International Strategy

and Management

Core Topics
International growth strategy
Global, international, multidomestic

Entering foreign markets

Market selection, timing, operational
decisions

Entry modes
Exporting, licensing, franchising, joint
ventures, strategic alliances,

Global marketing strategy

Global manufacturing strategy

Additional Topics
Globalization
Drivers, consequences, success factors

Global ethics
Impact on business

Culture
Determinants, impact on business

Foreign exchange
International human resource
management

Textbooks
Global Business Today
Charles W.L. Hill; Irwin

Mastering Global Markets

Czinkota, Ronkainen, and
Donath; Thompson

Total Global Strategy

George S. Yip; Prentice Hall

Pedagogy
Lecture / Discussion
Slides on web (before, complete)

Exercises
Hill GlobalEDGE

Case studies
Simulation: Country Manager
Interpretive Software

Globalization

Globalization
The way it was.
Self-contained national economies,
isolation, differences in govt., culture,
and business systems

The way it is
Reduced barriers (GATT, tariffs),
shrinking distance (technology,
transportation, culture), interdependent
economies
Sample slides

Average Tariff Rates

(Manufactured Products as % of Value)

France
Germany
Italy
Japan
Holland
Sweden
Britain
U.S.

1913 1950 1990 2000

21
18
5.9
3.9
20
26
5.9
3.9
18
25
5.9
3.9
30
5.3
3.9
5
11
5.9
3.9
20
9
4.4
3.9
23
5.9
3.9
44
14
4.8
3.9

Growth World Trade & Output

2500
2000
1500

Trade
Output
(GDP)

1000
500
0
1950

1960

1970

1980

1990

2000

National Composition of MNCs

1973

1990

1997

7000
U.S.A.
6000

48.5%

31.5%

32.4%Rest of26%
World

5000
Japan

3.5

12

15.7 Latin America

17

18.8

6.8

6.6

8000

4000
3000
U.K.

2000
1000
France

Germany

7.3

10.4

9.8

8.1

.9

12.7

2000

W.Europe

8
Asia Pacific
North America

13
12

The Changing World Order

The fall of Communism in Eastern
Europe and the former Soviet Union.
Czechoslovakia has divided itself into
two states.
Yugoslavia has divided into 5 (often
warring) successor states.
Pro-democracy movement
(suppressed) in China.
Latin America has seen both
democracy and free market reforms.

Globalization
Driving to work: The typical
American experience
Your
Your
Your
Your
Your
Your

car
gasoline
investments
entertainment
morning snack
news

Globalization

Has Globalization Gone Too Far?

Rodrik - California Management
Review, Vol. 39, No. 3, Spring 1997

What are the tensions between

social stability and globalization?

The Impact of Globalization

Jobs and income
Firms move jobs to low cost countries
Countries specialize in efficiently
produced goods and import those they
can not efficiently produce
Increases income in less developed
countries
May lead to income inequality

The Impact of Globalization

Labor policies and the environment
Firms move to countries with weak laws
Economic progress leads to stronger laws
By creating wealth and incentives for
technology improvements, world will be
better
Tie strong laws to international
agreements

What makes a company global?

What Makes a Company Global
Kogut - HBR Reprint 99106

Multinational / Multidomestic
Products differ greatly among country
markets; high transportation costs, no
scale economies

Global
Benefit from worldwide volume; larger
production plants (MES), larger
production runs, more efficient logistics
networks, higher volume distribution
networks

Global Success Factors

Industry potential
Timing
Entry barriers
First mover advantage
Preempting leading positions in NICs
Create switching costs
Block access to supply chain

Arbitrage exploiting differences

Culture, administration, geography,
economics
The Forgotten Strategy
Ghemawat - HBR Reprint R0311E

Globalization - Exercise

globalEDGE Exercise
globalEDGE Diagnostic Tools
GLOBE: Globalization Benchmark

Global Ethics

Guiding Principles
Three Guiding Principles
Respect for core human values,
which determine the absolute
moral threshold for all business
activities.
Respect for local traditions.
The belief that context matters
when deciding what is right and
what is wrong.
Values in Tension: Ethics Away From Home
Donaldson HBR Reprint 96502

Global Ethical Perspective

Treat corporate values and formal standards
as absolutes.
Design and implement conditions of
engagement for suppliers and customers.
Allow foreign business units to help formulate
ethical standards and interpret ethical issues.
In host countries, support efforts to decrease
institutional corruption.
Exercise moral imagination.

Global Ethics
Incentives to be ethical
Avoid legal penalties, bad PR, employee satisfaction

Ethics and corruption

Foreign Corrupt Practices Act 1977
Example

Ethics and human right

China & Tibet
Alien Tort Statute 1789 Unocal in Myanmar

Ethics and Corruption

After graduating, your first assignment lands you in Asia as the local director of a U.S.
pharmaceutical firm. It was a small operation, but you have big plans. You hope to segment your
customers, empower your workers, implement just-in-time production, and use the balanced
scorecard to keep score. You figure to double your business in the first year.
But right now, youre thinking it might have been a better idea to take that consulting offer instead.
The first million-dollar shipment of your companys new HIV-fighting drug has just been removed
from the refrigerated C-130 cargo plane. It sits on the steaming tarmac, not 30 feet away,
practically melting in the midday heat. Another twenty minutes, and its ruined. Unfortunately, you
cant seem to clear it through customs. There is some question as to the approval process that a
new product has to go through to enter the country. Youre not sure you can wait.
The friendly local customs official cruising around the airport looks from you to the metal container,
trying to decide which of you is sweating more profusely. Leaning against the counter, he reviews
your bills of lading and other customs documents. Your papers look to be in order, but I am just
not sure about the proper approval process, he says. You despair. Re-opening the approval process
will take time you dont have. What should you do?!?
Fortunately, you remember the $1000 travelers check in your back pocket thats supposed to pay
for your apartment deposit. You walk over to the official, grab the manifest, stuff the check into the
stack of papers, and hand it back to him. A smile spreads across his face. He decides that his
insecurity about the approval process has lessened. You are so thoughtful to understand. I look
forward to conducting further business with you. Your cargo is cleared through customs.

Global Ethics - Case

Hitting the Wall: Nike and International
Labor Practices HBS 9-700-047
Managing a multinational firm involves
managing and exploiting differences
among countries. In the case of
workplace standards and environmental
protection, managers have to
understand the underlying tradeoffs and
balance exploitation of differences with
global ethics.

Culture

Culture
Culture is a system of values and norms
shared among a group of people and, when
taken together, constitute a design for living.
Norms
Social rules and guidelines
that prescribe appropriate
behavior in particular
situations
Folkways:
Routine conventions of
everyday life
life
Mores:
Central to functioning of
society and
and its social life

Values
Abstract ideas about
what a group believes
to be good, right, and
desirable
The bedrock of culture
Have emotional
significance.
Freedom

What are American Values?

Achievement
and success
Individualism
Freedom
Progress
Democracy
Equality

Views of Another Culture

How the Americans

see the French:
-arrogant

How the French

see the Americans:
-naive

-flamboyant
-hierarchical
-emotional

-aggressive
-unprincipled
-workaholic

French culture

American culture

Norms and Values

Hofstedes Work-Related Values

Theory and empirical foundation
is used in a general way to look
at differences between cultures.
5 dimensions
Power distance
Individualism vs. collectivism
Uncertainty avoidance
Masculinity vs. femininity
ST vs. LT orientation

But
Dont assume everyone in a
country has the same norms and
values

U.S.

China

Determinants of Culture
Religion
Language
Education
Political
Philosophy
Economic
Philosophy
Social
Structure

Culture:
Norms and
Value
Systems

Religion Distribution
Christian
(1.2 Billion)

Islam

20%

(1 Billion)

43%

Hindu
18%

(500 Million)

Buddhist
(250 Million)

4%

5%

10%

Confucian
(150 Million)

Other/
Nonreligious

Impact of Religion on Business

Buddhism
Little emphasis on entrepreneurial behavior

Christianity
Protestant Work Ethic and The Spirit of Capitalism

Confucianism
Loyalty, reciprocal obligations, and honesty in
dealings

Hinduism
Asceticism may have an impact (spiritual achievements)
Caste system plays a role

Islam
Favors market-based systems (free enterprise)
No payment or receipt of interest

Language
Allows people to communicate
Structures the way the world is perceived
Directs attention to certain features of the
world rather than others
Helps define culture
Creates separatist tendencies?
Canada, Belgium, Spain, Cyprus

Non-verbal (93% of communication)

Eyebrows, fingers/thumbs, hand gestures, feet,
personal space, body gestures (ok, thumbs up)

Education
Formal education
supplements family role
in teaching values
and norms

Value of personal
achievement and
competition

For intl business, it is a

determinant of national
competitive advantage
(post-war Japan)

Medium to learn
language, conceptual,
and math skills

Focus on facts of social

and political nature
of society

Obligations of
citizenship

Political Philosophy (System)

Democracy and Totalitarianism
Democracy
Government by the
people, exercised
either directly or
through elected
representatives.

Totalitarianism
Government in which
one person or political
party exercises
absolute control over all
spheres of human life
and opposing political
parties are prohibited.

Economic Philosophy (System)

Market Economy
All
All productive
productive activities
activities are
are privately
privately owned
owned

Command Economy
Goods
Goods and
and services
services produced, their quantity, and
prices
prices are
are determined
determined by
by the
the government
government

Mixed Economy
Parts
Parts of
of the
the economy
economy are
are left
left to
to private
private ownership
ownership
and
and free
free market
market mechanisms
mechanisms while other
other sectors
sectors
are
are state-owned
state-owned and
and have
have government
government planning
planning

State-Directed Economy
The
The state
state plays
plays a
a significant
significant role
role through
through its
its
industrial
industrial policy
policy and
and setting
setting national
national goals
goals

Social Structure
Individuals vs. Groups
Shared sense of identification
Degree to which group is viewed as the
primary means of social organization
Cooperation MIT Study

Social Stratification
Social strata
Social mobility
Class system

Cultural Change
Americanization/Westernization
Global brands
McDonalds in China
Levis in India
Sony Walkman in South Africa
MTV everywhere
Countertrends
Quebec, Russia, Islamic
fundamentalism

Culture - Case
Euro Disney: The First 100 Days
HBS 9-693-013
Planning process
The role of culture
Differences in culture vs. attitude about
culture

Adapting versus adopting what is

core?

Foreign Exchange

Foreign Exchange & Strategy

Note on Operating Exposure to
Exchange-Rate Changes
Luehrman HBS 9-288-018

Example: Losses at JAL Airlines (Hill)

Case: Japans Automakers Face Endaka
HBS 9-796-030
Impact on business model - What they sell,
how they sell, where they manufacture,
manufacturing process
Japanese response vs. U.S. response

Foreign Exchange Markets

Foreign Exchange Markets

The FOREX market provides the
physical and institutional structure
through which the money of one
country is exchanged for that of
another country
A foreign exchange transaction
is an agreement between a buyer
and a seller that a fixed amount of
one currency will be delivered for
some other currency at a specified
rate

Foreign Exchange Markets

There are six main characteristics
of the FOREX markets which will
be discussed
The geographic extent
The three main functions
The markets participants
Its daily transaction volume
Types of transactions including spot,
forward and swaps
Methods of stating exchange rates,
quotations, and changes in
exchange rates

FOREX Market Geography

Geographically, the FOREX
market spans the globe with
prices moving and currencies
trading on a 24 hour basis
Major exchanges are located in
Singapore, Hong Kong and Tokyo
in the East
Then it moves to Bahrain, and
London for the European area
And on to New York, San
Francisco and Sydney

FOREX Market Geography

Measuring FOREX Market Activity: Average Electronic Conversations Per Hour

Greenwich Mean Time

10 AM
Lunch Europe
In Tokyo In Tokyoopening

Asia
closing

Americas London
open
closing

Afternoon
in America

6 pm Tokyo
In NY opens

FOREX Market Functions

The FOREX market is the
mechanism by which participants
transfer purchasing power
between countries, obtains or
provides credit for international
trade, and minimizes exposure to
exchange rate risk
Transferring of purchasing power is
necessary because international
trade and capital transactions
normally involve parties in countries
with different currencies yet each
party wishes to transact in their own
currency

FOREX Market Functions

Because the movement of goods between

countries takes time, inventory in transit
must be financed. The FOREX market
provides a source of credit via specialized
instruments such as letters of credit
The FOREX market provides hedging
facilities for transferring foreign exchange
risk to someone else more willing to carry
that risk

FOREX Market Participants

The FOREX market consists of two
tiers, the interbank or wholesale
market, and the client or retail market
Five broad categories of participants
operate within these two tiers
Bank
Bank and
and non
non bank foreign
foreign exchange
exchange
dealers
dealers
Individuals
Individuals and
and firms
firms conducting
conducting
commercial
commercial or investment
investment transactions
transactions
Speculators
Speculators and
and arbitragers
arbitragers
Central
Central banks
banks and
and treasuries
treasuries
Foreign
Foreign exchange
exchange brokers
brokers

Bank/Non-Bank Dealers
These participants profit from buying currencies at
a bid price and then reselling them at an offer or
ask price
Competition among dealers narrows the spread
between the bid and offer rate contributing to the
markets efficiency
Dealers on behalf of large international banks
often act as market makers, often willing to
stand in and buy or sell these currencies without
having a counterpart with which to unload the
inventory
Bid price: The price a buyer is willing to pay.
Offer (Ask price): the price a seller is willing to receive.
Bid-Ask spread: The amount that the ask price exceeds the bid.
Market maker: A broker-dealer willing to accept the risk of holding a particular
currency in order to facilitate trading in that currency.

Bank/Non-Bank Dealers
They trade amongst other banks and
dealers in order to keep their inventory
levels at manageable levels
Currency trading is profitable and often
contributes between 10% - 20% of a
banks average net income
Small- to medium-sized banks rarely
act as market makers yet still
participate in the interbank market

Commercial Investment
Importers, exporters, portfolio
investors, MNEs, tourists and
others use the FOREX market to
facilitate execution of commercial
or investment transactions
Some of these participants use
the market to hedge foreign
exchange rate risk

Speculators & Arbitragers

Speculators and arbitragers seek to profit from
trading in the market itself
They operate for their own interest, without need
or obligation to serve clients or ensure a
continuous market
Speculators seek all their profit from exchange rate
changes
Arbitragers try to profit from simultaneous
differences in exchange rates in different markets
A large proportion of speculation and arbitrage is
conducted on behalf of major banks by traders
employed by those banks

Central Banks & Treasuries

Central banks and treasuries use the market to
acquire or spend their countrys currency reserves
as well as to influence the price at which their own
currency trades
They may act to support the value of their currency
because of their governments policies or
obligations or because of commitments entered
through joint float agreements such as the
European Monetary System (EMS)
Consequently their motive is not to profit but rather
influence the foreign exchange value of their
currency in a manner that will benefit their
interests

Foreign Exchange Brokers

Foreign exchange brokers are agents
who facilitate trading between dealers
without themselves becoming
principals in the transaction
For this service they charge a small
commission
They maintain instant access to
hundreds of dealers worldwide via
open lines and at times may maintain
such lines with several banks, with
separate lines for differing currencies,
spot and forward rates

Any Questions?
Types of transactions

Inter-Bank Market Transactions

Transactions within this market can be
executed on a spot, forward, or swap
basis
A
A spot
spot transaction
transaction requires
requires almost
almost
immediate
immediate delivery
delivery of
of foreign
foreign exchange
exchange
A
A forward
forward transaction
transaction requires
requires delivery of
foreign
foreign exchange
exchange at
at some
some future
future date
date
A
A swap
swap transaction
transaction is
is the
the simultaneous
simultaneous
exchange
exchange of
of one
one foreign
foreign currency
currency for
for
another
another

Spot Transactions
A spot transaction in the interbank
market is the purchase of foreign
exchange, with delivery and payment
between banks to take place, normally,
on the second following business day
The
The settlement
settlement date
date is
is often
often referred
referred to
to as
as
the
the value
value date
date
This
This is
is the
the date
date when
when most
most dollar
dollar
transactions
transactions are
are settled
settled through
through the
the
computerized
computerized Clearing
Clearing House
House Interbank
Interbank
Payment
Payment Systems
Systems (CHIPS) in New
New York

Outright Forward Transactions

This transaction requires delivery at a
future value date of a specified
amount of one currency for another
The exchange rate is agreed upon at
the time of the transaction, but
payment and delivery are delayed
Forward rates are contracts quoted for
value dates of one, two, three, six,
nine and twelve months
Terminology
Terminology typically
typically used
used is
is buying
buying or
selling
selling forward
forward
A
A contract
contract to
to deliver
deliver dollars
dollars for
for euros
euros in
in six
six
months
months is
is both buying
buying euros
euros forward
forward for
for
dollars
dollars and
and selling
selling dollars
dollars forward
forward for
for euros
euros

Swap Transactions
A swap transaction in the interbank market is
the simultaneous purchase and sale of a
given amount of foreign exchange for two
different value dates
Both purchase and sale are conducted with
the same counterpart
A common type of swap is a spot against
forward
The
The dealer
dealer buys
buys a
a currency
currency in
in the
the spot
spot market
market and
and
simultaneously
simultaneously sells
sells the
the same
same amount
amount back
back to
to the
the same
same
bank
bank in
in the
the forward
forward market
market
Since
Since this
this transaction
transaction occurs at the same time and with
the
the same
same counterpart,
counterpart, the
the dealer
dealer incurs
incurs no
no exchange
exchange rate
rate
exposure
exposure

Swap Transactions
Forward-forward swaps A dealer
sells 20,000 forward for dollars for
delivery in two months at $1.6870/
and simultaneously buys 20,000
forward for delivery in three months at
$1.6820/
The
The difference
difference between the buying
buying and
and
selling
selling price
price is equivalent to the
the interest
interest
rate
rate differential
differential
Thus
Thus a
a swap
swap can
can be
be viewed
viewed as
as a
a technique
technique
for
for borrowing
borrowing another
another currency
currency on
on a
a fully
fully
collateralized
collateralized basis
basis

Swap Transactions
Non-deliverable forwards (NDFs)
NDFs possess the same characteristics
as traditional forward contracts except
that they are settled only in US dollars
and the foreign currency being sold or
bought forward is not delivered
The
The dollar-settlement
dollar-settlement feature
feature reflects
reflects the
the
fact
fact that
that NDFs
NDFs are
are contracted
contracted offshore
offshore and
and
are
are beyond
beyond the
the reach
reach and regulatory
regulatory
frameworks
frameworks of the home country
country
governments
governments
Pricing
Pricing of
of NDFs
NDFs reflects
reflects basic
basic interest
interest rate
differentials
differentials

FOREX Market Size

The Bank for International
Settlements (BIS) estimates
that daily global net turnover
in traditional FOREX market
activity to be US$1,210
billion in April 2001

FOREX
Market
Size
Global Foreign Exchange Market Turnover
Global Foreign Exchange Market Turnover
(daily averages in April, billions of US dollars)

Source: Bank for International Settlements, Central Bank Survey of Foreign Exchange and
Derivatives Market Activity in April 2001, October 2001, www.bis.org. Next survey planned for April
2004.

FOREX Market Size

Two of the three categories fell between
1998 and 2001 with spot market daily
turnover falling the most, from $568
billion in 1998 to $387 billion in 2001
Forward transactions increased slightly
from $128 billion in 1998 to $131 billion
in 2001
Swaps fell to $656 billion in 2001 from
$734 billion in 1998
BIS
BIS attributes
attributes the
the introduction
introduction of
of the
the Euro,
Euro,
the
the growing
growing share
share of
of electronic
electronic broking
broking in
in
the
the spot
spot market
market and
and consolidation
consolidation in
in banking
banking
as
as explanations
explanations for
for the
the reduction
reduction

FOREX Market Size

Geographic Distribution of Foreign Exchange Market Turnover
(daily averages in April, billions of US dollars)

Source: Bank for International Settlements, Central Bank Survey of Foreign Exchange and Derivatives
Market Activity in April 2001, October 2001, www.bis.org. Next survey planned for April 2004.

FOREX Market Size

Currency Distribution of Global Foreign Exchange Market Turnover
(percentage shares of average daily turnover in April)

Source: Bank for International Settlements, Central Bank Survey of Foreign Exchange and Derivatives
Market Activity in April 2001, October 2001, www.bis.org. Next survey planned for April 2004.

FOREX Rates & Quotes

A foreign exchange quote is a statement
of willingness to buy or sell at an
announced rate
In
In the
the retail
retail market
market (newspapers
(newspapers and
and
exchange
exchange booths),
booths), quotes
quotes are
are often
often given
given as
as
the
the home
home currency
currency price
price of
of the
the foreign
foreign
currency
currency

Interbank quotes professionals state

forex quotes in one of two ways
The
The foreign
foreign currency
currency price
price of
of one
one dollar
dollar
Sfr1.6000/$,
Sfr1.6000/$, read
read as
as 1.600
1.600 Swiss
Swiss francs
francs per
per
dollar
dollar
European
European quote
quote

The
The dollar
dollar price
price of
of a
a unit
unit of
of foreign
foreign
currency
currency

$0.6250/Sfr,
$0.6250/Sfr, read
read as
as 0.625
0.625 dollars
dollars per
per Swiss
Swiss
franc
franc
American
American quote
quote

FOREX Rates & Quotes

The former quote is considered
the European quote and the
latter is the American quote
Almost all European currencies,
except two, are quoted the
European way
The Pound Sterling and the Euro are
the exceptions
Additionally, Australian and New
Zealand dollars are also quoted in
American terms

FOREX Rates & Quotes

Bid and Ask Quotations
Interbank quotes are given as a bid
and ask
The
The bid
bid is
is the
the price
price at which a
a dealer
dealer will
will
buy
buy another
another currency
currency
The
The ask
ask or
or offer
offer is
is the
the price
price at
at which
which a
a
dealer
dealer will
will sell
sell another
another currency
currency
Example:
Example: 118.27
118.27 -- 118.37/$
118.37/$ is
is the
the
bid/ask
bid/ask for
for Japanese
Japanese yen
yen
The
The bank
bank will
will buy
buy yen
yen at
at 118.27
118.27 per
per
dollar
dollar and
and sell
sell yen
yen at
at 118.37
118.37 per
per dollar
dollar
making
making profit
profit on
on the
the spread
spread

FOREX Rates & Quotes

Expressing Forward Quotations on a

Points Basis
The previously mentioned rates for yen
were considered outright quotes
Forward quotes are different and typically
quoted in terms of points
A point is the last digit of a quotation, with
convention dictating the number of digits to
the right of the decimal
Hence
Hence a
a point
point is equal to 0.0001 of most
most
currencies
currencies

FOREX Rates & Quotes

Expressing Forward Quotations on a
Points Basis
The yen is quoted only to two decimal
points
A forward quotation is not a foreign
exchange rate, rather the difference
between the spot and forward rates
Example:
Bid
Ask
Outright spot:
Plus points (3 months)
Outright forward:

118.27

118.37

-1.43

-1.40

116.84

116.97

FOREX Rates & Quotes

Forward Quotations in Percentage
Terms
Forward
Forward quotations
quotations may also be
be expressed
expressed
as
as the
the percent-per-annum
percent-per-annum deviation
deviation from
from
the
the spot
spot rate
This
This is
is similar
similar to
to the
the forward
forward discount
discount or
or
premium
premium calculated
calculated earlier
earlier

The
The important
important thing
thing to
to remember
remember is
is which
which
currency
currency is being
being used
used as the home
home or
or base
base
currency
currency
For
For indirect
indirect quotes
quotes (i.e.
(i.e. quote
quote expressed
expressed in
in
foreign
foreign currency
currency terms),
terms), the
the formula
formula is
is

FC

Spot - Foward 360

x
x 100
Foward
days

FOREX Rates & Quotes

Forward Quotations in Percentage Terms
For
For direct
direct quotes
quotes (i.e.
(i.e. quote
quote expressed
expressed in
in home
home
currency
currency terms),
terms), the
the formula
formula is
is

Forward - Spot 360

f
x
x 100
Spot
days
H

FOREX Rates & Quotes

Forward Quotations in Percentage Terms
Example:
Example: Indirect
Indirect quote
quote

105.65 - 105.04 360

f
x
x 100 2.32% p.a.
105.04
90

Example:
Example: Direct
Direct quote
quote

0.009520183 - 0.009465215 360

f
x
x 100 2.32% p.a.
0.009465215
90
$

FOREX Rates & Quotes

Direct and Indirect Quotes
A direct quote is a home currency
price of a unit of a foreign currency
Sfr1.6000/$
Sfr1.6000/$ is
is a
a direct
direct quote
quote in
in Switzerland
Switzerland
$0.625/Sfr
$0.625/Sfr is
is a
a direct
direct quote
quote in
in the
the US
US

An indirect quote is a foreign currency

price in a unit of the home currency
Sfr1.600/$
Sfr1.600/$ is
is an
an indirect
indirect quote
quote in
in the
the US,
US,
$0.625/Sfr
$0.625/Sfr is
is a
a direct
direct quote
quote in
in the
the US
US and
and
an
an indirect
indirect quote
quote in
in Switzerland
Switzerland

FOREX Rates & Quotes

Cross Rates
Many
Many currencies
currencies pairs
pairs are
are inactively
inactively traded,
so
so their
their exchange
exchange rate
rate is
is determined
determined
through
through their
their relationship
relationship to
to a widely
traded
traded third
third currency
currency
Example:
Example: A
A Mexican
Mexican importer needs
Japanese
Japanese yen
yen to
to pay
pay for
for purchases
purchases in
in Tokyo.
Tokyo.
Both
Both the
the Mexican
Mexican peso (Pss)) and
and Japanese
Japanese
yen
yen ()
() are
are quoted
quoted in
in US
US dollars
dollars
Assume
Assume the
the following
following quotes:
quotes:
Japanese yen

121.13/$

Mexican peso

Ps9.190/$

FOREX Rates & Quotes

Cross Rates
The
The Mexican
Mexican importer
importer can
can buy
buy one
one US
US dollar
dollar for
for P
Pss9.190
9.190
and
and with
with that
that dollar
dollar buy
buy 121.13;
121.13; the cross
cross rate would
be
be
121.13/$
Japanes yen/US dollar

13.1806 / PS
Mexican pesos/US dollar PS 9.190 / $

FOREX Rates & Quotes

Intermarket Arbitrage
Cross rates can be used to check on
opportunities for intermarket
arbitrage
Example: Assume the following
exchange rates are quoted
Citibank

$0.9045/

Barclays Bank

$1.4443/

Dresdner Bank

1.6200/

FOREX Rates & Quotes

Intermarket Arbitrage
The cross rate between Citibank and
Barclays is
$1.4443/
1.5968/
$0.9045/

This cross rate is not the same as Dresdners

rate quote of 1.5800/, so an opportunity
exists for risk-less profit

FOREX Rates & Quotes

Citibank
End with $1,014,533
(6)

Receive $1,014,533

Start with $1,000,000

(1)

Sell $1,000,000 to Barclays

Bank at $1.4443/

Dresdner Bank
(5)

Sell 1,121,651 to Citibank

at $0.9045/

(4)

Receive 1,121,651

Barclays Bank
(2)

Receive 692,377

(3)

Sell 692,377 to Dresdner Bank

at 1.6200/

Managing Global Expansion

Managing Global Expansion

Managing Global Expansion: A
Conceptual Framework
Gupta & Govindarajan Business
Horizons, March/April 2000, 45-54
(Reprint BH043)
Globalization imperatives
Degree of local adaptation
Learning potential
Entry barriers
Competitive intensity

Entry Modes
Joint
Ventures
Licensing

Exporting

Wholly Owned
Subsidiaries
Franchising

Exporting

Sony TVs, Matsushita VCRs

Ship to another country for sale or exchange

Advantages:
Avoid cost of establishing manufacturing operations
Help achieve experience curve and location economies
Disadvantages:
May compete with low-cost location manufacturers
Possible high transportation costs
Tariff barriers
Possible lack of control over marketing reps

Example: Heineken Beer (Hill)

Improving Export Performance

Information from
government sources

Bundesregierung.
de
Miti.go.jp
Exim.gov
Ita.doc.gov

Export Management
Companies

Export
specialists who
act as the export
management
department or
international
department for
client firms

Export
strategies

Top management
commitment
Start small
Enter to learn,
add to grow
Build relationships
Hire locals

An Interesting Fact
Although the U.S. is the largest
single market, exporting does not
seem to come naturally to U.S.
companies. In the U.S., exports
account for 5.4% of GNP compared
to 26% in Germany, 25% in Canada,
and 10.5% in Japan (not most recent
statistics).

globalEDGE Core Exercise

Advanced Biomedical Devices, In

Assessment of Readiness to Expo
Team In-Class Exercise (50 points)
Your team has been hired to evaluate ABDs readiness to export.
Drawing on information from the case, your knowledge of factors
affecting global expansion, and what you learn from the CORE
diagnostic tool, prepare a two-page (double-spaced) memo with
your teams assessment and recommendations.
You may structure the memo however you see fit.
Attach the CORE output as supporting documentation.
The memo is due in two hours. The break-out rooms are available.

Licensing

Euro-Disney Japan

Licensor grants rights to intangible

property to another entity for a specified
period of time in return
Advantages:
Reduces development costs and risks of
establishing foreign enterprise
Lack capital for venture; Unfamiliar/volatile market

Overcomes restrictive investment barriers

Others can develop business applications of
intangible property

Disadvantages:
Lack of control
Cross-border licensing may be difficult
Creating a competitor

Franchising
A franchiser sells intangible property
and provides guidelines for operating
the business.
Advantages:
Reduces costs and risk of establishing
enterprise

Disadvantages:
May prohibit movement of profits from one
country to support operations in another
country
Quality control

Joint Ventures
Advantages:
Benefit from local partners knowledge
Shared costs/risks with partner
Reduced political risk

Disadvantages:
Risk giving control of technology to
partner
May not realize experience curve or
location economies
Shared ownership can lead to conflict

Strategic Alliances
Collaborate with your
Competitors & Win
Hamel, Doz & Prahalad HBR
Reprint 89104
Learning

Establishing a Wholly Owned Subsidiary

Acquisition

Pro:
Quick to execute
Preempt competitors
Possibly less risky

Con:
Often produce
disappointing results
Overpay for firm
Too optimistic about
value creation (hubris)
Culture clash
Problems with
proposed synergies

Greenfield

Pro:
Can build subsidiary
it wants
Easy to establish
operating routines

Con:
Slow to establish
Risky
Preemption by
aggressive
competitors

Selecting an Entry Mode

Basis for Competition

Technological
Know-How

Entry Mode
Wholly owned subsidiary unless
1. Venture is structured to reduce
risk of loss of technology
2. Technology advantage transitory
Then licensing or joint venture OK

Management
Know-How
Pressure for
Cost Reduction

Franchising, subsidiaries
(wholly owned or joint
venture)
Combination of exporting and
wholly owned subsidiary

Which Foreign Markets?

Market potential
Market size (e.g., China vs. Taiwan)
Demand
Costs: Customer acquisition,
infrastructure
Distance:
Cultural, administrative,
geographic, economic

(Comparisons Wal-Mart in Mexico)

Learning potential
Sophisticated/demanding customers?
Pace of technology?

Wal-Mart de Mexico
Sams Club, Mexico City, 1991
Per capita income $2,000

Monterrey 1993 (Laredo)

Distribution problems (no NAFTA yet)
Ice skates, riding mowers, leaf blowers, fishing

1994 (post NAFTA)

Labels on 80,000 products
December: Peso crisis, 40% depreciation

By mid-1997, 373 of 1000 non-US stores

Distribution center
Local sourcing (Sony Wega $1600,$600); scale
Joint venture w/ Cifra (WalMex)

Timing of Entry
First-mover advantage.
Preempt rivals and capture demand
Build sales volume
Move down experience curve before rivals
and achieve cost advantage
Create switching costs

Disadvantages:
First mover disadvantage - pioneering
costs
Costs early entrant
Changes in government policy
bears that later
entrant can avoid.

Global Expansion - Cases

Citibank: Launching the Credit Card
in Asia Pacific (A) - HBS 9-595-026
Preempting rivals and capturing
demand, Market entry analysis, market
evaluation, target market selection,
product positioning issues

Xerox and Fuji Xerox HBS 9-391-156

Importance of structural flexibility,
autonomy/integration tradeoff, drivers
of collaboration, multi-market contact

International
Manufacturing
Strategy

Where to manufacture?
How to Integrate Work and Deepen
Expertise
Leonard-Barton, Bowen, Clark, Holloway,
& Wheelwright HBR Reprint 94502

Key factors
Country: Factor costs, CAGE, location
externalities, infrastructure
Technological: Economies of scale, MES,
manufacturing flexibility
Product: Value to weight ratio, universality
of needs

Location Strategy

Favored Manufactured Strategy

Country Factors
Differences in political
economy
Differences in culture
Differences in factor costs
Trade barriers

Concentrated

Decentralized

Substantial
Substantial
Substantial
Few

Few
Few
Few
Many

High
High

Low
Low

Technological Factors
Fixed costs
Minimum efficient scale

Flexible manufacturing technology Available

Not Available

Product Factors
Value-to-weight ratio
Serves universal needs

High
Yes

Low
No

Manufacturing Location - Case

The Acer Groups China Manufacturing
Decision HBS 99M009
Decentralized structure
Role of core competencies
Key considerations
Costs, market presence, infrastructure,
materials management, expats (safety,
desire), labor laws, time frame, environment

PEST framework - environment

International
Marketing
Strategy
(Global Branding)

Global Branding
The Lure of Global Branding
Aaker and Joachimsthaler HBR
Reprint 99601

Advantages
Disadvantages
When is it possible?
Developing a global brand
Managing a global brand

Global Branding - Case

EMDICO (A) HBS 9-597-029
Re-launching a global brand in an
emerging market
Challenges faced by a late entrant
Impact of cultural and religious
considerations on market demand
and marketing strategy
Marketing program calculations

International
Human
Resource
Management

Developing an Expatriate Policy

The Right Way to Manage Expats
Black & Gregersen HBR Reprint 99201
Benefits: Enhance management
experience, knowledge transfer, best
allocation of people, reducing turnover
Constraints: willingness to travel/live
abroad, costs, achieving equity (pay,
taxes, cost of living), impact on career

Expatriate Policy - Case

Colgate-Palmolive: Managing
International Careers HBS 9-394-184
Leader in attention and care
Pre-departure, moving, financial
Needs of expat AND family
Compare C-Ps policy to your companys
policy
Continuous improvement
Pre-departure concerns, spouse assistance
Surveys to review and revise
Effective but costly
Focus on selection