INTERNATIONAL BUSINESS STRATEGIES

Andrey G. Medvedev,

Professor

September 21, 2009CEMS MIM Programme

© Andrey Medvedev

6. FOREIGN OPERATIONS METHODS:NON-INVESTMENT MODES

1. FOREIGN ENTRY: A MODEL FOR ANALYSIS

2. COMMERCIAL OPERATIONS (FOREIGN TRADE)

3. EXPORTING SERVICES

4. LICENSING

5. FRANCHISING

6. CONTRACT MANUFACTURING

© Andrey Medvedev

FOREIGN OPERATIONS METHODS

Responsibilities of International ManagerResponsibilities of International Manager:

Evaluate opportunities and risksopportunities and risksof entering foreign economy

Define a degree of local responsivenesslocal responsiveness Select a foreign operations methodforeign operations method Search for strategic partnersstrategic partners and target companiestarget companies

abroad

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FOREIGN ENTRY: A MODEL FOR ANALYSIS

CompetenceCompetences, values, s, values,

overall overall strategy & strategy &

ODOD

entry mode; entry mode; entry-mix; entry-mix; entry entry stagesstages

PEST-factors PEST-factors of of

opportunities opportunities and threatsand threats

Implementation

Goals of internationalisation

Development (real option)

Industry (SBA) Industry (SBA) / product / product

nature (multi-nature (multi-domestic vs. domestic vs.

global)global)

Current performance

Reasons to internationalise

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FOREIGN MARKET AND/OR INDUSTRY ENTRY: BASIC DECISIONS WHICH MARKET / INDUSTRY?

COUNTRY SELECTIONCOUNTRY SELECTION

WHAT OPPORTUNITIES? ENTRY GOALSENTRY GOALS

WHEN TO ENTER?TIMING OF ENTRYTIMING OF ENTRY

IN WHICH FORM? ENTRY MODEENTRY MODE

ON WHAT SCALE?DEGREE OF INTERNATIONALISATIONDEGREE OF INTERNATIONALISATION

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FOREIGN OPERATION METHODS (FOM): HOW?

FOREIGN OPERATION METHOD (MODE) =FOREIGN OPERATION METHOD (MODE) =PARTICIPATIVE STRATEGYPARTICIPATIVE STRATEGY

– ANY TYPE OF BUSINESS ACTIVITYTHAT CROSSES NATIONAL BORDERS

INTERNATIONAL COMMERCIAL OPERATIONSINTERNATIONAL COMMERCIAL OPERATIONS INTERNATIONAL CONTRACTUAL OPERATIONSINTERNATIONAL CONTRACTUAL OPERATIONS FOREIGN DIRECT INVESTMENT MODESFOREIGN DIRECT INVESTMENT MODES

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HOW? NON-INVESTMENT MARKET ENTRY – COMMERCIAL MODES

COMMERCIAL OPERATIONS IN PHYSICAL GOODSPHYSICAL GOODS– INDIRECT AND DIRECT EXPORTING

EXPORTING R & D, KNOWLEDGE, KNOW-HOW R & D, KNOWLEDGE, KNOW-HOW– SELLING R & D PROJECTS, ETC.

PROVISION OF SERVICESSERVICES– PROVIDING CONSULTING CONSULTING AND ENGINEERING ENGINEERING SERVICES

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NON-INVESTMENT MARKET ENTRY – RECENT TRENDS IN RUSSIA

PROMISING OPPORTUNITIESPROMISING OPPORTUNITIES IN SOME SECTORS:– HIGH DEMAND

– GROWING PURCHASING POWER

– INDUSTRIAL DEVELOPMENT

CONTROLCONTROL: MOVING TO DIRECT EXPORTATIONDIRECT EXPORTATION

MARKET EXPANSIONEXPANSION: MOVING TO DISTRIBUTIONDISTRIBUTION

““A HOME MARKET ABROAD”A HOME MARKET ABROAD”

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EXPORT OPERATIONS

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EXPORT STRATEGIES

INDIRECT EXPORTINGINDIRECT EXPORTING– A FIRM DELEGATES EXPORTING FUNCTIONS TO OUTSIDERS

(AGENTS AGENTS OR DISTRIBUTORSDISTRIBUTORS)

– THEY USUALLY HAVE A KNOWLEDGE OF LOCAL METHODSOF CONDUCTING BUSINESSAND THE ABILITY TO ACHIEVE A MARKET SHARE MORE RAPIDLY

DIRECT EXPORTINGDIRECT EXPORTING– A COMPANY CARRIES OUT EXPORT TASKS DIRECTLY BY ITSELF

(MARKET RESEARCH, INTERNATIONAL INSURANCE, PRICING, FINANCING, ACCOUNTING, SHIPPING AND PREPARING EXPORT DOCUMENTATION)

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FOREIGN TRADE AGENCY EFFICIENCY

TRADING WITHIN A NARROW WELL-EXAMINED SEGMENTOF THE MARKET

REDUCED DISTRIBUTION COST

SHORTER DELIVERY TERMS

PRE-SALES SERVICE AND POST-SALES MAINTENANCE

PROVIDING AN EXPORTER WITH A DATA ON QUALITY LEVELS AND COMPETITIVENESS OF GOODS IN A MARKET SEGMENT

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FROM INDIRECTTO DIRECT EXPORTATION: VALIO Valio GroupValio Group comprises the parent company, Valio Ltd,

and its subsidiaries in Finland, Sweden, Belgium, Estonia,Latvia, Lithuania, Russia, and the US.

Production facilities are located in Estonia and Belgium. In 2005, ValioValio Group net turnover was EUR 1.net turnover was EUR 1.66 billion billion. International operations account for one-third of net turnover.

Russia attracts about 10 percent10 percent of the Group turnover. ZAO Valio St. Petersburg, Valio Ltd’s subsidiarysubsidiary

was founded in 1994 to support exports. Since 2002, ZAO Valio SPb is the only importeronly importer

of Valio products in Russia. Local marketingLocal marketing is designed especially for Russia.

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PURE MARKET ENTRY: HONDA

Japan’s Honda Motor CoHonda Motor Co. said in April 2004 it had set up a wholly owned sales and after-service unitwholly owned sales and after-service unit in Moscow to boost demand for its cars in the Russian market.

The Russian auto market has grownfrom around 0.9 million units in 2000to 1.2 million in 2003, and is setto expand even more.

Honda imports the Civic compact,Accord sedan and CR-V sport utilityvehicle, among others,from its British and Japanesefrom its British and Japanesefactories factories for the Russian market.

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TRADE IN SERVICES

ENGINEERINGENGINEERING

BUSINESS CONSULTINGBUSINESS CONSULTING

TRANSPORTATION & COMMUNICATIONTRANSPORTATION & COMMUNICATION

CONSTRUCTIONCONSTRUCTION

TOURISMTOURISM

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INTERNATIONAL ENGINEERING

ENGINEERINGENGINEERING– PROVIDES A FOREIGN CUSTOMER

WITH A PACKAGE OF SERVICES TO SUPPORTAND ENSURE A PRODUCTION PROCESS,MAINTAIN THE CONSTRUCTIONAND OPERATION OF INDUSTRIAL PROJECTS

ENGINEERING INCLUDES– PRE-PROJECT SERVICES

– PROJECT SERVICES

– POST-PROJECT SERVICES

– RECOMMENDATIONS AND INSTRUCTIONS

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EXPORTS OF INDUSTRIAL PROJECTS

INDUSTRIAL PROJECTINDUSTRIAL PROJECT: A CONCEPT– DESIGN– FULL EQUIPMENTFULL EQUIPMENT (COMPLETE DELIVERIES)– TURNKEY OPERATIONSTURNKEY OPERATIONS– TRAINING– POST-PROJECT SERVICES

PROJECT MANAGEMENT

FINANCING INTERNATIONAL PROJECTS– PROJECT IMPLEMENTATION BY A JOINT VENTUREJOINT VENTURE– PROJECT FINANCINGPROJECT FINANCING– COMPENSATION (BUY-BACK) AGREEMENTCOMPENSATION (BUY-BACK) AGREEMENT

• TRADE IN EQUIPMENT (A SELLER OF EQUIPMENT RECEIVES PAYMENT AS GOODS PRODUCED AT THIS EQUIPMENT)

– PRODUCTION SHARING AGREEMENTPRODUCTION SHARING AGREEMENT

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HOW? NON-FDI MARKET ENTRY – CONTRACTUAL MODES LICENSINGLICENSING

FRANCHISINGFRANCHISING

MANAGEMENT CONTRACTSMANAGEMENT CONTRACTS

CONTRACT MANUFACTURINGCONTRACT MANUFACTURING

OEMOEM--AGREEMENTAGREEMENT

LOW INVESTMENT RISKLOW INVESTMENT RISK LEARNINGLEARNING LOCAL CONDITIONS SUIT WELL IN MULTI-DOMESTIC SECTORSMULTI-DOMESTIC SECTORS

IF BUSINESS OPPORTUNITIES ARE LOWOPPORTUNITIES ARE LOW (OR RISKS HIGHRISKS HIGH)

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LICENSING: HOLSTEN BRAUEREI

In 2002, Holsten Brauerei AGHolsten Brauerei AG has signed a long-term contractwith Kaluga breweryKaluga brewery in Russia for the latter to produceHolsten Premium and Holsten Festbier under license for 15 years.

The long-term deal caps a pilot partnership that has been runningfor two years, when Holsten sales in Russia grew by almost50 percent. Holsten has over 16 percent of the booming licensed beer market in Russia.

All raw materials, from malt to bottles, are supplied by Holsten Brauerei. SAB is responsible for manufacturing, promotion and sales. Producing Holsten in Kaluga is 30 percent cheaper than in Hamburg.

Kaluga Brewing Company was acquired by South African Breweries (SAB) in 1999. It produces

its own beer brand “Zolotaya Bochka“ and about 16 percent of all licensed beer production in Russia.

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LICENSING: CHRYSLER

GAZGAZ, the country’s second-largest automotive firm, invested $150 million in two new cars, based on older-generation ChryslerChrysler models.

The company, which is best known for its Volga sedan, will buy licenses and equipment to produce Chrysler Sebring and Dodge Stratus sedans under its own brand in Russia. Chrysler is now working on new versions of both the Sebring and Stratus models.

Under the deal, GAZ transfered older manufacturing equipmentfrom Chrysler’s Sterling Heights, Michigan, plant to Nizhny Novgorod, where the Volga is made. GAZ also plans to buy enginesfrom Chrysler’s engine plant in Saltillo, Mexico.

The models were restyled and adapted to Russian roads. The first cars based on the Chrysler technology are expected

to roll off the production line in 2008. GAZ plans to initially produce65,000 cars per year. Output could be increased if necessary.

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INTERNATIONAL FRANCHISING

AN ACTIVITY WHEN A FRANCHISER FRANCHISER FROM ONE COUNTRY TRANSFERS TO A FRANCHISEEFRANCHISEE IN ANOTHER COUNTRYTHE RIGHT TO USE ITS TRADEMARK AND OTHER RIGHTS AS WELL AS THE RESOURCES REQUIRED FOR DOING BUSINESS

SELLING A BUSINESS IDEA BUSINESS IDEA AS THE WHOLERATHER THAN A PARTICULAR PRODUCTION PROCESS

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FRANCHISINGAS A FOREIGN MARKET ENTRY MODE «TRADE» FRANCHISING

FRANCHISING PLUS A «LICENSE» FOR MANUFACTURING– SOFT-DRINK MANUFACTURING

BUSINESS FRANCHISING– FAST-FOOD RESTAURANTS

SERVICE FRANCHISING– CAR REPARING

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FRANCHISING:KOTIPIZZA Finnish home delivery pizza

restaurant chain, Kotipizza OyjKotipizza Oyj, was founded in 1987. With€53 million turnover, today it isthe second largest in Europe.It has over 220 restaurantsin 100 locations all over Finland.

Kotipizza is a 90 percent franchisefranchise chain.

Kotipizza Oyj is planningto open about 60 restaurantsin St. Petersburg.

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MANAGEMENT CONTRACT:ORIENT-EXPRESS HOTELS In February 2005, British hospitality chain Orient-Express Orient-Express

HotelsHotels acquired a 93.5 percent stake in St. Petersburg’s historic Grand Hotel EuropeGrand Hotel Europe from Germany’s KempinskyKempinsky Hotels & ResortsHotels & Resorts.

Orient-Express owns and manages 48 properties,including hotels, restaurants, tourist trains and river cruisesin 28 countries. The company doesn’t usually build its hotels, preferring instead to buy historical or original properties.

The managers plan to bringin an Orient-Express designerto create a more traditionally

Russian interior with a local artist.

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MANAGEMENT CONTRACT:TELEFONICA

An Argentine subsidiary of TelefonicaTelefonica, a Spanish-based telecommunication corporation, has to pay 4.6 percent of its revenue to Telefonica for management services management services provided by the parent company.

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CONTRACT MANUFACTURING

CONTRACT MANUFACTURINGCONTRACT MANUFACTURING– THE EMPLOYMENT BY ONE FIRM OF AN ESSENTIALLY UNRELATED

FIRM TO MANUFACTURE SPECIFIED PRODUCTS FOR DELIVERY BACK TO ITSELF

MAY SERVE AS A FOREIGN ENTRY MODEOR AS FOREIGN SOURCING

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CONTRACT MANUFACTURINGAS A FOREIGN MARKET ENTRY MODE

TELECOMMUNICATION EQUIPMENT

COSMETICS

CONFECTIONERY

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CONTRACT MANUFACTURING:ALFRED RITTER GmbH & Co. KG In 2002, Russia's Odintsovo Confectionery Factory in Moscow region

(the A. Korkunov brand) and German chocolate company Alfred Alfred Ritter GmbH Co.Ritter GmbH Co. have signed a $20 million deal on joint productionof chocolate. The two companies each invested $10 millionin the project. With the new line, the factory increased capacityto produce 25,000 tonnes of confectionery products per year. Abouta fifth of this was allocated for chocolate under the Ritter Sport brand. The remainder will be produced under the A. Korkunov brand.

During only five years, Ritter Sport occupied5.3 percent of the Russian market (it is nownumber 7 chocolate-bar producer in Russia).

In 2007, a new chocolate factory wholly-ownedby Alfred Ritter will start its productionin Moscow Region.

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CONTRACT MANUFACTURING

CONTRACTOR

MARKET

OFFICE