International Corporate Strategy GEST-S-467

Pr Manuel Hensmans

Extension deadline Case Report 1

• Tuesday 29 October, 11am – Digital version per e-mail

– Physical version in my pigeon hole (5th floor, last office, left hand side)

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Questions Case Report 1

• Come to my office – Monday 21 October, 4-5pm

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Last class: main questions for group work

Class2:

Is your organization fully leveraging its home advantages?

Class 3:

Is your organization effectively leveraging possible host advantages?

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This class: Relation HQ (home) & subsidiaries (host)

Is your firm HQ managing the strategic role of subsidiaries well?

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• Host country subsidiaries self-sufficient and autonomous

• Parent control through appointment of subsidiaries’ senior management

e.g. Unilever, Phillips, Courtaulds, Royal Dutch/Shell.

CORE RIGIDITY OF THIS MODEL? Lack of cross-subsidiary learning & global efficiency

Decentralized Federation

• Host country subsidiaries some strategic autonomy

• Dominant role U.S. parent-- especially in developing new technology and products

e.g. Ford, GM, Coca Cola, IBM

CORE RIGIDITY OF THIS MODEL? Inability to tap foreign subsidiaries for technology, design & new product ideas

Coordinated Federation

• Pursuit of global strategy from home base

• Strategy, technology development, and manufacturing concentrated at home

• Host country subsidiaries primarily sales and distribution companies with limited autonomy.

e.g. Toyota, NEC, Matsushita

CORE RIGIDITY OF THIS MODEL? Inability to become true insiders abroad

Centralized Hub

– Each network node can be source of ideas and capabilities that can be harnessed to benefit whole corporation.

– Local subsidiaries become world sources for particular products, components, and activities.

– Corporate center orchestrates collaboration

Tight complex coordination and a

shared strategic decision process

Heavy flows of technology, finances, people, and materials

between interdependent units.

The Transnational solution The idea of a matrix

Two problematic assumptions Senior Management

• To offset increasing internationalization complexity

1) United Nations syndrome of multinational management:

Treat each subsidiary in a similar manner

- Regardless of different capabilities each subsidiary

- Regardless of strategic importance host market of subsidiary

2) Headquarters hierarchy syndrome

corporate headquarters rule

- complete dependence of subsidiaries who are mere implementers

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UN syndrome vs. HQ syndrome?

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Example & diapers

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• Japan: strategic subsidiary

– Japanese R&D cluster?

• Specialised in miniaturisation of technology

• Due to shortage of land / home storage space

– Baby diapers

» Reduce thickness, without reducing absorbency

» Transfer innovation to all locations, most notably home (US)

Example & Eurobrand teams

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• Natural authority instead of HQ imposition!

– Identified most successful national subs for each prodjct

– Lead subsidiary in charge of pan-European team for that product

– Natural peer authority leads to

• new system of interdependencies & reciprocal collaboration

–

Subsidiary autonomy can be problematic

• 30 percent rule

– Company’s long-standing goal

• produce 30 per cent of revenues from products less than 4 years old

– Was abused by host country subsidiary managers

• 11 R&D centres in the world

– Many centres introduced dubious innovations

» Very incremental

» Or copies from each other/corporate R&D HQ

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Strategic

importance of

the local market

Resource base of

the subsidiary

Figure 5.1 A classification of subsidiary roles in the MNE

Low High

1High

Low 2

3

4

Black hole Strategic leader

Implementer Contributor

Strategic classification of subsidiary roles

Capability of Subsidiary

Strategic importance Local market

• Economic crisis & Pet Care? – Threat of private labels

– Lots of competition in mid-price segments

– BUT Nestlé outperforms global market with PREMIUM food

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Why does Nestlé PetCare outperform?

• Pet owners refuse to trade down quality food – for their cats & dogs

• Why? – Humanization of pets trend

• Cats & dogs are like children

– Especially in countries where

• Lots of professional singles, double income families without kids

– Nestlé US is leader in humanization of pets!

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Purina PetCare

Nestle’s Subsidiary Dynamics

Capability of the

subsidiary

Nestle US: leader in humanization (premium)

• US consumers leaders in spoiling their pets – Premium dog food: Beneful, Purine ONE

– Premium cat food: Fancy Feast

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Anti-obesity Healthy premium food

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Problem Nestle PetCare in Asia-Pacific?

• Big gulf with Western humanization trend!

– Pets fed table scraps…

• Often not even in the house

– Unhealthy?

• Don’t invest

– Getting another one may be cheaper

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What Asian subsidiary could become strategic leader?

• Taiwanese households – pioneers in pet ownership across Asia

• Typically, pets occupy their own specific spaces for feeding and sleeping

– but share the entire home with their human owners

» largely down to a lack of space in most urban Taiwanese domiciles

• followed trend of keeping smaller animals (dogs) & humanizing

» Chihuahuas, Shih Tzus, miniature poodles and Yorkshire terriers.

– Contributing demographic factors

• Taiwan‘s low birthrate, the lowest globally in 2011

• Increasing number of singles and DINKS (double-income households without kids)

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Purina PetCare

Nestle’s Subsidiary Dynamics

Capability of the

subsidiary

2 different ways of transnationalizing HQ-subsidiary relation

• Recruit & promote multiculturals

– travel & climb their way through & up HQ and subsidiaries

• Recruit external Chief Exec + transnational Board directors – Work with wholly autonomous strategic subsidiaries that influence HQ

• TIP: Find the right balance for your case!

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Multiculturals travel & climb their way through & up Contrast!

• Revenues

39%

24%

37%

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Multiculturals travel & climb their way through & up Contrast!

• Board?? – very white &

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Read article on Multiculturals

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Multiculturals CEO L’oreal China?

• Alexis Perakis-Valat – Franco-Greek HEC graduate

– began his career as Product Manager for L'Oréal Paris

– Afterwards managed Garnier in Belgium

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Multiculturals Belgian on Exec Committee?

• Ann Verhulst-Santos – Tervuren

– Studied at

• Solvay Brussels School of Economics and Management

• Institut Francais de la Mode

– Married to Brazilian!

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Contrast with Board Transnational mix

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• External Chief Exec Polman - Sustainable Living Plan – Double sales and halve the environmental impact our products

– improve the nutritional quality of our food products

• cuts in salt, saturated fats, sugar and calories

– Link > 500,000 smallholder farmers & distributors in developing countries to our supply chain

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Autonomous Board

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Autonomous Board

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Unilever accommodates & learns from Ben & Jerry “sustainable living” activism

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• Entirely focused on sustainability – Tripple bottom line

Capitalism and the wealth it produces do not create opportunity for everyone

equally. We recognize that the gap between the rich and the poor is wider than

at any time since the 1920’s. We strive to create economic opportunities for those

who have been denied them and to advance new models of economic justice that

are sustainable and replicable.

Wasn’t easy process! B&J’s acquired by Unilever in 2001

• Ice Cream executive Yves Couillet becomes CEO B&J in 2001 – CEO = Chief Euphoria Officer

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Wasn’t easy process!

• Ice Cream executive Yves Couillet becomes CEO B&J in 2001 – CEO = Chief Euphoria Officer

• Symbolic gestures

– Dresses down, "a grain of sand in the eye of Unilever“

• Act don’t talk – Continues B&J’s social responsibility strategy

– Pays millions to charity

– Invests in social entrepreneurship, local employment…

• Introduces tough business-wise changes – Lays off people, cuts a few exotic brands

– Reorganizes financial bottomline

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Financial issues Relation HQ & subsidiaries?

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Economic exposure

• largely unexpected changes in exchange rates – Fluctuations in foreign exchange rates create the risk of net present

value reduction of the firm’s future income streams

– Potential value reduction is called economic exposure

– Relative to rivals?

• choices made by rivals in terms of the geographic configuration of their investments and their sourcing policies

• Also goes for purely domestic firms if rivals have internationalized (sourcing, sales…)

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Economic exposure (2)

• Distinguish between real versus nominal exchange rates – Nominal rate?

– Direct exchange ratio between currencies

» How many € for one $?

– Real rate? – Changes in nominal exchange rate minus difference in inflation rates

» F.i. nominal rate change of 4% and inflation difference of 3%

» = 1% change in the real exchange rate

• Focus on real exchange rate fluctuations

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Economic exposure (3)

• Consequence – 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 flows

• So what to do? – Develop capabilities allowing risk mitigation

• input-side absorption capability

– Each subsidiary’s capability relative to rivals to adjust sourcing structure

• output-side exchange-rate-pass-through capability

– Each subsidiary’s capability relative to rivals to pass any price change on to its customers

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Exposure

absorption

capability on

the input

market side

Exchange rate

pass-through on

the output

market side

Figure 8.1 A classification of operating exposure at the subsidiary level

Weak Strong

1Strong

Weak 2

3

4

Ideal competitive

position - Flexible sourcing

/ natural hedging

- Strong

differentiation

Worst competitive

position - No flexible sourcing /

natural hedging

- Compete on price

(high price elasticity)

Natural hedging:

revenues in same

currency as expenses

Develop capabilities of risk mitigation

Case 8.2 Porsche:

Fighting with Currency Swinging

Background

• Legendary German manufacturer of luxury sports cars

• Founded in 1931

• Voting shares controlled by extended Porsche family

– Feuding between executives and family throughout 1980s

• Heavy financial losses in 1992-3

– Global recession

– Exposure to weak US dollar

• New executive management in 1993

– Improving efficiency

– New product launch

• Continued attention to foreign exchange exposure

Porsche’s Economic Exposure Position?

1

3

2

4

Exchange rate pass-through on the

output market side

Weak Strong

Weak

Strong

Exp

osu

re a

bso

rpti

on

cap

ab

ilit

y o

n

the

in

pu

t m

ark

et

sid

e

Input: Porsche’s Sourcing Structure

• Manufacturing and sourcing in Germany and Finland

– Supports “Made in Germany” brand promise

• Reflects core capabilities in engineering and manufacturing

– But: inflexible cost structure & significant exposure to euro fluctuations

• Discrepancy between location of production and markets

– 40% revenues from US, yet no US production!

Competitors’ strategy?

• natural hedging

– Japanese automakers disperse production across major regions

– N-American manufacturers expanded overseas production into Asia and Latin America

– European automakers hedge USD exposure

• BMW & Mercedes plants in the USA, Volkswagen plants in Brazil & US

• Lower discrepancy between location of production and location of markets

• Procuring parts and materials overseas

Exchange Rate Pass-Through Capability

• Varies by product line

– 911 series: can pass through exchange rate without harming sales

– Boxster: low exchange rate pass through capability (price increase would hurt sales)

– Cayenne: top-end models may allow for some exchange rate pass through

• Conclusion:

– Portfolio allows for some exchange rate pass through

– Can not fully pass on exchange rate costs to North American customers without significant reductions in sales

What to do?

• More Product differentiation

– compete even more on quality rather than price

• Financial options: aggressive “put options” hedging strategy

– firm’s 2011 and 2012 sales have been hedged for 100 %

– May be costly due to option premiums

– Main objective: “to buy time”

• “…will have to live with an adverse dollar”

– Currently engaging in a cost-cutting program

Taken over by Volkswagen

• Main difference with Porsche? – Natural hedging

– Big manufacturing centres in USA, China,…

• Main commonality with Porsche? – New upgraded quality image across brand range

• Made in Germany

• Common production & sales platforms

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“Porsche is the world's best premium car story”