Managing Across Borders: Corporate Culture, Ethics, and Purpose

Managing across borders Corporate culture, ethics and the purpose of the organization Socially responsible approach in a global scale Ing. Ladislav Tyll, MBA, Ph.D. Corporate culture Corporate culture refers to the beliefs and National behaviours that determine how company's culture...

Managing across borders Corporate culture, ethics and the purpose of the organization Socially responsible approach in a global scale Ing. Ladislav Tyll, MBA, Ph.D. Corporate culture Corporate culture refers to the beliefs and National behaviours that determine how company's culture employees and management interact and handle outside business transactions. Regional Often, corporate culture is implied, not culture explicitly defined, and develops organically over time from the cumulative traits of the Industry culture people the company hires. A company's culture will be reflected in its dress code, business hours, office setup, employee benefits, turnover, hiring decisions, Corporate treatment of clients, client satisfaction and culture every other aspect of its operations. 2 Levels of corporate culture Other artefacts Culture eats strategy for breakfast. Peter Drucker Norms Trust Fairness Symbols Management style Basic principles corporate philosophy ways of cooperation and Attitude competition to risk Language Effort System of decision making process Corporate taboo Rituals Remuneration Values and system faith Way of behaviour Myths and legends 3 Corporate culture and strategy Strategy Corporate Corporate culture Defining strategy implementation performance If not satisfactory Step 1 Stricter monitoring Step 2 Strategy redefinition Step 3 Abandoning the original paradigm and creating a new culture Culture has a direct impact on the corporations’ success Culture can represent a sustainable competitive advantage Culture unites employees and creates a sense of community Culture has an impact on financial performance With M&A, culture is more important than compatibility of corp. strategies 4 The impact of national culture on corporate culture Geert Hofstede Power distance Partner A Uncertainty avoidance Partner B (e.g. Sony / Japan) Individualism / Collectivism (e.g. Ericsson / Sweden) Masculinity / Femininity Long term / Short term orientation National culture National culture Indulgence / Restraint Means vs. Goal oriented Employee vs. Work oriented Local vs. Professional Opened vs. Closed system Corporate culture Easy-going vs. Strict work discipline Corporate culture Degree of identification with organization National culture influencing the Joint Venture Deal and Kennedy (1982) (Great Britain) Xenikou and Furnham (1996) 1) The Tough-Guy, Macho culture 1) The Openness to change / Innovation culture 2) The Work Hard/Play Hard culture 2) The Task-oriented culture 3) The Bet-Your-Company culture Joint Venture corporate culture 3) The Bureaucratic culture 4) The Process culture (SonyEricsson) 4) The Competition / Confrontation culture 5 The impact of national culture on ethical position Forsyth R.D. et al., 2008 Relativism 0,900 Absolutism Spain Situationism Individuals should act Individuals should act in Brunei to secure the best ways that are consistent Poland Turkey possible consequences with moral rules, for doing 0,800 Egypt Korea Ukraine Great Britain for all concerned, even so will in most cases yield South Africa Malajsie India if doing so will violate the best consequences for Saudi Arabia Libanon traditional rules about all concerned. Individuals’ personal SAE Idealism Australia Russia Western USA Ireland ethics. values and perspectives Canada should guide Japan Thailand 0,700 USA their moral choices, rather than East USA China Hongkong universal ethical principles Israel orNew desire Zeland Individuals’ personal Individuals should act in to achieve positive consequences values and perspectives ways that are consistent should guide their with moral rules, but one moral choices, rather Austria than universal ethical should remain pragmatically 0,600 open to exceptions to these Belgie principles or desire rules. to achieve positive Exceptionism Subjectivism consequences. Source: Forsyth, D. R., O’boyle, E. H., & McDaniel, M. A. (2008). East meets west: A meta-analytic investigation of cultural variations 0,400 0,500 0,600 0,700 in idealism and relativism. Journal of Business Ethics, 83(4), 813-833. 6 Corporate Ethics Set of principles of a decent approach to business partners, fair relationship with competitors and customers and a quality care provided to company´s employees. Ethical dilemma ??? https://www.yalerussianbusinessretreat.com/ 7 Corporate responsibility Way of doing business that meets or goes beyond the ethical, legal, commercial and social expectations in a positive sense. Profit Corporate responsibility 8 Corporate responsibility Carroll pyramid of corporate social responsibility Corporate social responsibility Philanthropic responsibilities Be a good corporate citizen Contribute resources to community, improve quality of life Ethical responsibilities Operate ethically Obligation to do what is right, just and fair. Avoid harm Legal responsibilities Obey the law Law is society´s codification of right and wrong. Play by the rules of the game. Economic responsibilities Be profitable The reason why the company was founded 9 Creating value – for whom…? Who are our stakeholders??? https://encrypted-tbn0.gstatic.com/images?q=tbn:ANd9GcSz8p-e32SdjsHuwT3gEhiqTUldyhrgaxJqyTenxlHHC1W5gKAoRQ Primary (key) stakeholders Secondary stakeholders Shareholders Local community Employees Local authorities Creditors Foreign governments Market Suppliers Social groups Non-market relations Company relations Distributors Media Customers General public Competitors Business groups 10 Stakeholder mapping Mendelow power/interest matrix Interest Low High Low A B Minimal effort Keep informed Power C D Keep satisfied Key players High Source: Mendelow 11 Lidl Case Relation to: Employees Customers Business partners Local community Rokycany, January 12, 2002: two rare oak trees cut down, nominated to be memorable trees, costs estimated at 1.25 mil. CZK Vyškov, June 2002: by alleged coincidence three massive lindens were cut down during the supermarket construction Dobříš, April 2003, three chestnut trees, two lime trees and one ash were illegally cut down, a request for their chopping had been rejected by the municipal office. Písek, June 2, 2003: rare silver spruce and other 13 trees illegally cut down. Kralupy nad Vltavou, September 2003: 44 thirty years old trees cut down on the construction site Mariánské Lázně, September 23, 2003: 15 birch trees cut down. When cutting them down, lumberjacks were caught by the city mayor Ludek Nosek. They went to their cars for the documents, but then suddenly fled, the police did not reveal their identities. Sokolov, September 23, 2003: 6 maple trees cut down and many other trees were damaged so that they also had to be cut down later České Budějovice, September 2003: 5 maple trees cut down. Lidl application for their chopping was previously rejected. Chomutov, October 6, 2003: on Monday night, there had been incised and subsequently chopped centennial linden obstructing vision for Lidl billboard. The linden was later considered the most important Chomutov tree. 12 Paradox of profitability vs. responsibility Profit Social responsibility Shareholder value perspective Stakeholder value perspective Emphasis on Profitability Responsibility Organization seen as Instrument Joint venture Organization purpose To serve owner To serve all parties involved Measure of success Stock price and dividends Stakeholders' satisfaction Major difficulty Agent principal problem Balancing interests of various stakeholders Social responsibility Individual Both individual and organizational Society best served by Pursuing self-interest (economic efficiency) Pursuing joint-interests (economic symbiosis) 13 Concept of shared value- CSV M. Porter, M. Kramer, HBR2011 Creating shared value policies and operating practices that enhance the competitiveness of a company while simultaneously advancing the economic and social conditions in the communities in which it operates. Shared value creation focuses on identifying and expanding the connections between societal and economic progress. How shared value is created: Reconceiving products and markets Redefining productivity in the value chain Enabling local cluster development 14 Reconceiving products and markets Vodafone project in Kenya Thomson Reuters project in India http://www.reutersmarketlight.com/images/rml_logo.png 15 Redefining productivity in the value chain Natural resources and water treatment Health and safety Labour conditions and equal treatment in the workplace To improve synergies you need to be enviromenatl friendly and have equal labour conditions Environment protection issues The level of synergy grows when companies approach social issues and problems from the shared value concept perspective and when they are able to invent new ways of doing their business while pursuing simultaneously their solutions… 16 Redefining productivity in the value chain Resource use Energy use and logistics Enviroment and Carbon Procurement footprint is becoming more and more important Growing shared value Distribution Employee productivity Location 17 Enabling local cluster development E.g. The Dutch Flower Cluster The image highlights a complex and interconnected ecosystem, in which each actor has a specific role to support the competitiveness and efficiency of the floriculture sector at a global level. 18 CSR vs. CSV CSR Corporate Social Resposbability CSV Corporate Social Value Value: doing good Economic and societal benefits relative to costs Discretionary or in response to external pressure Integral to profit maximization Separate from profit maximization Integral to competing - part of the competitive advantage Agenda is determined by external reporting and personal preferences Agenda is company specific and internally generated Impact limited by corporate footprint and CSR budget Realigns the entire company budget CSR = The value the company CAN create to help society CSV = The value the company IS creating heping socity 19 Global strategy and Global ESG strategy E = Enviromental: Climate Change, Carbon Footprint … S = Social: Equal Opportunities, Human Rights … G = Business Ethics, Compliance … Key challenges? MNEs misbehavior? 20 Add-on slides 21 Build your positive image …contribute to the society as well as to yourself 22 Build your positive image …contribute to the society as well as to yourself ▪ Sponsoring, charity, exhibitions… ▪ Event ticket = discount coupon for service / product ▪ Image enhancing ▪ Emphasis and presentation of other product / company benefits It required to find a suitable link between the company and the philanthropy 23 Build your positive image E.g. …contribute to the society, as well as to yourself For returning purchased and used goods, you are provided special 20% discount for other purchases. Second-hand goods will be used for humanitarian purposes Advantages: Social responsible approach Ecologic approach Sales – attractive for customers Customers feel socially responsible themselves too E.g. Which companies may find a link to following issues: Child abuse Homelessness Breast cancer Environmental protection – (e.g. paper recycling) 24 Build your positive image …contribute to the society, as well as to yourself E.g. + Students collect receipts for their spendings in Safeway stores A certain amount of these receipts is then subsequently exchanged for Apple products Advantages? Sales growth Image growth Image growth Building future customer base Tax savings Tax savings 25 Build your positive image …associate yourself with what you are familiar with It cannot be perceived as a commercial! Better to build it as a sponsoring or product placement Alternatively, leave it to customers http://www.hannah.cz/images/logo.gif 26 Build your positive image The feedback and its measurability is important If your efforts to do something good for the society will bring no money into your piggy bank, will you continue with these efforts ??? 27 Build your positive image Be aware of the traps associated with image!!! There should not be felt too much commercialization from your philanthropy Philanthropy works well, especially with the positive publicity, but journalists then pay attention to all the company's actions - even the negative ones Socially responsible companies often employ staff with a strong social conscience - will these employees be able to undertake unpopular steps in case of an emergency? Corporate responsibility vs. the company survival and meeting of its primary goals If you cannot find anything specific with what to combine your patronage, be at least short of good and make the world a better place to live.... 28 Market Exit Strategies Ing. Ladislav Tyll, MBA, Ph.D.  Economical Reasons: ▾ Sales, Profits, Deamand Competition: New entrants, Technology Exit reasons External Factors: Economy of the country, War, Bettere conditions in other countries Suppliers Cultural Issues o Low sales figures o Ethical reasons o Low profits o Cash flow issues o Low demand o Increase in loan rates o Distribution channels o Product life cycle o Suppliers o New entrants – innovation o Competitor actions o New technology o Competitors exiting the market o Change in company strategy o Changes in government regulations o Cultural issues o Economy of the country o Civil unrest / War o Foreign exchange rules o End of tax relief period o Better conditions in other countries 2 AVIVA case Exit to focus in other countries (European) to scale and have a SUSTAINABLE competitive advantage 2012 Sale of an entire 49 % stake in Malaysian joint venture with Malaysia's CIMB Group 2012 Sale of an entire 58 % stake in Sri Lankan joint venture with NDB Bank 2014 Sale of an entire 47 % stake in South Korean Joint Venture, Woori Aviva Life Insurance to NongHyup Financial Group. Aviva said its exit from the venture is part of a strategy to focus on markets where it has “scale or a sustainable competitive advantage to maximize return on capital”. Aviva has been cutting back in underperforming or subscale markets and plans to focus on 12 countries it considers core: the U.K., France, Ireland, Italy, Poland, Spain, Russia, Turkey, Canada, the U.S., China and India. Within the Asia-Pacific region, it also has a presence in Hong Kong, Singapore, South Korea, Sri Lanka and Taiwan, according to its website. 3 Carrefour exits Exit because of competitor that make market conditions changes Carrefour market o Second biggest retailer in the world o Entered Korea in 1996 o In the time of exit No. 4 on the market (2005) o Sale of its 32 hypermarkets in South Korea to E.Land Corporation o In the same time Carrefour withdrew from the Czech Republic, Japan, Mexico, Slovakia o Future focus on Brazil, Poland, Turkey and China Carrefour (and the subsequent departure of Wal-Mart) from Korea, the South Korean media reported that 'Native Korean retailers won a battle with the world's retail Goliaths. 4 Carrefour exits "The withdrawal of Carrefour from South Korea is mainly explained by a strategic decision by headquarters, especially because of the difficulty in acquiring a leading position in the near future." Philippe Broianigo, CEO, Carrefour Korea, 2006. They (Carrefour and Wal-Mart) have struggled to find the economies of scale and to compete with groups like E-Mart, and they've struggled just as much with the back-of-house business as much as the front-of-house." Morgan Parker, President, Taubman Asia, 2006. "Wal-Mart and Carrefour were not aggressive enough in expanding their networks in South Korea, once they lost the race, they could never catch up." Koo Chang Gun, Retail Analyst, Korea Investment and Securities, 2006 Real reasons…??? Carrefour market o Carrefour entered the Korean market without a local partner o Failed to understand the market and was unable to select good locations for its stores o Employed most of the top management from France - not viewed favorably by the local employees o Faced problems from local trade unions 5  Exit from UK in just one year becasue: BEST BUY Case - US brand was too present - Few Stores outside of town - Over ambitious sales higher then market leader - Understimating Competition File:Best Buy Logo.svg o 2010 entered UK market in JV with Carphone Warehouse o In 2011 generated a loss of £46.7m o Best buy exited the UK market late 2011 o This failed venture cost its parent companies £200m What went wrong? 6 Market evaluation Brand recognition o Best Buy is a major retailer in the United States. o Awareness spread slowly in the UK o The advertising may not have helped. One TV spot, narrated by an actor with a US accent led to comments like "Why is it so American?" on the company's YouTube site. Too few stores o Dixons Retail operates more than 600 stores under brands including Currys and PC World. Comet has about 250. o With just 11 shops in out-of-town locations with no passing trade, Best Buy was slow to make an impact. Over-ambitious sales targets o In 2008, it was predicted that the stores would eventually generate an average of £600 to £700 a square foot — significantly more than market leader Dixons, whose shops make on average £500 a square foot Underestimating the competition Location o Securing planning permission for out-of-town locations a slow process 7 The exit decision Conrad Berenson posited an exit model in 1963 that identified 5 categories of criteria used to evaluate a product abandonment decision: 1.Financial security - determine if the minimum return on investment is being met for the firm 2.Financial opportunity - calculating the return on alternative uses of the firm's resources 3.Marketing strategy - determine the value of the product above pure financial profit, such as brand-name worth and the value of established distribution channels 4.Social responsibility - or criteria that encompass the firm's responsibilities to customers, employees, suppliers, and so forth 5.Organised intervention - including actions by government, society, or labour groups as a result of the decision to exit 8 The exit decision R.S. Alexander, 1964 Model identifies 6 signs a firm should exit from a market Alexander's model identified 6 signs that suggest a firm may have to consider exiting a market: 1. falling sales 2. deteriorating prices 3. declining profitability 4. increase in popularity of substitute products 5. obsolescence of a product or idea 6. increasing consumption of management resources to keep the product viable 9 The exit decision Philip Kotler 1965 Added 3 point to Alexander’s model His model incorporated Alexander's six points but added: o alternative opportunities o product contribution in relation to other products o impact of the product on the company's image or on sales of other products 10 Barriers to exit o Dedicated assets o Contractual obligations o Tax incentives owed to the local, regional or national government o Costs of laying off staff 11 Cost of exiting Financial o start up costs not yet amortized o repatriating ex-pats o laid off staff compensations o negotiating redundancy terms with staff o cost of legal advice o tax issues Damage to reputation Damage to brand 12  Enter in a new market in 1997 to diversificate their Crédit Agricole Case business providing loans BUT WITHOUT collateral and guarantor. Abandon market in 2013 because: - Risk too high - Change of company strategy o Market entry in 1997 as a financial leasing company o Service diversification – car purchase financing (car loans) o Later also added operating leasing o Exclusive contractor of financial services for Fiat, Alfa Romeo, Lancia, Mazda, Jaguar, Land Rover and Jeep o Loans without collateral and guarantor o 2013 – decision to abandon the market 13 Crédit Agricole Company facts (2012): Total assets: CZK 9000M Sales (KAM for car dealers): 100 FTE Revenues: CZK 600M Marketing: 15 FTE No. of new contracts: 8k units Customer service (incl. call centre): 30 FTE Total No. of customers: 37200 Back-office: 55 FTE Total loans and receivables: CZK 8132M IT: 10 FTE Total overdue loans and receivables: CZK 1421M Accounting and controlling: 15 FTE Legal: 15 Audit: 2 No. 4 on the Czech market in financing cars, vans and motorcycles Project managers: 5 FTE HR: 4 14 Crédit Agricole Case o Market entry in 1997 as a financial leasing company o Service diversification – car purchase financing (car loans) o Today – financial and operating leasing o Exclusive contractor of financial services for Fiat, Alfa Romeo, Lancia, Mazda, Jaguar, Land Rover and Jeep o Loans without collateral and guarantor o 2013 – decision to abandon the market Reasons: o Increasing costs of risk o Change of corporate strategy – withdrawal also from Slovakia and Hungary Planned exit - 2016: o No potential buyer for the company o Unsold / Unsolved Non-performing loans 15 Crédit Agricole Case What are the arising issues of such long exit period ? 16  It can male sense to engange in a low-performing market because: Stay and Make it Work - Market growth - ▲ customer purcasing power (Ex beer market in China) Stay Abandon There may be strategic reasons to engage in a low-performing market o e.g. Beer industry in China o Almost no profitable foreign beer producer o Chinese market grows 30 % annually o Increasing purchasing power of customers o Foreign beer is a status symbol o Premium beer may not be profitable today but in 5-10 years it may pay off Example of Russia 1998 – first default: 6 RUB/USD to 20 RUB/USD 2008 – second crisis 2014 – third crisis 17 Exiting from exporting Issues if you want to exit from a country as an exporter: - Obligatory payment - After-sales guarantees - Terminate all licenses (software, Patents etc..) - Leased equipment o Obligatory payments to representatives following contract termination o Guarantees o Trademarks o Need to terminate all licenses and accesses to proprietary information o Leased equipment Other issues? 18 Exiting from licensing o Licensee wants to exit o Licensor wants to exit What are the issues? 19  Reasons: Exiting from franchising - Realtionship breakdown - New opportunities Issues: - Fixed term Reasons - Commerce restrction - Extensive contract - Franchisor own the real estate (Ex: Hotel Marriot owns an o Retirement hotel but mandates an external entity to manage the hotel) o Relationship breakdown Easy way: - Sell BUT the shorter the term the lower the price o New opportunities o Disappointment with franchisor’s performance or the financial return on investment o Franchisor not providing services Issues o Most franchises are for a fixed term (although there may be renewals) o When the term ends, need to consider how plant, equipment and stock is disposed of o A franchise agreement may grant a franchisor a first right to purchase, possibly at less than market value o Does the agreement allow the franchisor to take over the existing lease o is there a restraint of trade (from the franchise or the premises of other franchises) o When entering into a franchise agreement always consider how easy it is to exit the relationship 20 Exiting from franchising o Can be hard to withdraw o Extensive contracts are typical o Non-compete – No-solicit clauses o Some franchisors own the real estate and lease to the franchisee (e.g. hotels) o Easiest way to exit is by selling o But… the shorter the term remaining the lower any possible sale price may be o Typically, a franchise agreement enables the franchisor the first right of refusal to acquire the business. Only if the franchisor decides not to take up this right can the franchisee go to the market o Franchisor may be required to approve the new franchisee and require a new franchise agreement to be signed, possibly on more onerous terms 21 Exiting Joint Ventures Reasons: - ▾ Demand - ▾ Financial Performance - Competitor Reasons to exit - Relationship - Sature market o Demand for product declines - Change in low Type of exits: o Financial performance - HARD: Make parties more motivated in rough times - EASY: More flexibility in decisions and resources allocation o Competitor actions o Poor relationship with members of JV o Opportunism by a partner o Consolidating market o Changes in laws - opportunities to wholly own a business Have robust exit provision in your JV agreement III How can you best extract/protect value from your joint venture(s)? What are your options? How can you negotiate a fair valuation when you are in dispute with your partner(s)? What can you do to ensure ongoing funding/trading relationships/access to technology for the JV if your partner exits or reduces their share? 22  Exiting Joint Ventures Everyone knows how to get into a relationship, but getting out is not so easy… “Should a given exit be easy or hard?” Rende difficile l’uscita dalla JV Hard exit could be advantageous because it makes parties more likely to remain dedicated to the relationship during rough times, and to build trust and a deeper commitment in general. On the other hand, easy exit brings unparalleled flexibility with regard to strategic decision making and Rende facile l’uscita dalla JV resource allocation. Rather ask: „When should the exit be easy or hard? „For which partner should it be easy or hard?” 23 Alliance exit blind spots To avoid: - Plan in advance potential exit strategies while formulating the alliance - Quantify the value created together - Who initiated the contract has to be the one running the alliance 1. Planning-stage honeymoons Alliance managers often fail to think about explicit exit strategies while formulating their alliances 2. Missing a moving target Rigid strategies of joint projects 3. Quantification Dilemma Alliance managers often fail to successfully quantify the value created by the alliance 4. Functional Funnel In many organizations the employees who initiate the contact with the alliance partner and negotiate the terms of the deal are usually not the ones running the alliance 24  Project strted from scratch Exiting Acquisition or Greenfield Exit options o Sale o Spin-off o Merger o MBO Management by Objectives o Liquidation o Receivership being dealt with by an official receiver (professional = curatore fallimentare) 25 Exiting Acquisition or Greenfield Sale o allows a company to quickly jettison a product or division o provides an injection of capital that can be invested elsewhere at a higher return o can maintain employment for staff o contracts with suppliers maintained Things to consider o sell for cash or shares ? o sell the whole business or part of it ? o sell to who ? o who will pay the highest price ? o is one buyer better from a strategic viewpoint ? competitive threat could be posed by a prospective buyer 26 Exiting Russian Market Companies still operating in Russia Companies that have Curtailed Operations in Russia Common excuses, why they are still staying? How those left? Source: https://som.yale.edu/story/2022/over-1000-companies-have-curtailed-operations-russia-some-remain 27 Market Selection doc. Ing. Ladislav Tyll, MBA, Ph.D. Market evaluation Unilateral analysis Bilateral comparison identifies Cultural, Administrative, Geographic and Economic ▪ PESTEL CAGE differences or distances between countries that companies should address when crafting international strategies. ▪ Five Forces Model Hofstede’s 6 D Model ▪ Competitive analysis Always try to use the tools and indicators adjusted for a given case In case of need and lack of data, you may use proxies 2 Measuring market attractiveness ▪ Market´s size and growth rate ▪ Country (region´s) institutional context Political and social system Openness Product markets Labor markets Capital markets ▪ Country (region´s) competitive environment ▪ CAGE distance from other markets company serves 3 External environment analysis Technological Economic environment Political environment environment Competitors Customers Natural COMPANY MICRO MACRO conditions Internal factors Subcontractors Environment Environment Key players Social Stakeholders Legislative environment environment Demographical environment 4 General analysis of Macro environment Czech Republic Russia Measure 2016 2019 2023 Evaluation 2016 2019 2023 Evaluation WEF (position) 31 32 32 stable 38 43 43* ? CPI index (position) 47 44 56 worsening 131 137 141 worsening Country rating (Moody´s) A1 AA3 AA3 stable Ba1 Baa3 Baa3* ? Doing business position index 36 41 41 stable 51 28 120 worsening GDP Growth 2,60% 2,57% -0,3% worsening -0,20% 1,34% -2,20% worsening Overall tax burden 41,00% 46,10% 34,6% ? 50,70% 46,20% 46,20% stable Inflation rate 0,70% 2,80% 12,0% worsening 9,70% 4,47% 15,90% worsening Unemployment 3,50% 2,20% 2,60% stable 5,40% 4,59% 4,40% Improving *Due to geopolitical tensions Russia has been withdrawn from ratings, Data available from 2021 Doing business methodology – researched areas: Source: http://www.doingbusiness.org, http://www.weforum.org, http://www.oecd.org ▪ Starting a Business ▪ Protecting Minority Investors ▪ Dealing with Construction Permits ▪ Paying Taxes ▪ Getting Electricity ▪ Trading across Borders ▪ Registering Property ▪ Enforcing Contracts ▪ Getting Credit ▪ Resolving Insolvency 5 PESTEL Analysis Political Legal Economic ENVIRONMENT Ecological Social Technological 6 PESTEL – Political environment Regional economic and political integration Taxes Political stability and risks (e.g. Nationalization, rise of taxation) State control of the internet Wars and embargos Corruption Support to FDIs 7 PESTEL – Economic environment Purchasing power Average hourly labour costs in textile and automotive industry in USD (2020) Costs of production 60 Productivity of labour 50 Exchange rate development 40 Cost of capital 30 20 10 0 Textile industry Automotive industry Source: Eurostat, OECD, UK Office for National statistics, ILO 8 PESTEL – Social environment Cultural factors Demographic factors Population ageing Global convergence 9 PESTEL – Technological environment Identifying technological clusters Access to internet Cloud computing Global convergence in technological area 10 PESTEL – Ecological/Environment/Legal Ecological / Environmental / Natural conditions 11 PESTEL Analysis Political factors Technological factors Licencing Innovations in new types (flavours) of beer Importing rules Innovations in packaging State owned vs. Private companies New cylindro-conical tanks technology Economic factors Decrease of real incomes (consumers seek for cheaper brands) Ecological factors Increasing energy prices No need of recycling Central bank strategy regarding exchange rate management Water quality issues Social factors Rising demand for flavoured beers Legal factors Increased popularity of wine No alcohol allowed while driving Country of origin effects Potential growth of taxes and import duties http://cafejustina.cz/images/loga/budweiser_logo.jpg 12 Micro environment analysis Type of industry Convergating x Divergating Concentrated x Fragmented Cyclical x Neutral x Anticyclical 13 Porter´s Five Forces Model New incumbents Threat of new entrants Competition Suppliers Buyers within industry Bargaining power Bargaining power of suppliers Rivalry of buyers Threat of substitutes Substitutes 14 Porter´s Five Forces Model Barriers to entry Capital requirements Economies of scale Product differentiation Access to distribution channels Governmental policy – e. g. Import duties, licencing, quotas, ownership restrictions Expected retaliation 15 Porter´s Five Forces Model Rivalry Concentration within industry Concentration Monopoly Diversity of rivals Oligopoly Product differentiation and switching costs Monopolistic competition Industry growth Perfect competition Exit barriers Excess capacities 16 The 5 Forces Model – Amazon Case Rivalry Threat of new entrants Power of buyers Power of suppliers Threat of substitutes 17 Competitive analysis 1. Design of competition analysis system Defining: scope, responsibilities, sources of information 2. Data collection (primary x secondary) 3. Data analysis 4. Conclusions 18 Competitive analysis Lift up from your chair The research should be conducted from the top Use your common sense rather than your money Do not be to proud, lofty and egocentric Do not be afraid to copy what is good Only a good thief knows what to steal! Make your notes! 19 Competitive analysis What can we do, to learn about our competitors? I am the customer of my competitors I am the shareholder of my competitors I Interview my competitors’ customers I visit fairs, exhibitions, workshops etc… I eagerly study all the industry trends.. I buy competitive information from specialists Sources of reliable and valid information about our competitors? 20 Challenging 5 Forces analysis Percentage of variance in firms´ ROA explained by Industry effects Firm effects Unexplained variance (%) (%) (%) Schmalensee (1985) 19,6 0,6 79,9 Rumelt (1991) 4,0 44,2 44,8 McGahan and Porter (1997) 18,7 31,7 48,4 Hawawini at al. (2003) 8,1 35,8 52,0 Roquebert et al. (1996) 10,2 55,0 32,0 Misangyi at al. (2006) 7,6 43,8 n.a. 21 Modification of Five Forces Model New incumbents Threat of new entrants Competition Suppliers within industry Buyers Bargaining power of suppliers Rivalry Bargaining power of buyers Threat of substitutes The level of demand for complementary products The level of offer of complimentary products Complementary Substitutes products + we cannot just learn about the Status Quo – 6 Forces analysis is used to understand (forecast) Industry profitability, size, etc. 22 Industry life-cycle analysis Monopoly / Oligopoly Monopolistic / Perfect competition Introduction Growth Maturity Decline Market size / Sales Time Rivalry Low Growing High High Competitive adv. Innovation, differentiat. Differentiat., price Price Price war Barriers to entry Low Low High Low Power of buyers Weak Weak High High Power of suppliers Weak Growing Growing Neutral 23 International Product Life Cycle analysis Production in EU and US Production Production in Less Developed Countries in Germany Net Exporter Time New product Net Importer Mature product Phase 1 Phase 2 Phase 3 Phase 4 Phase 5 Production in Production begins EU exports to LDC EU exports LDC export home market In other DC to Germany to Germany Exports to DC Export mainly to Exports to LDC LDC Arranged mainly by Other DC exporters 24 CAGE Framework CAGE - Cultural, Administrative, Geographical and Economic distance Cultural distance Administrative and political Geographical distance Economic distance distance Different languages Absence of historical Physical remoteness Different consumer Different ethnic groups Absence of common borders incomes Distance between two (colonial) relations Different religions Absence of common political Lack of adequate Different costs and quality countries increases Different values, norms associations transportation or of natural, financial and and naturales Absence of common communication infrastructure human resources currency Different climate Insufficient infrastructure with… Differences in law system Different information or Political hostilities knowledge Related to national identity That foreign government With low value-to-weight For which demand varies Distance most affects (foods) sees as strategical or ratio (building materials) by income(cars) With high linguistic content incremental for national That are fragile or In which labor and other industries and (media) security or as for national perishable(fruits) cost differences matter With different sizes (cars), reputation (energy, In which communications are (garments) products… standards (el. devices), telecommunications, vital (financial services) packaging aerospace etc.) 25 CAGE Framework CAGE - Cultural, Administrative, Geographical and Economic distance 26 Star TV entering China What went wrong? What were the key factors of failure? Analyse the level of distance between US and Chinese market in case of TV companies using the CAGE Framework 27 Hofstede’s 6 D Model Power distance Long Term Uncertainty orientation avoidance Cultural differences Individualism Masculinity / / Femininity Collectivism Indulgence Source: http://geert-hofstede.com 28 Besides data driven and rational analyses MNE should also understand behavioral factors affecting choice of international localization Source: Schotter, A., & Beamish, P. W. (2013). The hassle factor: An explanation for managerial location shunning. Journal of International Business Studies, 44, 521-544. 29 Suggested market assessment process 1. Define Your "No-Go" Criteria 2. Develop a multicriteria analysis framework 3. Collect the data 4. Normalize data 5. Score each criterion and calculate weighted scores 6. Rank the markets and proceed with final in-depth analysis 30 Multi-criteria comprehensive analysis Factor weights Group of factors Subgroup of factors services production Financial factors Labour costs 0,19 0,19 30 % services Infrastructural costs 0,01 0,02 32 % production Tax and regulartory costs 0,05 0,06 Other financial factors 0,05 0,05 Labour force factors Overall labour force experience and skills 0,15 0,12 40 % services Availability of labour force 0,15 0,19 34 % production Education 0,05 0,02 Language endowement 0,05 0,01 Economic factors Economical-political stability 0,1 0,1 27 % services Infrastructure 0,05 0,07 30 % production Level of bureaucracy and corruption 0,02 0,02 State support 0,01 0,02 Legislation factors 0,05 0,05 Geopolitical situation 0,02 0,02 Cultural factors 0,02 0,02 Others Different time zones 0,01 0,01 3 % services Geographical distance 0,01 0,02 4 % production Ethical factors 0,01 0,01 31 Multi-criteria comprehensive analysis Market Potential Index (MPI) - 2022 Market Overall Market Growth Market Commercial Economic Market Country Market Size Consumption Country Risk Overall Score Rank Rate Intensity Infrastructure Freedom Receptivity Capacity 1 China 100 87 1 100 100 10 27 66 100 2 Singapore 2 52 60 59 79 100 82 94 51 3 Hong Kong 2 52 60 59 79 100 82 94 51 4 India 37 67 22 39 46 10 54 51 45 5 Canada 6 40 57 63 52 54 92 94 42 6 Ireland 1 88 37 52 47 42 98 82 40 7 Japan 13 29 49 77 72 14 84 94 40 8 Switzerland 2 42 66 68 61 40 100 77 39 9 Netherlands 3 42 44 56 69 44 95 94 38 10 Germany 8 32 55 69 60 23 91 88 37 Source: https://globaledge.msu.edu/mpi/data/2022 32 Multi-criterion comprehensive analysis The 2023 Kearney Global Services Location Index (GSLI) Source: https://www.kearney.com/service/digital/gsli/2023-full-report 33 Modes of entry EXPORTING Ing. Ladislav Tyll, MBA, Ph.D. Modes of entry Without a capital involvement With a capital involvement Level of control over foreign activities Green field M&A Joint FDI Strategic Ventures alliances Corporative Franchising Licensing Direct Contractual Indirect export export Resources committed / level of risk / expected return 2  High PURCHASING Joint Modes Ventures Acquisitions Subsidiaries of International Production Imports Level of control over foreign activities entry outsourcing abroad Internationalization Company and its Home market competitive RATs & CATs activities SALE advantages Internationalization Exports Production abroad No capital With capital involvement involvement Licences, Joint High Acquisitions Subsidiaries franchising… Ventures 3 Mode of entry decision – frameworks and approaches http://4.bp.blogspot.com/-GTkHc0o0BuI/USdB_nINBbI/AAAAAAAAB5c/4h7tm-K2OFA/s1600/honda-logo-01.jpg 1. Uppsala strategy (Step-by-Step): Export – Licencing - JV - FDI http://www.grcea.com/wp-content/uploads/2012/03/bmw-logo.jpg 2. „Born Globals“ http://www.androidmarket.cz/wp-content/uploads/2013/01/Logo-firmy-ESET.jpg http://freebit.cz/wp-content/uploads/2012/12/Avast-logo.png http://www.exodus.cz/img/avg_logo_small.jpg 3. Transnational companies from emerging markets http://www.aptechnn-students.com/projects/std433121/LIBERTY/pics/pmsHaierLOGO.jpg http://www.drevoastavby.cz/images/stories/dum_o_drevostavbach/CEMEX-logo.JPG 4 Mode of entry decision - frameworks 4. OLI Framework Ownership advantage Unique assets – brand, technology, resources… Location advantage Economic, Political and Socio-cultural advantages Internalization (or control) advantage …the more OLI advantages a firm possesses, the greater the propensity of adopting of an entry mode with a high control level such as wholly owned venture. 5 Mode of entry decision - frameworks Costs of doing business abroad Costs of doing business abroad Price Price MC AC of a transnational company P0 AC of a local company Frameworks D MR Q0 Quantity Liability of foreignness Cognitive Normative Institutional distance Regulatory 6 Corporate approach to foreign market entry considering the impact of an institutional distance A) Strategy of ownership minimizing CDBA – Institutional distance in general B) Regulatory distance C) Normative distance D) Cognitive distance Customer ethnocentrism Effect of country of origin Mutual and social relationships of local companies Proportion of local and foreign companies E) Cultural differences (cognitive and normative distance) F) Corruption (regulatory and normative distance) Structural corruption Spontaneous corruption 7 Internationalization risks Economical, political, geographical and social risks in the host country Lower market experience and knowledge risk Risk of lower acceptance by local customers, partners and governments Worse attitude of home government Growth limit risk Risk of autonomous behaviour of subsidiaries Foreign partner selection risks Risk of disruption of value chain Exchange and interest rate risks Higher costs Investment risks Liability of foreignness 8 Entry timing First movers vs. Fast followers 1. Existing scarce resource we can acquire 2. We must be able to lock up this scarce resource in a way it creates the barrier for entry to the potential competitors The Combined Effects of Market + the same logic could be applied as when considering and Technological Change market entry with new technological innovation Source: Suarez, F., & Lanzolla, G. (2005). The half-truth of first-mover advantage. Harvard business review. 9 Entry timing, speed & expansion +„first mover“ advantage + Risk diversification thanks to market diversification + Higher potential of faster sales growth + Broader use of competitive advantage + Economies of scale (e. g. Uniform advertising) - Required high capital and HR endowment in short-term horizon - Thread of significant losses in case of failure on more markets - No or limited possibility to learn from own or other´s mistakes Wave strategy 10 Exporting Foreign Risks warehousing Price and Regulations, duties, payment taxes, licences… conditions GOALS C O M P E T I T I V E A D VA N TA G E http://blog.martinhujer.cz/wp-content/uploads/2012/10/2012-10-10-topgal-batoh-03-czechmade.jpg Finance Production Transport Competition and Insurance R&D HR http://www.jkwsp.com/images/internationalization.png Language Social differences conventions 11 ealism.com/home/jtodonnell/careerealism.com/wp-content/uploads/2012/02/cover-letter-introduction-goals.jpg Exporting - gains and losses growth of sales and profits growth of market diversification (lower dependency) utilization of technologies and know-how enterprise expansion utilization of spare (excessive) production capacity elimination of seasonal swings new experiences subordinating SR profits to LR profits http://3.bp.blogspot.com/_rKG-ziTSNUQ/TLIoo9_HJFI/AAAAAAAABso/oIdteyUqzAc/s1600/blogger+limits.png growth of administrative costs search for suitable specialists longer payment terms product of packaging modification financing licences 12 Types of exporting Direct export Sales representative (company) Intra-company transfers PRODUCER Customer e-commerce / catalogues Sales agents / Intermediaries (mandate x consignment contracts) Dealership / Distributors (Exclusive vs. Non-exclusive) Piggybacking Franchising Indirect export 13 Franchising as a type of indirect exporting http://www.maneoshops.cz/uploads/layout/filipi_logo.gif http://gabrielprata.com/portfolio/SpryAssets/blank-map-of-southern-and-eastern-asia-779.gif Franchise fee Products Payments for goods 14 Export sales agreement Parties to a contract Description of goods, packaging… Price and payment arrangement Delivery conditions (INCOTERMS) Documents Avoidance (termination) of a contract Force majeure -> excuse for non-performance Applicable law in case of disputes 15 Export sales agreement Price and payment arrangements Means of payment: cash, cheque, bank draft, bank transfer… Payment arrangements: Payment in advance Cash on delivery / on delivery of documents High Letter of credit (L/C) - irrevocable Open account Documentary collection Exporter´s risk Documentary collection Payment on invoice (supplier credit / delivery on credit / open account) L/C Cash on delivery + eventual currency clause Advance payments Low Low Importer´s risk High 16 Export sales agreement Price and payment arrangements - Letter of credit 1 5 SELLER BUYER (beneficiary) (applicant) 2 6 4 3 Seller´s bank Buyer´s bank 7 7 17 Export sales agreement Price and payment arrangements Documentary collection 4 3 SELLER BANK BUYER (beneficiary) (applicant) 2 3 1 18 Export sales agreement Special price and payment arrangements - Countertrade Barter Direct exchange without money http://www.aviationgraphic.com/1027-1761-thickbox/jas39c-gripen-czech-air-force-tc-191.jpg Counter purcha