple of elements into account 5) Implemen...

International business Volume I: Concepts 1 to 25 on Strategy Concept 1: 5 steps in strategy 1) Define purpose with stakeholders 2) External analysis: external elements will change your strategy 3) Internal analysis 4) Define strategy: you take a couple of elements into account 5) Implement Concept 2: Stakeholders analysis Categories of stakeholders: All these people together will define your road Personnel is the most important one, because they’re the future of the company 1 Concept 3: Business purpose VS social purpose Why do we do business? Clear purpose => more efficiency Clear purpose can be business or social related - Business related: e.g. Ritchie -> make the best lemonade in the world - Social related: help to solve a problem in the world, make the world a better place. E.g. Tesla -> in 2021, the global feet of Tesla vehicles, energy storage and solar panels enabled our customers to avoid emitting 8.4 million metric tons of CO2 No purpose is bad, having a purpose is good, having a social purpose is better Concept 4: Social Purpose Business purpose: Health care: loss but added value War: loss and destruction Traditional economy: profit & destruction Old school investment (incl. philanthropy): Typical: business people win money -> give something back to community First step: CSR = corporate social responsibility (e.g. Dripl)  Good citizenship can be viewed as a cost increase but also as an opportunity to develop FSA’s and to improve performance. Second step: impact investment (e.g. AUTHENTICT)  Making money and being good for the society 2 What is the role of CSR? 1. Determine the meaning of ‘corporate citizenship’ in each country where you operate and across all of the firm’s international operations 2. Assess each CSR initiative in terms of its joint contribution to ‘doing well’ and ‘doing good’, and evaluate the longer term business opportunities that CSR activities can create for the firm in host countries 3. Improve working conditions and labor standards at your factories and your suppliers’ by effectively implementing CSR activities 4. Rethink your pricing decisions by trading off profit maximization against fulfilling obligations to society 5. Align your CSR activities to your host country business objectives and the host country socio-economic and institutional context Concept 5: UN Sustainable Development Goals Concept 6: Impact Investment Impact investment = investing money in companies that also do good for society You hope that an investment will bring a financial return, but you don't know if its environmental or social ramifications. Impact investing marries the best of these two approaches by combining the rigorous analytics of financial investing and the heart of philanthropy ultimately, impact investors seek a double bottom line return, both a financial and a social return. Concept 7: Purpose or Greenwash Greenwash = do what you did before but now say that you are ‘green’ The act of providing the stakeholders with misleading/false info about the environmental impact of a company’s products and operations Green is fashionable, being green often comes from a marketing perspective and not from the CEO, not genuine -> Greenwash (=presenting as environmentally responsible for the public image) Example: - Belfius -> they suddenly had a new advertising campaign “We invested your money maximally in Belgian society, in Belgian companies…” We are a good bank because we do this. They do nothing differently than 50 years ago, only now they are advertising. Is it greenwash of genuine? Little bit of both. Trying to do the same thing in the market with a different angle (eco-friendly, fair-trade) 3 Concept 8: External factor - Porter 5 Forces Regulation is missing, because Porter was from the US and there they don’t have regulation But now regulation is seen as the 6th force Concept 9: External Factors – STEEPLE // DESTEP analysis STEEPLE is used to analyze market attractiveness Example: India Concept 10: External Factors – KPMG Innovation Lab Methodology Way to look at the position you’re working 4 Concept 11: Company VS Ecosystem Companies will be more and more ecosystems or part of an ecosystem. They can’t do it on their own they need to work with other companies. Ecosystem: a purposeful business arrangement between two or more entities (the members) to create and share in collective value for a common set of customers Concept 12: External Factors – GE McKinsey -> look at internal & external factors for market attractiveness (when is interesting to be in the market?) Concept 13: External Factors – Capability Maturity 1. Initial: chaotic process, lack of documentation and rapid product changes, uncontrolled 2. Repeatable: some processes are repeatable with consistent results. 3. Defined: defining & documenting the process, identify potential problems & risks 4. Managed: process is managed (collecting data) to measure effectiveness of the process. 5. Optimized: process is constantly being improved through innovations Concept 14: External Factors – Business Cycles Invest in a company -> where is it on the cycle? 5 BCG matrix -> dynamic model, it divides companies in strategic business units Concept 15: Internal Factors – Core Competences 3 questions to judge whether a core competence really is a core competence: - Provides potential access to variety of markets? - Benefits perceived by the end customer? - Difficult to imitate? Characteristics of core competence: - Difficult for competitors to imitate (internal coordination and learning) - Provides potential access to wide variety of markets - Makes a significant contribution to perceived customer benefits from the end products - The loss of a core competence would have an important negative effect on the firm’s present and future performance, in terms of value creation and satisfying stakeholder objectives Concept 16: Internal Factors – GE McKinsey Internal factors that affect competitive strength: Strength of assets & competences Relative cost position Relative brand strength Relative profit margins Market share Distribution strength & production capacity Market share growth Record of tech & innovations Customer loyalty Access to financial resources 6 Concept 17: Internal Factors – Reputation Can you measure a reputation? Concept 18: External & Internal Factors Combined Portfolio overview: GE-McKinsey matrix: 7 Concept 19: Value Drivers Tree & Underlying Value Drivers Understanding of value drivers: you get an EBITDA but by what is it influenced?what ww Concept 20: 9 Levers of Value Where to play? Levers 1–4 consider where a transaction may help drive growth by targeting new markets, products, or services, with each lever prompting a key strategic question: 1. Financial Outcomes / purpose: What should the financial target be, given investor demands, corporate structure and business realities? -> ambitions of a company what do you want to achieve 2. Markets: Which markets bring the greatest growth potential? Where do you want to play? 3. Propositions and Brands: What value propositions are needed to win in the target market? 8  4. Customers and Channels: How do we drive customer attraction, conversion, and retention to increase sales and improve profitability? How to win? Levers 5–9 consider how to extract maximum value from deal execution. Each lever prompts a key strategic question: 5. Core Business Processes: How do we execute our core operations in a way that will strengthen competitive positioning in the marketplace? 6. Technology & Operations Infrastructure: What foundational services, physical assets, information and systems are required to enable the core operations? How can we best leverage advances in delivery models? 7. Governance, Structure & Risk Controls: How does our organization need to be governed, structured, and risk managed to best enable our strategy? 8. People & Culture: Do we have the leadership, capabilities, and corporate culture needed to activate our ambitions? 9. Measures & Incentives: How do we accurately track progress toward our goals and incentivize the right behaviors required to accomplish the ambition? Concept 21: Definition of Strategy – Porter Generic Strategies Differentiation (you’re the best) >< cost leadership strategy (you’re the cheapest) Concept 22: Definition of Strategy – 3C Focus on one strategy but don’t neglect the other 2 - Corporate based strategies: o Efficiency based o Everything needs to be as efficient as possible because it’s already expensive o Company says to customers “you should be happy that we serve you” - Customer based strategies: o Pleasing your customer o Company does anything for the customer - Competitor based strategies: o Following and adapting other brands -> be better than the competition 9 Concept 23: Definition of Strategy – Value Discipline (Tracey & Wiersema) 1) Product leadership : my product is the best, people come from far to buy my product 2) Operational excellent : be efficient and the cheapest, sellers come to you 3) Customer intimacy : great customers relationship, that’s why they buy my product Concept 24: Definition of Strategy – Ansoff Theory: Example: Coca Cola Concept 25: Definition of Strategy – Motivations for Foreign Expansion Foreign direct investment (FDI) = the allocation of resource bundles by MNE in a host country, with the purpose of performing business activities over which the MNE retains strategic control in that country. MNE should engage in FDI only if host country confers location advantage relative to home country 10 4 Motivations for foreign expansion: why go international? 1. Natural resource seeking: search for physical, financial or human resources 2. Market seeking: search for customers in host countries - If this confers higher value to the firm than engaging in an alternative investment project at home - Market seeking ≠ exporting: it also involves business activities in the host country 3. Strategic resource seeking (e.g. move to somewhere the licenser are easier to get): gain access to advanced resources in the sphere of upstream knowledge, downstream knowledge, administrative knowledge or reputational resources - Involves taking over other companies, engaging in alliance activity or becoming an insider in foreign knowledge clusters 4. Efficiency seeking: firm’s desire to capitalize on environmental changes that make specific locations in the MNE’s international network of operations more attractive for the consolidation of concentration of specific activities - Technological break-throughs allowing greater scale economies, more focus on innovation, higher R&D investments, shorter product cycles, reduction of trade and investment barriers Concept 26: 8 Themes of New reality The world is changing very fast: key themes and the questions they raise 11 Volume II concepts 27 to 48 on framework of international business Concept 27: The essence of international business International business strategy = effectively and efficiently matching a multinational enterprise’s (MNE’s) internal strengths (relative to competitors) with the opportunities and challenges found in geographically dispersed environments that cross international borders. Such matching is a precondition to creating value & satisfying stakeholder goals, both domestically and internationally. Components of the unifying framework: The triangle in the model represents the ‘pyramidal’ nature of the firm’s advantages. Upon the broad base of home country external location advantages (LAs) the MNE selectively builds a narrower and distinct set of FSAs that are location- bound and then a typically even narrower initial set of FSAs that are non-location- bound. The circle represents the actual usage of the company-level FSAs in the home country milieu. Bounded rationality and bounded reliability constraints will influence the firm’s strategy for transferring, deploying and exploiting effectively its non-location-bound FSAs across borders (e.g., operating mode choices) The essence of international business strategy: The middle section of the host country triangle illustrates the importance of developing new, LB FSAs in the host country. These LB FSAs complement the FSAs the firm has transferred from the home country, and are critical to achieve the firm’s goals, in terms of accessing and benefiting from the location advantages (LAs) of the host country. If the firm commands insufficient FSAs internally to access and benefit from these LAs, it may draw upon complementary resources of external economic actors to achieve its goals in the host country. The NLB FSAs allow the MNE to connect the two countries’ milieus, as described by the two circles 12 Concept 28: MNE’s resource base Building upon its resource base, as well as its access to location advantages, the MNE will develop stand-alone FSAs (e.g., brand names patents) and routines, and will also engage in resources recombination. FSAs reflect the firm’s distinct strengths vis-à-vis rivals and are the source of its competitive advantage in the marketplace. The MNE’s unique resource base : 1. Physical resources  natural resources, buildings, plant equipment 2. Financial resources  equity and loan capital 3. Human resources  individuals and teams, entrepreneurial and operational skills 4. Upstream knowledge  sourcing, product & process-related technological knowledge 5. Downstream knowledge marketing, sales, clients, distribution and after sales service 6. Administrative knowledge  organizational structure, culture and systems 7. Reputational resources reputation for honest business dealings Concept 29: Routines How to do things? What are the different steps? It’s about the distinct ability to combine further the firm’s resources, in unique ways valued by the firm’s stakeholders. Routines are stable patterns of decisions and actions that coordinate the productive use of resources, and thereby generate value, whether domestically or internationally. The combination ability expressed in routines is a higher-order FSA. Concept 30: Recombination Recombination is the foundation of international business strategy. Artful orchestration of resources, especially knowledge bundles, as a response to differences between national and foreign environments, and to satisfy new stakeholder demands in these foreign environments. Entrepreneurial judgment is at the heart of the MNE’s recombination capability. Precondition to value creation and satisfying stakeholder needs in complex international settings. Concept 31: International Transferability of Firm Specific Advantage (FSA) To overcome additional costs of doing business abroad, MNE must have internal strengths (technological, marketing, administrative knowledge) FSAs do not stop creating value when the border is crossed -> but value can be different between host and home country Facing natural or government-imposed trade barriers -> MNE may transfer some FSAs abroad directly, as intermediate products Exploitation of FSAs abroad can also be done by external factors (licensees) or by network partners (distributors) who may add their own complementary resources 13 Paradox: If the FSA consists of easily codifiable knowledge (i.e., if it can be articulated explicitly, as in a handbook or blueprint), then it can be cheaply transferred abroad, but it can also be easily imitated by other firms (-> easy to explain = easy to copy). Though expensive and time-consuming to transfer tacit knowledge across borders, the benefit to the MNE is that this knowledge is also difficult to imitate. It is often a key source of competitive advantage when doing business abroad. Most important tacit knowledge = the key routines developed by the firm -> these are set by the firms particular external circumstances Location bound FSA’s are not transferable abroad, 4 main types: - Stand-alone resources linked to location advantages (privileged retail locations). - Local marketing knowledge and reputational resources, such as brand names (may not be applicable to a host country context, or valued to the same extent). - Local best practices (routines), such as incentive systems or buyer-supplier relations (may not work abroad). Routines considered highly effective and efficient in one country - Domestic recombination capability (may not work in foreign markets). Even if transferability of the relevant resources were technically possible, this does not mean the transfer of the potential for profitable deployment, i.e. the resource bundles that may be transferable from a technical perspective (the way in which a product is marketed at home), do not constitute an FSA abroad. -> it is not because something is transferable, that it is also economy- friendly transferable Concept 32: Location advantages Entire set of strengths of a location, and accessible by firms in that location. Should always be assessed relative to the strengths of other locations. Instrumental to FSA, can vary widely in their geographical scope, natural resources Concept 33: 4 archetypes of MNE = multinational enterprise Each type has its own specific routine of international FSA transfer. All these types transfer at least some FSAs across borders. Which type of business is the MNE? 1. Centralized exporter: exporter of central products (e.g. Apple: they do very lite adaptations) 2. International projector: exporter of recipes (e.g. Disney, Ford) 3. International coordinator: combines resources of multiple countries (e.g. BP) 4. Multi-centred MNE: multiple home bases (e.g. Phillips, Lafarge) Most large, established MNEs with sophisticated international operations do not simply conform to a single archetype, even if in-depth knowledge on their foundation and early history will typically allow positioning them as one of the four archetypes  Combination of archetypes 1. Centralized exporter -> exporter of central products Standardized products manufactured at home embody the firm’s FSAs (themselves developed on the basis of a favorable home country environment, including local clustering) and make the exporting firm successful in international markets. 14  The home-country based circle and related pyramid connect directly with the location advantages in the host country. This represents the direct link between home country NLB FSAs, and the host country’s LAs (foreign market), without development of new, LB FSAs in the host country, or formal transfer of existing NLB FSAs to the host country (the NLB FSAs are embodied in the centralized exporter’s products). No host country circle is drawn here, as FSAs are not explicitly transferred to – nor actively developed and used in– the host country milieu. Exported products will in many cases simply be consumed, but especially in B2B transactions, these products may still lead to longer-term impacts in the host country milieu, for example through productivity improvements (as is the case with sales of advanced manufacturing equipment) - selling products internationally - when you have a good product which is easy to use - minor value-creating activities abroad - multinational activities occur primarily in the downstream end of the value chain, related to marketing, distribution and logistics - market seeker: FSAs are embodied in its final product 2. International Projector -> exporter of recipes Knowledge-based FSAs developed in the home country are transferred to subsidiaries in host countries. The international projector MNE seeks international expansion by projecting its home country success recipes abroad. The home and host country circles intersect because of the NLB FSAs that the MNE has transferred to its foreign operations, and which are now shared by – and used in– the two geographic milieus. The blank area of LB FSAs in the middle section of the host country triangle on the right, reflects the international projector not developing LB FSAs in the host country, where operations simply clone those prevailing in the home country. Extant NLB FSAs suffice to success and benefit from host country Las - Subsidiaries are clones of the home operations - Relies on professional managers who can act as expatriates or transfer agents of home country success recipes - Clones operations in the host country, replicating its internationally transferable FSAs 15 3. International Coordinator -> combines resources of multiple counties (BP) International operations are specialized in specific value added activities and form vertical value chains across borders. The MNE’s key FSAs are in efficiently linking these geographically dispersed operations through seamless logistics. The different sizes of the overlapping areas between the home country circle and each of the (smaller) host country circles, reflect the different types and levels of selected home country NLB FSAs to be transferred to different host environments as a function of the LAs the firm wishes to access. The large circle links together the various countries involved, which highlights the international coordinator’s strengths in putting together a value chain based upon access to the coveted LAs of each country where the firm operates. The blank areas of LB FSAs in the middle sections of the host country triangles on the right, reflect the MNE not developing LB FSAs in these host countries. - Tradition of managing international operations, both upstream and downstream, through a tightly controlled but still flexible logistics function - Main FSAs is ability to coordinate the location advantages accessed in multiple host countries; it may sometimes be necessary to transfer resource bundles to the host country operations to gain access to the location advantages 4. Multi-Centered MNE -> multiple home bases (Phillips) The multi-centered MNE consists of a set of entrepreneurial subsidiaries abroad which are key to knowledge-based FSA development. National responsiveness is the foundation of the international strategy. Non-location bound FSAs that hold these firms together are minimal: - common financial governance - identity and specific business interests of founders or main owners The multi-centered MNE typically transfers only key routines (managerial practices) from the home country to host countries. The middle sections of the triangles in the host countries represent the need to build distinct, LB FSAs in each host country. 16 The non-overlapping ovals reflect the independent nature of each MNE host country operation, whereby substantial investment in LB FSAs permits access to the coveted host country’s LAs, whether at the input or output side - MNE viewed as a portfolio of largely independent businesses - Recognizes that each host country operation needs to build upon its own distinct location- bound FSAs, transfers only core routines Concept 34: 4 types of distance Complementary resources of external actors -> needed from external actors (technology providers, licensees, local distributors, joint venture partners, etc.) to be successful abroad. Distance types that can be covered by partners: 1. Cultural 2. Economic 3. Institutional 4. Spatial Conditions: - attempts at internal development would lead to lower NPV or are not feasible - external actors are able and willing to provide the resources. Domestically FSAs, routines and recombination capabilities may be insufficient to be successful in host countries because the cultural, economic, institutional and spatial distance from the home country Concept 35: Bounded rationality  about imperfect assessment of present or future state of affairs, thereby leading to incorrect beliefs Scarcity of mind: managers responsible for making decisions and engaging in purposive action in the firm always face information problems: You can’t know everything, you will make mistakes 1. One source is poor access to information sufficient in quality and quantity -> information about the environment (especially the future state) is incomplete 2. Another source is the limited mental capability to process complex information bundles -> not good in determining its relevance and implications for strategy Example: AGFA (see guest lecture) Concept 36: Bounded reliability  About imperfect effort towards pre-specified goal achievement, thereby leading to incomplete fulfilment of promises Scarcity of effort to make good on open-ended promises - One source is opportunism (ex-ante false promises; ex post reneging on promises). - A second source is benevolent preference reversal (e.g., good faith local prioritization: distance in time from punishment; distance in space from the headquarters’ monitoring apparatus; proximity to - and intrinsic satisfaction from - focusing on local opportunities with immediate local rewards). Need for safeguards 17 2 types of benevolence preference reversal: 1. good faith prioritization: promise in good faith but, over time, diverting their effort to the pursuit of local preferences; satisfaction derived from focusing on autonomous, locally driven investment opportunities 2. scaling back on over-commitments: actor who made an initial promise was overconfident in his/her capability to deliver; the problem with opportunism lies with the individual’s self- centered desires and effort Promises to headquarters have been replaced by the pursuit of local goals -> Causes long-term conflicts between subsidiary and headquarters -> Need for safeguards Unreliability in the MNE can be eliminated by: - Contractual safeguards - Joint goal development and frequent communication - Routines such as multi-level and multi-stage decision-making processes to reduce the impact of individual evaluation biases and impulsivity Concept 37: 7 questions in IBS 1. What is our distinct resource base, including elements of our administrative heritage, that provides internationally transferable FSAs? 2. Which value-added activities in which foreign location(s) will permit us to exploit and augment to the fullest our distinct resource base? 3. What are the expected costs and difficulties we will face when transferring this distinct resource base? 4. What specific resource recombination (associated with each alternative foreign entry and operating mode) will be required to make the proposed international value-added activities successful? 5. Do we have the required resource recombination capability in-house? 6. What are the costs and benefits of using complementary resources of external actors to fill resource gaps? 7. What are the main bounded rationality and bounded reliability problems we will face when extending the geographic scope of our firm’s activities, given the changed boundaries of the firm, the changed linkages with outside stakeholders and the changes in our internal functioning? Concept 38: Guide vs command How do you communicate with local managers? Five simple principles of procedural justice: 1. Corporate headquarters’ familiarity with the local situation at the subsidiary level 2. Effective two-way communication between corporate headquarters and subsidiaries 3. Consistency in decision-making across subsidiaries 4. Possibility for subsidiary managers to challenge the dominant perspective at headquarters 5. Transparent explanation of final decisions made by corporate headquarters Concept 39: Hierarchy MNEs does not recognize their subsidiaries’ potential to develop strengths 18 Selectively decentralizing elements of strategic decision making and control -> optimizes the deployment and exploitation of their present FSAs and supports the development of new FSAs at their subsidiaries Two common, wrong assumptions made by senior MNE management about roles of subsidiaries: 1. United Nations model of multinational management: treat each subsidiary in a similar manner implies either subsidiary independence (multi-centered MNEs) or complete dependence (global exporters or international projectors) 2. Headquarters hierarchy syndrome: corporate headquarters rule (only valid in case of complete dependence of subsidiaries) Dysfunctional effects on the MNE - First assumption: important markets and subsidiaries are treated in the same way as unimportant ones, and therefore the opportunities they provide are not optimally exploited - Second assumption: subsidiaries with a distinct, specialized resource base are unable to escape from an implementer role, and lose their entrepreneurial motivation  Solution: an organizational model of differentiated rather than homogeneous subsidiary roles and of dispersed rather than concentrated responsibilities -> ineffective and overly centralized organizational structure and related decision-making is not good Simple normative model as a response to differentiated subsidiary role requirement: 1. Assess each market according to its strategic importance 2. Rate each subsidiary’s resource base in terms of sales and marketing achievements, production capabilities, research and development, or any other strength contributing to competitiveness What are the roles of the subsidiaries? 1. Black hole: weak specialized resources, located in strategically important market  use it to maintain presence in key market, commit more resources to these markets to build up the subsidiary 2. Implementer: weak specialized resources, market of lesser importance  key for success, steady stream of cash flow + scale and scope economies 3. Strategic leader: high specialized resources, strategically important  role: assist corporate headquarters in identifying industry trends and develop new 4. Contributor: high specialized resources, less important market  developing new FSAs, understand potential economic value for the MNE Concept 40: R&D Home based exploiting vs Augmenting Many MNEs are moving from centralizing R&D in the home country towards building international networks where foreign R&D laboratories fulfil specific roles 19 Two main reasons: 1. Need for presence in knowledge and innovation clusters (input side) 2. Commercial requirement of moving quickly from innovation to market (output side) so that MNEs must integrate R&D facilities more closely with host country manufacturing First: the MNE selects the decision makers  Technology steering committee: reports directly to CEO -> reduces bounded rationality problems Second: strengthen the lab’s initial capabilities Third: maximize lab’s constructions to the MNEs strategic goals - Each lab should interact regularly with the other R&D units, as well with manufacturing and marketing operations - Contributions complement the MNEs existing FSA base Managers must connect the labs with other resources in the firm and effectively tap the external environment in host markets for new knowledge How do you organize R&D? Two distinct types of R&D facilities: - Home-base exploiting sites: supporting manufacturing facilities in foreign countries or to adapt standard products to the demand there, with information flows to the foreign laboratory from the central lab at home o Close to key markets and MNE’s foreign manufacturing units o Initial leadership in the hands of “highly regarded managers from within the company intimately familiar with the company’s culture and systems to forge close ties between the new lab’s engineers and the foreign community’s manufacturing and marketing facilities” o Bounded rationality problem reduced by these labs: lowering of distance between home- country R&D and host country manufacturing - Home-base augmenting sites have information flows from the foreign laboratory to the central lab at home o In critical knowledge clusters to tap into new sources of innovations o Initial senior managers “should be prominent local scientists to nurture ties between the new site and the local scientific community” o Main bounded rationality problem is the subsidiary cannot access knowledge in foreign locations without becoming an insider 5 management take-aways: 1. Analyze your firm’s portfolio of international R&D facilities, and categorize these according to their home- base-exploiting versus home-base-augmenting status. 2. Assess whether your knowledge-generating activities are located in the best possible knowledge clusters with optimal access to specialized resources. 3. When exploring drivers of innovation inside the firm, examine the potential of subsidiary initiatives. 4. Reflect on the potential to partner in alliances, so as to absorb new knowledge in your industry. 20  5. Align R&D initiatives in host country labs with overall corporate goals and consider alternative paths to new knowledge (e.g., acquisitions). Concept 41: 6 types of factories Focus on key issues of location advantages, transferability of home country FSAs & build-up of host country LB FSAs Most successful manufacturing MNEs view their foreign factories as sources of FSAs beyond the ability to save costs “How can a factory located outside of a company’s home country be used as a competitive weapon not only in the market that it directly serves but also in every market served by the company?” Foreign factory senior managers’ attitude is critical MNEs should leverage their foreign factories to get closer to customers and suppliers, attract skilled and talented employees and to create centers of expertise for the whole company Changes in the international business environment driving assignment of new foreign factory roles: - International trade tariffs declined substantially in the second half of the 20th century, so foreign factories can be more than branch plants - Modern manufacturing increasingly technologically sophisticated, so that location in sophisticated knowledge clusters makes sense - Shortened product life-cycles, requiring close linkages between knowledge development and production Subsidiary must develop internationally transferable FSAs, building upon the location advantages of the host country cluster What types of factories do you have? Possible roles of foreign manufacturing facilities result from: 1. Offshore factory: o Accesses low-cost input production factors o Output exported o No new FSA development o Minimum autonomy 2. Server factory: o Supplies predefined, proximate national or regional output market o Overcomes trade barriers, logistics costs and foreign exchange exposure o Some FSA development o Narrow charter with relatively little autonomy or specialized capabilities 3. Outpost factory: o Gathers valuable information from advanced, host country clusters, mainly on input side o Manufacturing combined with offshore/server factory role 4. Source factory: o Accesses low-cost input production factors; receives resources o Engages in resource recombination; develops FSAs to build ‘best practice’ plant in MNE’s network o More autonomy o In locations with good infrastructure and skilled workforce o May be a strategic leader at input side 21  o Narrow charter 5. Contributor factory: o Oriented towards host country/region output market o Stronger capabilities o At input market side, responsible for resource recombination of process improvements, new product development, customizations, etc. 6. Lead factory: o Strong resource recombination and new FSA development o Accesses local cluster’s valuable inputs and plays key role in localized manufacturing innovation o Connected with all key-players in input markets (such as research labs) and end- users at the output side 6 roles of foreign manufacturing plants: Overall: MNE should upgrade offshore, server and outpost to develop FSAs as source, contributor or lead factories -> this involves: enhancing internal performance, accessing and developing external resources and developing new knowledge that can benefit the overall MNE network End result: ‘robust network’ of factories with FSA-development roles, able to adapt to changes in the marketplace Footloose set of plants: capability to relocate operations Common obstacles to upgrading of foreign factories: - Fear of relying on foreign operations for critical skills - Treating overseas factories like cash cows and neglecting long-term investment - Creating instability by shifting production in reaction to fluctuating exchange rates and costs - Responding to government relocation incentives to move factories to new locations that possess minimal potential for upgrading 5 management take aways: 1. View each foreign manufacturing plant as performing primarily one of six generic roles in the firm’s portfolio. 2. Consider the potential of ‘upgrading’ existing, market- and resource-seeking roles of individual factories. 3. Re-evaluate your portfolio of international operations by recognizing changes in initial drivers for expansion. 4. Assist source, contributor and lead factories to transform themselves into centres of excellence. 22  5. Take into account the quality of human resources when contemplating low-cost locations: successfully exploiting advanced production techniques requires access to a pool of sophisticated human resources Concept 42: Economic exposure - foreign currency Important to distinguish between ‘real’ versus ‘nominal’ exchange rates: - Nominal rates = direct exchange ratio between currencies - Real rates = changes in nominal rates – difference in inflation rates Real exchange rate fluctuations create operating exposure risk for companies Operating exposure depends not only on decision- making inside the individual firm, but also on choices made by rivals in terms of the geographic configuration of their investments and their sourcing policies Fluctuations in foreign exchange rates create the risk of net present value reduction of the firm’s future income streams: If $ depreciates against the yen in real terms, the US manufacturer will enjoy and improved competitive position vs Japanese competitors. Potential value reduction is called economic exposure  Refers to the possible negative effects of largely unexpected changes in exchange rates on a firm’s competitiveness relative to rivals  It adds uncertainty to the value of a firm’s location advantages Location advantages should be considered, not solely in a positive sense, and on a country-by- country basis, but also as a portfolio of potential risks for future cash flow. Example: - Dollar has become stronger -> more difficult for US companies to export, easier for EU companies to export - If all products are produced in the US, the prices in EU will increase 23 Concept 43: Foreign currency management FX impact analyzed through Porter 5 forces: - If all competitors have the same issues, customers will accept price increases - Bargaining power of suppliers: put costs in the same region as your income How do you manage foreign currency? 1. Hedging – forward buying / selling to fix FX - Good solution at short term – not on long term 2. Manage where you sell (output side) - Increase prices / move sales to beneficial markets - Only feasible if competition has same issue or if market dynamics are allowing – economic exposure definition 3. Manage where you produce / buy (input side) - Move production to optimize currency – in theory OK but issue of agility 4. Manage where/ how you fund - Fund in currency to optimize long / short positions – can only work in leveraged situations and little agility – works good in acquisitions What FX strategy is used? Companies typically manage operating exposure through one of three approaches: - First approach: each business unit is assessed individually, and each unit therefore configures its own operations to reduce its specific operating exposure - Second approach: a company-wide perspective, whereby a portfolio of businesses and operational structures is established with offsetting exposures - Third approach: flexibility in operational planning (switching production between factories) - Fourth approach: adapt the company funding to match debt servicing with operational cash flows. Eg if you receive more USD than you spend (you are long in USD), you can use these USD to pay back a USD loan MNEs can develop FSAs allowing risk mitigation through an input-side absorption capability and an output-side exchange-rate-pass-through capability 24 A classification of operating exposure at the subsidiary level - 2 parameters describe situation for MNE: 1) Unit’s capability relative to rivals to adjust sourcing structure 2) Unit’s capability to pass through changes in real exchange rates - quadrant 3: most desirable - quadrant 2: least favorable o typically selling commodity-type products, the sales of which can be greatly affected by small price increases o also typical for subsidiaries that import products from the parent company home base Implications for MNE strategy: - Managers who cannot set company policy on operating exposure should not be held responsible either for the effects of volatile exchange rates - The operating exposure effects on performance of fluctuations in real exchange rates should be eliminated from performance assessments 5 management take-aways 1. Analyze how you can reduce economic exposure and impact on the NPV of future income streams. 2. Assess your operating exposure at the level of each subsidiary, in terms of capacity for adjustment at the input as well as the output market side. 3. Consider the implementation of a global cash management system and possible extension and its implications for your corporate strategy. 4. Discuss the degree of responsibility for economic exposure by the head office versus the subsidiaries. 5. Examine the relationship between corporate strategy and international financial management tools Concept 44: International Marketing Levitt sees the multi-centered MNE being gradually replaced by centralized exporters and international projectors Advances in technology, communications and travel confer additional value to non-location bound FSAs, and strengthen the MNE’s ability to deploy and exploit such FSAs Majority of the world’s consumers want high quality, reliable products at low prices They are often willing to accept globally standardized products Companies that grasp this new ‘global’ reality and can inject these attributes in simplified products will gain competitive battles 25 Two foundations of Levitt’s argument: (there are 2 schools) 1) A customer is someone local and you have to adapt to your local customer o Cultures and national societal tastes are moving toward homogenization o Converging global preferences overpower differences rooted in national cultures and historic customs o Examples: ethnic foods (pizza, pita bread, Chinese food), music (jazz, country and western), and product brands (Coke and Pepsi soft drinks, McDonald’s fast food, Sony TVs, Levi Jeans) 2) Sell one product all over the world (bcs the world has become global => Starbucksification) o Converging tastes allow globally standardized products o High quality and low cost are complementary goals achievable through innovation and efficiency o Even small niches allow for a global approach satisfying the three criteria (quality, reliability and low price) Levitt: two things clearly influence customers to buy: 1) Low prices regardless to feature preferences 2) Heavy promotion regardless of price Potential of the Internet to change international marketing: - Internet can have revenue enhancing and cost reducing effects - Revenue enhancing side: network effects, including network externalities -> key network effect: services with a broad geographic scope often become more valuable to customers because of services’ international availability and accessibility Internet is a tool to reduce bounded rationality: inexpensive communication for interactions with potential customers (informing and persuading customers)  need to invest less in developing location-bound FSAs in host countries Growth of new types of intermediaries, acting as international projectors (e.g. standardized logistics services to support Internet-based sales of physical products and intermediaries to reduce the information overload facing internet users) BUT: limits to standardization: 1) Brand names will become increasingly vulnerable to isolated problems with quality, price and availability 2) Government imposed restrictions may limit international, Internet-based sales 3) MNEs must have: twenty-four hour order-taking and customer service response capability, regulatory and customs-handling expertise to ship internationally, in-depth understanding of foreign marketing environments Difficulty of after-sales service provision: requires a physical infrastructure and localized human resources Internal challenge inside the MNE: Internet-based sales should not be at the expense of conventional foreign affiliates’ sales 5 management take-aways: 1. Study your firm’s product portfolio’s potential for global standardization 26  2. Examine the potential of the Internet to increase revenues and reduce costs in international markets 3. Carefully monitor you Internet activities to avoid law suits and reputation losses, and make sure online sales do not cannibalize foreign affiliate sales 4. Determine the potential and limitations of global account management 5. Reflect on your own context (administrative heritage, internationalization strategy) to determine the limits of product standardization as the preferred vehicle for international expansion. Concept 45: Managing Expat managers How do you manage expat managers? 1. Reflect carefully on the common problems of expatriate management faced by every MNE. 2. Learn about best practices to manage expatriates, including experiences from competitors. 3. Given your administrative heritage, explore the possible purposes and forms of expatriation (e.g., ‘external’ expatriation, overseas knowledge transfers, extended/permanent expatriation). 4. Focus strategic change on fine-tuning the MNE’s organizational context and follow eight implementation steps that have proven successful in many firms. 5. Train managers to successfully integrate the activities of geographically dispersed international operations Concept 46: Managing distributors Distributor = company that sells your product for you MNEs should keep independent, local distribution partners in the long term, even after establishing their own local network for primary clients Characteristics of success cases: distributors - did not distribute competing product lines from rivals - shared market information with the MNE - initiated new projects and collaborated with other distributors in adjacent markets - invested to grow the business in areas such as such as training, ICT, and promotion How you manage distributors? Guidelines for MNE managing local distributors: 1. Pro-actively select locations and only then suitable distributors: do not expand as a response to unsolicited proposals from local distributors. Best distributors are not necessarily the largest, who may have contracts with rivals and an interest in dividing the existing market among them, rather than rapidly building this market for one firm 2. Focus on distributors’ market development capabilities. Critical is the best ‘company fit’ in terms of strategy, culture, and willingness to invest, not the ‘market fit’ with distributors already serving key target customers with related products 3. Manage distributors as long-term partners: give incentives to invest in long-term development. E.g., if the buy-back price depends on sales volumes, not profit margins, the distributor may position the product as a commodity, rather than extract the highest price from customers and harm the product’s positioning 27 4. Provide resources (managerial, financial and knowledge- based) to support distributors for market-development purposes: committing more resources (skilled support staff, minority equity participations and knowledge sharing) earlier may foster higher performance 5. Do not delegate marketing strategy to distributors: the MNE should provide clear leadership on choice of products, their positioning, marketing budget size, etc. Distributors should adapt this strategy to local market needs 6. Secure shared access to the distributors’ critical market and financial intelligence: their willingness to share this information, signals their commitment to becoming a solid, long-term partner 7. Link national distributors with each other, especially at the regional level (spanning several countries): regional headquarters to coordinate distribution efforts, or autonomous distributor councils, may lead to best practices diffusion inside the distributors’ network, and act as an internal monitoring mechanism, stimulating more consistent strategy implementation throughout the region 5 management take aways: 1. Review your international distribution strategy & portfolio of relationships with local distributors. 2. Follow the seven guidelines for MNEs when using local distributors in international expansion. 3. Consider the disadvantages of using distributors and the benefits of direct sales. 4. Assess in a comparative fashion uncertainty in your input &output markets in supply chain. 5. Evaluate the optimal governance of international distribution and apply an integrative approach to coordinate various components of your supply chain. Concept 47: Managing alliances High trust makes a relationship more vulnerable to bounded reliability, unless safeguards (6 types) are introduced: 1. Regular re-evaluation of the alliance relationship 2. Continued focus on profitability, not volume 3. Continued attention to alternatives (“back-ups”). 4. Swapping hostages 5. Setting and reassessing common goals 6. Avoiding vicious cycles of suspicion and the resulting build-up of bounded reliability Concept 48: 2 innovations from environmental triggers Environmental regulations trigger 2 innovation types: 1. Type that converts pollution sources into something of value 2. Type that improves resource productivity Early adoption of advanced environmental management approaches may produce a first-mover advantage: herein lies the relevance for international business strategy. Case of German companies specializing in less-packaging intensive products. 28 Volume III: Concepts 49 to 64 on M&A Concept 49: 10 steps in buying a company How to buy a business in 10 steps: 1) Define your acquisition strategy Why would I buy a company? Some reasons: in some markets being the biggest is really important, to acquire something you could not build yourself, there are also intentional factors 2) Source opportunities Where do you find companies that are for sale? 2 steps: - Step one: look for typical targets and make a list - Step two: knock on the door and ask if they are on sale. It’s better to ask this: Would you be open for a conversation so that we could strategically think on how you and I could approach the market together? 3) Engage with key internal stakeholders Do we all want to do this? 4) Approach potential targets 5) Obtain information about a potential target 6) Prepare a non-binding offer A non-binding offer is: I might consider buying your company for… 7) Carry out due diligence Just before buying something you check it out, you have one more visit 8) Negotiate 9) Close the deal 10) Integrate and unlock deal value The most important steps are 1 and 10 Concept 50: business cycles trigger M&A Mergers & acquisitions play across the entire business cycle You have good and bad times. A company is always on the move. 29 Concept 51: Types of transactions Transactions types and structures Concept 52: Sell side steps The 10 step plan how to “sell a business”: 1) Define the sales strategy 2) Make the company exit-ready 3) Prepare marketing materials and organize vendor due diligence 4) Approach potential buyers 5) Provide information to potential buyers 6) Analyze offers and select preferred bidders 7) Organize due diligence 8) Negotiate 9) Close the deal 10) Manage transition How to sell a business? - Investment overview: o Anonymous profile = I want to go to markets and test them if I can sell my company there, but I don’t want the world to know that I’m selling my company o One pager - Information memorandum: o Containing all major information -> Company profile, Strategy, Products, Markets, People, … o You cannot lie!!! If you have a problem, make it into an opportunity - Preparation data room: o Gathering data o Deliberation on what data to disclose at what stage 30  - Vendor due diligence (perspective of seller of the company): finding out how much is the company is worth and what can buyer do with the company - Organization sales process: o Negotiation o Auction Concept 53: Due Diligence = research and analysis of a company or organization done in preparation for a business transaction (such as a corporate merger) It’s basically the steps a company takes to thoroughly investigate and verify an entity before initiating a business arrangement, whether that’s with a vendor, a third party or a client. DD means being proactive, rather than reactive, in response to problems. Vendor due diligence is the process of evaluating the financial, operational, legal and regulatory risks of a vendor, before entering into a business partnership with it DD as a strong backbone when working for multiple stakeholders: Concept 54: Quality of earnings EBITDA = earnings before interest tax depreciation amortization - A basis for valuation - Easy to compare between companies with different capital structures. - Good proxy for operating cash flow. - Due diligence provides a view on underlying EBITDA - Assists either the vendor or the buyer - Critical to assist them in negotiations on value and headline price  Normalization: Adjust items in historical performance which are not considered to be part of the company’s underlying performance:  Non-recurring/one-off items  Accounting changes and estimates  Pro-forma: 31  Illustrative adjustments to reflect the current structure of the business -> usually as a result of a permanent change in value drivers Concept 55: Quality of debt Net debt analysis: Concept 56: Working capital Working capital analysis Example: €25 000 value of apartment + loan of €100 000 => value = €150 000 Fluctuations of working capital - Cash is added to the value of a company: look to fluctuations of working capital - if you sell out inventory, you have more cash 32 Concept 57: Data room What is a data room? When you sell a company, you don’t want all the people to look inside the whole company -> you make a physical data room to give all the information you want to give, now more electronic data rooms It’s smarter to put bad information in it as well, because the will eventually investigate it and this will destroy the trust between them Concept 58: Share Purchase Agreement Definition SPA: - Gives legal substance to the transaction - Defines exactly what is being purchased (definitions, transaction structure, consideration etc.) - Provides a protection mechanism to: o Obtain a purchase price adjustment  Closing mechanisms o Get some money back  Representations, warranties, indemnities o Terminate the deal  Conditions precedent, material adverse change clause Indicative SPA structure 33 Concept 59: Value drivers tree and underlying value drivers Concept 60: Risk/value model for M&A (EXAM) Value creation through M&A What do you pay for a company? - If you buy a company, the best value is the stand-alone value. But obviously, you will have to pay more: the transaction costs.  You always pay more than what it’s worth - How do you win that back? Earn price back by synergies (better position) and new strategies (e.g. website + shop) Risks that you want to cover: - Integration risk: all the clients go away, you can’t keep them - Target risk: you don’t buy what you think you buy, your target might not be what it is - Synergy risk: you might not realize the synergies - New strategy risk: your new strategies might not work 34 You can catalogue each issue into (the beauty buckets that you can use in any diligence): - Deal breaker: not buy company anymore - Value issues (e.g. just lost contract with big customer -> pay less): you find something, you still buy the company but no longer at that price - Contract terms: you sign a contract to solve the problem - Integration issues (if you take it over, you need to do the to-do list) Concept 61: Integration pitfalls Why do integrations go wrong? Pitfalls to fulfilling strategic objectives - Vision not clear or not articulated - Lack of attention to detail - Lack of post-deal acquisition plan - Focusing only on the financial arrangements - Lack of strategic fit - Lack of understanding cultural sensitivities - Lack of knowledge of target prior to deal - Lack of clarity in the value creation logic - Underestimation of costs - Underestimation of complexity of integration - Lack of sponsorship - Lack of credibility - Lack of communication of implementation team Concept 62: Financing options are different over the lifecycle Impact of lifecycle on financing options 35 Concept 63: Private equity Various private equity forms in function of development phase Importance of private equity keeps rising - Private equity increasingly drives the M&A market PE has favorable tailwinds despite challenging macro backdrop - PE deal activity has largely been positive and rebounded after periods of temporary softness Concept 64: Crowd Funding (not that important) 36 Volume IV: 45 bites on megatrends We can use trends to predict the future 1. Types of trends Megatrends = trends that come in waves over us and they don’t stop. All that with a large source of technology  Difference with technology: technology changes a lot overtime, but the main megatrends don’t change Blackrock classification: If you have a business, you need to adapt to the rapidly changing world 2. Geopolitics – (De)globalisation - All these shifts of power and geopolitical tensions will change. The one thing that you can be sure of is the continuation of these changes will amend you and any of your businesses. - Sanctions can help on the short term but on the long term they will work counterproductive - Picture of professor when he was a child: between now (age 54) and then (age 6), with how many people did the world population raise? It doubled in size: 4 billion -> 8 billion people - Now we are with 8 billion people but there’s a lot of uncertainty of what will happen to the world population. - Is the population growing everywhere? For example, in China the population has grown dramatically but then they introduced the “one child policy” -> killed their own future in terms of population. China will go into an economy of a lot of old people and very few young people to work for them, to make the economy work. Example, Africa. The population in Africa is exploding like hell. 37  - Magic number: 2.1  Each woman needs to have 2.1 children to maintain the population size in the long term. In other terms, this ensures that on average enough children are born to “replace” the parents and maintain the population size. The extra 0.1 child accounts for children who may die before reaching reproductive age and some women who may not survive to have children. Where are we? We are at below 2. But how come is our population than still growing? It’s thanks to migration, it’s thanks to them that our economy is still flowing - Hikikomori = individuals, typically young adults, who withdraw from social life and isolate themselves in their homes for extended periods, sometimes for years.  South Korean government gives subsidies to youth to leave their home. Why would they do that? Bcs if you sit behind your computer and don’t go out, you don’t need real people, and if you don’t need real people in the current state of technology, it’s very difficult to have children. - Threat of an aging population (60+ years): how many of that people do we have today and will we have in the future? Today: 16,5% and in 2050: 21,5% of total world population. 3. Urbanization & Megacities - Urbanization - Growing cities: the city population is comparatively youthful and predicted to rise from approximately 7 million today to more than 50 million by 2060, which will make Dar Es Salaam one of the world's largest cities. - If you want to invest in the trend of megacities, this might be an idea: you wait for the city to come to you 4. Climate Change & Resource Scarcity - If there’s not enough room here, why don’t we use some extra room? Why don’t we think space and go space? Ideas that could potentially help: web via satellite, GPS 3, Phone 14 satellite connection, spin launch - Is climate change causing more extreme weather? There’s a lot of consensus that it is - Solar panels is also a new trend - Renewable energy is at the centre of the transition to a less carbon-intensive and more sustainable energy system. Renewables have grown rapidly in recent years, accompanied by sharp cost reductions for solar photovoltaics and wind power in particular. The IEA expects renewable electricity generation to increase by a more than one-third by 2022. However, renewable heat and transport are lagging behind, despite good potential. - Companies are also stepping up their game. Example: Elon Musk updated Tesla’s mission statement last year. He made a one-word change: from “sustainable transport” to “sustainable energy”. So what does this tell us? 38  Is the electric car manufacturing company heading towards utilities? And what about the competition? Are they moving in the same direction? You’re pretty damn right. With the conversion of second-hand car batteries into energy buffers positive spillover effects also come into play. Both in sustainable transport and sustainable energy. Undoubtedly, they will help lower the cost of ownership. And when the electric car gets rid of its high price tag, it might get closer to mass-market appeal. It’s a tough time also for critics of green energy as the second-life storage projects will contribute to the stabilisation of the intermittent renewable energy sources like wind and solar. Curious to see what barrier they will come up with now. - Currently our batteries fluid-based, but the next ones will be solid state. Why is this better? Bcs it’s less dangerous and charges quickly. Is it always that the most newest technology wins? If you look at the batteries, there are 2 types: LFP and NMC batteries. The LFP is always considered inferior bcs it weighs more and it has less energy-density, even though it’s cheaper. So a logical choice is to go for NMC batteries but we see that all the electric cars use LFP batteries. Conclusion: it’s not always that the technologically best product wins - No supply without demand. Would you buy something that is produced by child labour? Preferably not, but as customers we do have our responsibility => ethical consumer = a customer that thinks with his head, being more socially responsible - It is generally held that corporate social responsibility (CSR) could increase company profits and thus most large companies are actively engaged in it. 5. Technology - Breakthrough in 1999: mobile phone (flip phone). The reaction of the people then was “Why would we use this? We don’t need it” - Short history of what has happened since 1999: It’s crazy to think that all of these apps wouldn’t had existed if the mobile phone hadn’t been invented - What will it be like in 25 years? You will need an interface - Omni presence of an smartphone o How many times per day does the average person their smartphone? 75 o The NYT published an article saying that that people touch their smartphone over 2600 times a day -> we get addicted to the interface - Screenification o Screens get bigger and bigger o Even fridges have screens o Transparent screens o Foldable screens - Internet of things 39  o Things are getting more and more connected to each other - Wearable technology o We think that we don’t have wearable technology but we do -> our phones are always in our pocket o We have wearable technology in a form that we don’t imagine - Internet of Bodies o Implantable technology o Inject people with chips o Any technology can be used positively and for the bad - Virtual reality and augmented reality o Difference: AR = you have a reality that is augmented with a new layer of information. VR = you have a dark glass and everything is projected on that o Communication will get a virtual layer (e.g. Apple Vision Pro, Meta) o Privacy issues with smart glasses - Google glasses back in business o How can these glasses be used in practical business world? It’s working because you can scan something without having to use your hands - AR thanks to Pokémon o Pokémon is the key example of AR but other industries started using it too (example: Ikea has an app for furniture) - Agents or virtual assistants o We are on the verge of 2.0. o We already have virtual assistants and they are quite powerful o But we don’t use it. Why? Bcs it’s awkward + we are used to get things visualized (=addicted to visualisation) o Professor his opinion: Siri can follow simple commands but there it stops o AI pins - Robots o Robots are entering our world - Bots o Bots = the interface (example: we use chatbots to talk to sales, marketing etc.) - Platform economy o Concept of platform economy = you try to put everything in your own marketplace o The big tech companies have been trying to do that for ages o New centre of communication and consumption - Education changes o What’s the future of education? We will be educated in different ways - Big 7 become even bigger o Who are they? Google, Amazon, Tesla, Apple, Meta, NVIDIA and Microsoft o This is how you can describe NVIDIA the best: All the big tech companies are looking for gold and NVIVIA is the one selling the shovels 40 - Always connected o Digital detox - Disrupting startups o Technology, addictive or not, has created lots of opportunities also for startups, which are changing traditional industries including retail, music and traffic - Value of data o Data is the new oil in all industries. Tech giants like Alphabet, Amazon, Apple, Facebook and Microsoft look unstoppable. Smartphones and the internet have made data abundant, ubiquitous and far more valuable. Whether you’re going for a run, watching TV or even just sitting in traffic, virtually every activity creates a digital trail. o You sell your personal data for 4% of what you buy - Netflix story change of core competence o Why change of core competence? They started with: mail order = customer rents DVD online and receive them by mail. By giving them your preferences, Netflix could sent you more similar movies. But then they had to reinvent themselves when the internet and streaming came. They started streaming and even created their own content. o From a logistic mail order system to one of the largest movie makers in the world - Personalisation o Everything is personalised today o Getting personalisation right is the holy grail for brands - Big brother watching us o Not only watching, but also listening and interrupting. o Everything we do is tracked and followed. o Agreeing to the general terms: do you really know what you’re agreeing to? - AI on the loose? o One of Microsoft's most recent forays into AI ended up becoming a genocidal racist. The Twitter-bot only lived within the context of social media which rendered it pretty harmless, but it demonstrated how quickly things can go wrong. o The big data and AI evolution is not only worrisome to consumers but also to tech CEO’s. o Musk is perhaps the most prominent voice warning us about the impact of AI. He helped start Open AI, an open source, non-profit company that hopes to develop benevolent AI technology. - Ethical dilemma’s o As decision-making is shifting from humans to machines, engineers are burdened with an ever-increasing responsibility when writing computer algorithms. This demands for a better understanding of how people make moral choices and a 41  better understanding of how people perceive machines making moral choices. Because some of us might think it is a terrible idea of giving that important responsibility to a machine. o On the website Moral Machine you can decide warn you, though. It is not a pleasant exercise as you have to choose between the lesser of two evils, such as killing five babies or killing five pregnant women. If you feel inspirational, you can even make your own (evil) scenarios. - Future of jobs o AI’s capabilities to handle images, sounds and text have improved significantly. Recent developments have also improved robots’ ability to teach other machines what they’ve learned. This implies that we no longer obliged to do the clumsy programming of robots. Sorry, mistaken, we still need to program one (and then have that robot remotely teach others). When one robot learns, all robots learn. This will save us both time and money. - Security risks o Companies are putting aside money to defend themselves against cyber attacks. o Attacks = to steal very confidential data. - Quantum computing o A normal computer works with binary, but quantum computing works with 0 and 1 and everything between. o Beauty of this: it can solve problems extremely fast. o Danger of this: inscription tools 6. So what? Now what? Recommendations: - Agility o Make sure that you’re flexible, that you can adapt o Rather than building one big factory in one country, build 4 all over the world and adapt your production to whatever it’s needed o Shit happens and when you think you just solved it, shit happens again. So agility is key - Build on core competence o Make sure that you know where you can do that o Example: Chinese battery company, they were so good at making batteries that they suddenly said “why don’t we start building cars around our batteries?”. Now they make cars -> they have built on their core competence - Embrace Schumpeter o Schumpeter is a philosopher that wrote about creative disruption: you can only start doing something new if you disrupt the previous thing o Examples: fridge is hunting on the milk men, uber is hunting on taxi (how are they doing this bcs it’s practically the same thing? It’s all about the customer experience), Google’s self driving car is hunting on Mercedes o Be bold enough to endanger your own products - Adopt sharing models o The former economy: if you want to use something you, you need to own it o Sharing model = you don’t need that ownership anymore to use something (example: Airbnb) 42  o Step further: how can launch those sharing models? How can we make sure that the resources are better used by fundamentally changing the underlying models? (example: circular lighting) - Embrace purpose o Doing something just for money will no longer work in this economy o Clear purpose can be business or social related o Try to discover your “Ikigai” = something you love to do, something that you’re good at, something that the world needs and something that you can be paid for 43