Expansion Strategies – The Way to Growth

Dr.Ashvini RaviAssociate Dean – AcademicsmyBskool.com

Corporate strategy establishes the overall

direction that the organization hopes to go.

Types of Expansion Strategies

Expansion

Cooperation

International Concentration

Diversification Integration

Expansion - Types

1. Integration

2. Diversification

3. Cooperation

Vertical Integration

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall. 6-5

Vertical Integration

•Combining activities related to the present activity

•Committing to adjacent businesses•Extending value chain from the basic raw

materials to ultimate consumer•Two types- Vertical and Horizontal

Vertical Integration

•New products/services to serve own needs

•Supplying inputs or serving as a customer for outputs

•Backward –Upstream-Going back to source of raw material

•Forward –Downstream- Moving closer to consumer

What is Vertical Integration?

Leprino Foods(Mozzarella Cheese)

Where your pizza comes from

Dairy Farmers(milk)

Crop Farmers(Alfalfa & Corn)

Seed Companies(Alfalfa & Corn)

Food Distributors

Pizza Chains

End Consumer

Summary

Vertical Integration…

• Makes sense when value chain economiescan be created and captured

• May allow a firm to leverage capabilities

• May be a response to the threat of opportuniesmand uncertainty

• As a form of exchange per se, is not rare norcostly to imitate

Summary

Vertical Integration…

• Is an important consideration in the decisionto expand internationally (range of possibilities)

• Makes sense when done for the right reasons,under the right circumstances

• Can be a costly mistake if done wrong

Ownership is costly—integrate only when thebenefits outweigh the costs of integration!

Apple

•  In technology, for 35 years has championed a vertical model, which features an integrated hardware and software approach.

•For instance, the iPhone and iPad have hardware and software designed by Apple, which also designed its own processors for the devices.

• This integration has allowed Apple to set the pace for mobile computing. 

•Starbucks grows own coffee beans in China to support its ambitious growth plans in China

Conditions favoring Vertical Integration ???

5

Make or Buy

•Current trend favors outsourcing all activities that do not directly represent or support core competencies.

•Are there any dangers associated with aggressive outsourcing? What are the implications for JIT production?

•Cost of manufacturing vs cost of procuring from suppliers

•Cost of selling vs price paid to sellers

Make-or-Buy Illustration

One of the best examples of vertically integrated companies is the oil industry.

Oil companies, both multinational (such as ExxonMobil, Royal Dutch Shell, or BP) often adopt a vertically integrated structure.

This means that they are active all the way along the supply chain from locating crude oil deposits, drilling and extracting crude, transporting it around the world, refining it into petroleum products such as Petrol/Gasoline, to distributing the fuel to company-owned retail stations, where it is sold to consumers.

Horizontal Integration

• The acquisition of additional business activities ( same type of products)at the same level of the value chain is referred to as horizontal integration.

•Eg suitcase company takes over its rival suitcase company…

•Buying competitor’s business to expand geographically,

•

Horizontal IntegrationSingle-Industry Strategy

• Focus resources Its total managerial, technological, financial and functional resources and capabilities are devoted to competing successfully in one area.

• ‘Stick to its knitting’ Company stays focused on what it does best, rather than entering new industries where its existing resources and capabilities add little value.

Horizontal Integration is the process of acquiring or merging with industry competitors in an effort to achieve the competitive advantages that come with large scale and scope.

Staying inside a single industry allows a company to:

Benefits of Horizontal Integration

Profits and profitability increase when horizontal integration:1. Lowers the cost structure

• Creates increasing economies of scale• Reduces the duplication of resources between two companies

2. Increases product differentiation• Product bundling – broader range at single combined price• Total solution – saving customers time and money• Cross-selling – leveraging established customer relationships

3. Replicates the business model• In new market segments within same industry

4. Reduces industry rivalry• Eliminate excess capacity in an industry• Easier to implement tacit price coordination among rivals

5. Increases bargaining power • Increased market power over suppliers and buyers• Gain greater control

Problems with Horizontal IntegrationA wealth of data suggests that the majority of mergers and acquisitions DO NOT create value and that many may actually DESTROY value.

Implementing a horizontal integration is not an easy task.• Problems associated with merging very different company

cultures• High management turnover in the acquired company when

the acquisition is a hostile one• Tendency of managers to overestimate the benefits to be had

in the merger• Tendency of managers to underestimate the problems

involved in merging their operations The merger may be blocked if merger is perceived to:

• Create a dominant competitor• Create too much industry consolidation• Have the potential for future abuse of market power

examples

•The Standard Oil Company's acquisition of 40 refineries.

•An automobile manufacturer's acquisition of a sport utility vehicle manufacturer.

•A media company's ownership of radio, television, newspapers, books, and magazines.

Limitations

•Commitment to businesses serving the same customers

•Main product failing /becoming obsolete•More resources put in same market

Expansion types

1. Integration

2. Diversification3. Cooperation4. Internationalisation

Diversification

•Much used, Most important type• Involves all strategic alternatives:Internal/external, related/unrelated,

horizontal/vertical, active/passive•New markets, technologies, products….•Two types – concentric and conglomerate

Concentric Diversification

• Related to existing business in some way- market, technology ….

• 3 types – 1. Marketing related – to same customer

group – printers and stationary2. Technology related-an electronic major decided

to diversify into related businesses of cellular phones, telecommunication equipment, electronic components etc

3. Marketing and technology related- Books, maps, calendars sold in same shops

Concentric diversification example• At Proctor and Gamble  a paper towels business and a baby

diapers business both use paper products as a primary input to the manufacturing process. Having a joint paper manufacturing plant that produces inputs for both units is an example of operational relatedness.

Honda has developed and transferred its expertise in small and now larger engines for a number of vehicles from motor cycles and lawn mowers to its range of automotive products

•Motorola’s  remarkable long term success in semi-conductors and wireless telecommunication products ( modems, networks, broadband, radio, voip…..)

Conglomerate Diversification

•Diversification two types – concentric and

conglomerate•Unrelated to existing business definition

•Eg ITC- Hotels, shampoo(fiama), biscuits(sun feast);Hinduja, WIPRO,Tatas…

•Why do companies adopt conglomerate diversification ???

•Minimise risks•Exploit strengths or minimise weakness•Slow growth in existing business due to

Govt, customer, …

More about GE- presence in 100 countries

The products and services :

1. aircraft engines2. power generation3. water processing4. household appliances5. medical imaging6. business and

consumer financing 7. industrial products. .

Its segments include :

Energy InfrastructureAviationHealthcare Transportation Home & Business

Solutions GE Capital.

Tata Group

The Tata group operates in more than 80 countries and markets across:

•AFRICA•ASIA•AUSTRALIA•NORTH AMERICA•SOUTH AMERICA•EUROPE

Business sectors

Tata companies operate in seven different business sectors:

• information systems and communications•Engineering• materials•services •Energy• consumer products • chemicals.

Tata products and services for consumers

•  AgricultureAppliances• AutomobilesBeverages• Charter flights• Crockery• DTH television• Financial services• Food• Holiday homes

• Hotels• Housing• Jewellery• Leather• Retail• Solar appliances• Telecommunications• Watches and clocks

•Agriculture  The Tata group has established itself as a leading provider of agricultural implements, products and services.+  Agricultural tools  +  Agrochemicals  +  Resource centres   

•Appliances  The Tata group offers customers a range of home appliances to suit every budget+  Air-conditioners, water coolers, water dispensers  +  Water purifiers  

•Automobiles  The Tata group has a significant presence in both the commercial vehicles and passenger car segments.+  Automotive components  +  Commercial vehicles  +  Passenger cars  

•Beverages  Tata Global Beverages has a presence around the world with a stable of leading global and regional brands. The company is driven by a mission to provide life-enhancing, sustainable hydration alternatives.+  Coffee  +  Tea  +  Water  

• Charter flights  The Tata group has, through TajAir, extended its luxury hospitality services to include charter flights.+  Air services   Crockery  Fine bone china crockery, including hollowware and flatware products, is manufactured by Tata Ceramics at its factory in Cochin.+  Ceramics  

•  •  

•  DTH television  The direct-to-home television service offered by the Tata group comes through Tata Sky, the group's joint venture with Britain's Sky Broadcasting Group.+  Satellite television   Financial services  The Tata group provides multiple services for individual and corporate customers.+  Credit cards  +  Home loans  +  Insurance  +  Mutual funds  +  Other services   

•  Food  The Tata group is involved in the making and marketing of a variety of food additives and spices.+  Food additives  +  Spices   Holiday homes  For an off-beat holiday, the Tata Coffee offers holiday homes in Coorg in southern India.+  Vacations  

•  Hotels  The Tata group's involvement with the hospitality industry dates back to 1903, when the Taj Mahal Palace opened in Mumbai.+  Ginger  +  Taj Group   Housing  Tata Housing constructs residential buildings and complexes, commercial properties and information technology parks. +  Residential and commercial buildings  

•  Jewellery  The jewellery business of the Tata group is a flourishing one.+  Gold, platinum and gemstone jewellery   Leather  Tata International is India's leading leather and leather goods exporter.+  Finished leather goods   Retail  The Tata group operates some of India's largest and fastest-growing retail chains.+  Croma  +  Landmark  +  Poltrona Frau Group Design Center  +  Star Bazaar  +  Tashi  +  Westside    

•Solar appliances  Tata BP Solar manufactures solar photovoltaic and thermal products and systems.+  Solar products and systems   

•Telecommunications  The Tata group has a formidable presence in the telecom industry through three companies, Tata Communications, Tata Teleservices and Tata Teleservices (Maharashtra). The telecom offerings cover all segments, from retail and enterprise to wholesale and international, and deliver a complete range of telecom solutions.+  Telecommunications  +  Telephony   

•Watches and clocks  Titan Industries offers watches for everyone – across different styles ages, price points and brands.+  Wristwatches

Types of Expansion Strategies

Expansion

Cooperation

International Concentration

Diversification•Related Businesses•Unrelated Businesses

Integration•Related Businesses•Unrelated Businesses

Expansion types

1. Concentration2. Integration3. Diversification

4.Cooperation5. Internationalisation

Cooperation

Competition could exist with cooperation( Moore, Noorda, …)Types :1. Mergers2. Takeovers3. Joint Ventures4. Strategic Alliances

Mergers – mutual need of buyer and sellerTakeover- Strong motivation of the buyerJoint Venture- Independent firm is created

by at least two other firms.Strategic Alliance- Partnership firms

resources, capabilities are combined

1. Mergers

•Voluntary Combination of two or more organisations

•Exchange of cash or shares of one for the assets and liabilities of another( merger)

•Or each dissolves to create a new entitiy..( consolidation)

• In a merger of two corporations, the shareholders usually have their shares in the old company exchanged for shares in the merged entity. 

•They have become popular •because of the enhanced competition, •breaking of trade barriers, • free flow of capital across countries •and globalisation of businesses.• increasing exposure to competition both

domestically and internationally.

Two types of mergers

•Merger through Absorption:- An absorption is a combination of two or more companies into an 'existing company'. All companies except one lose their identity in such a merger. For example, absorption of Tata Fertilisers Ltd (TFL) by Tata Chemicals Ltd. (TCL). TCL, an acquiring company (a buyer), survived after merger while TFL, an acquired company (a seller), ceased to exist. TFL transferred its assets, liabilities and shares to TCL.

•Merger through Consolidation:- A consolidation is a combination of two or more companies into a 'new company'. In this form of merger, all companies are legally dissolved and a new entity is created. Here, the acquired company transfers its assets, liabilities and shares to the acquiring company for cash or exchange of shares. For example, merger of Hindustan Computers Ltd, Hindustan Instruments Ltd, Indian Software Company Ltd and Indian Reprographics Ltd into an entirely new company called HCL Ltd.

Examples

Types of Mergers

•Horizontal Mergers- Pharma company with another pharma company

•Vertical- footwear company + shoe retail stores

•Concentric- Related in terms of customer or technology or ….eg footwear + socks, ….

•Conglomerate – footwear + Pharma

Horizontal merger-

•  Two companies that are in direct competition and share the same product lines and markets i.e. it results in the consolidation of firms that are direct rivals.

• E.g. Exxon and Mobil, • Ford and Volvo, •Volkswagen and Rolls Royce and Lamborghini•Daimler-Benz and Chrysler • Lipton and Brooke bond, • ICICI bank and bank of madura,• centurion bank and hdfc,•ACC and Damodar cement

Vertical merger-

•  A customer and company or a supplier and company i.e. merger of firms that have actual or potential buyer-seller relationship eg., Time Warner Incorporated, a major cable operation, and the Turner Corporation, which produces CNN, TBS, Pixar and Disney

Concentric mergers

•E.g. Phillip Morris-Kraft, Pepsico- Pizza Hut, Proctor and Gamble and Clorox

Conglomerate merger-

•Two companies which merge have no obvious relationship of any kind. E.g. BankCorp of America- Hughes Electronics.

De mergers

•Opposite of mergers •Eg Clariant from sandoz,•Ciba speciality from Ciba Geigy •Aptech from Apple•Dabur Pharma from Dabur

•Reasons for mergers ???

1. Accessing new markets 

# maintaining growth momentum# acquiring visibility and international brands # buying cutting edge technology rather than importing it # taking on global competition# improving operating margins and efficiencies# developing new product mixes

1. Increase stock value2. Increase growth3. Diversify4. To reduce competition5. Tax concessions6. Acquire resources quickly7. Synergy8. Succession problems

Issues in Mergers

1. Strategic Issues• Match in objectives of firms• Should increase strength2. Financial Issues- • Valuation of firm – DCF, CAPM(Capital Asset Pricing Method).

EPS of merged entity should be higher or neutral

Ranbaxy and Crosslands = positivePunjab National Bank and New bank of

India= negative•Source of funds- Increasing Debt,

Equity;NRIs, surplus, ….

•Chrysler and Daimler benz

3. Managerial Issues- Change in structure, leadership, Authority, style

4. Legal Issues – Companies Act, Income Tax Act ,

Cooperation- 2. Takeovers

•Post liberalisation- popular strategy•SEBI introduced Takeover code in 1994•Bhagwati code in 1996•SEBI 1997 – modified takeover code •To ensure transparency, fair

•  A merger - the mutual decision of two companies to combine and become one entity;

• it can be seen as a decision made by two "equals",

• Takeover characterized the purchase of a smaller company by a much larger one. This combination of "unequals" can produce the same benefits as a merger,

• but it does not necessarily have to be a mutual decision

• In a Takeover, • the acquiring firm usually offers a cash

price per share to the target firm’s shareholders

•or the acquiring firm's share's to the shareholders of the target firm according to a specified conversion ratio.

Issues in takeovers

1. Check Compatability of business styles2. Treat people with dignity and concern3. Trusted intermediary – Accountant,

Merchant bankers 4. Negotiations –

•What factors influence the price of takeovers

•Asset valuation•Goodwill•Market opportunities•Growth potential

•A leveraged buyout (or LBO, or highly-leveraged transaction (HLT), or "bootstrap" transaction) occurs when a financial sponsor gains control of a majority of a target company's equity through the use of borrowed money or debt. The purpose of a LBO is to allow an acquirer to make large acquisitions without having to commit a significant amount of capital

Leveraged buyouts(LBOs) or bootstrap acquisitions

• In an LBO, there is most often a ratio of 70% debt to 30% equity, although debt can reach as high as 90% to 95% of the target company's total capitalization. The equity component of the purchase price is typically provided by a pool of private equity capital.

•Often, the debt will appear on the acquired company's balance sheet and the acquired company's free cash flow will be used to repay the debt.

• the assets of the target company are used as collateral for the debt

Target Company

Country

Indian acquirer

Value Type

Tetley UK 271 million pound

LBO

Whyte and Mackay

UK 550 million pound

LBO

Corus UK 11.3 billion $

LBO

American axle

USA 2 billion dollars

LBO

Hansen transmission

Netherlands

465 million euro

LBO

Target Company

Country Indian acquirer

Value Type

Tetley UK tata tea 271 million pound

LBO

Whyte and Mackay

UK UB group 550 million pound

LBO

Corus UK Tata Steel

11.3 billion $

LBO

American axle

USA Tata motors

2 billion dollars

LBO

Hansen transmission

Netherlands

Suzlon 465 million euro

LBO

Friendly takeover and Hostile takeovers

•Friendly – both parties consent – same as a merger eg tata tea –Asina coffee

•Hostile – resisted by the existing management –pick up share in open market, through support of other major share holders – NEPC – Modiluft

•Pros and cons of takeovers

Motives behind M & A -Economies of Scale:

•  Average cost per unit is decreased through increased production

• Fixed costs are shared over an increased number of goods.

• More the products, more is the bargaining power. • This is possible only when the companies merge/

combine/ acquired, as the same can often obliterate duplicate departments or operation,

• It also provides varied pool of resources of both the combining companies

• Larger share in the market

Increased revenue /Increased Market Share:

•  This motive assumes that the company will be absorbing the major competitor and thus increase its power (by capturing increased market share) to set prices. 

Cross selling: 

•For example, a bank buying a stock broker could then sell its banking products to the stock brokers customers, while the broker can sign up the bank’ customers for brokerage account.

•Or, a manufacturer can acquire and sell complimentary products – cars /houses  

# Corporate Synergy:

•  Better use of complimentary resources. It may take the form of revenue enhancement (to generate more revenue than its two predecessor standalone companies would be able to generate) and cost savings (to reduce or eliminate expenses associated with running a business). 

Taxes :

•A profitable can buy a loss maker to use the target’s tax right off i.e.

•wherein a sick company is bought by giants.

Geographical diversification

•# Geographical or other diversification: this is designed to smooth the earning results of a company, which over the long term smoothens the stock price of the company giving conservative investors more confidence in investing in the company. However, this does not always deliver value to shareholders.

# Resource transfer:

•  Resources are unevenly distributed across firms and interaction of target and acquiring firm resources can create value through either overcoming information asymmetry or by combining scarce resources. Eg: Laying of employees, reducing taxes etc.

Market Reach and industry visibility

•# Improved market reach and industry visibility - Companies buy companies to reach new markets and grow revenues and earnings. A merge may expand two companies' marketing and distribution, giving them new sales opportunities. A merger can also improve a company's standing in the investment community: bigger firms often have an easier time raising capital than smaller ones.

Merger – a Case Study…William Durant founded GM. Lost control because of unconsolidated expansionLost control of GMStarted Chevrolet with a swiss Racer Louis

ChevroletDurant brought out LouisChevrolet became a popular brandUsed the money to buyout GM with a 5:1 swap of

sharesMerger of GM with Chevrolet

Legal Procedures for Merger, Amalgamations and Take-overs

•The general law relating to mergers, amalgamations and reconstruction is embodied in sections 391 to 396 of the Companies Act, 1956

•  

Companies Act 1956• Permission for merger:- Two or more companies can amalgamate only when the amalgamation is permitted under their memorandum of association. Also, the acquiring company should have the permission in its object clause to carry on the business of the acquired company. In the absence of these provisions in the memorandum of association, it is necessary to seek the permission of the shareholders, board of directors and the Company Law Board before affecting the merger.

• Information to the stock exchange:- The acquiring and the acquired companies should inform the stock exchanges (where they are listed) about the merger.

• Approval of board of directors:- The board of directors of the individual companies should approve the draft proposal for amalgamation and authorise the managements of the companies to further pursue the proposal.

• Application in the High Court:- An application for approving the draft amalgamation proposal duly approved by the board of directors of the individual companies should be made to the High Court.

• Shareholders' and creditors' meetings:- The individual companies should hold separate meetings of their shareholders and creditors for approving the amalgamation scheme. At least, 75 percent of shareholders and creditors in separate meeting, voting in person or by proxy, must accord their approval to the scheme.

• Sanction by the High Court:- After the approval of the shareholders and creditors, on the petitions of the companies, the High Court will pass an order, sanctioning the amalgamation scheme after it is satisfied that the scheme is fair and reasonable. The date of the court's hearing will be published in two newspapers, and also, the regional director of the Company Law Board will be intimated.

• Filing of the Court order:- After the Court order, its certified true copies will be filed with the Registrar of Companies.

• Transfer of assets and liabilities:- The assets and liabilities of the acquired company will be transferred to the acquiring company in accordance with the approved scheme, with effect from the specified date.

• Payment by cash or securities:- As per the proposal, the acquiring company will exchange shares and debentures and/or cash for the shares and debentures of the acquired company. These securities will be listed on the stock exchange.

The Competition Act, 2002• Act regulates the various forms of business combinations through

Competition Commission of India. • Under the Act, no person or enterprise shall enter into a combination, in the

form of an acquisition, merger or amalgamation, • which causes or is likely to cause an appreciable adverse effect on

competition in the relevant market and such a combination shall be void. The Commission while regulating a 'combination' shall consider the following factors :-

▫ Actual and potential competition through imports;▫ Extent of entry barriers into the market;▫ Level of combination in the market;▫ Degree of countervailing power in the market;▫ Possibility of the combination to significantly and substantially increase prices or

profits;▫ Extent of effective competition likely to sustain in a market;▫ Availability of substitutes before and after the combination;▫ Market share of the parties to the combination individually and as a combination;▫ Possibility of the combination to remove the vigorous and effective competitor or

competition in the market;▫ Nature and extent of vertical integration in the market;▫ Nature and extent of innovation;▫ Whether the benefits of the combinations outweigh the adverse impact of the

combination.• Thus, the Competition Act does not seek to eliminate combinations and only

aims to eliminate their harmful effects.

• The other regulations are provided in the:- The Foreign Exchange Management Act, 1999

•  the Income Tax Act,1961.• the 

Securities and Exchange Board of India (SEBI) has issued guidelines to regulate mergers and acquisitions.

• The SEBI (Substantial Acquisition of Shares and Take-overs) Regulations,1997 and its subsequent amendments aim at making the take-over process transparent, and also protect the interests of minority shareholders.

New Takeover Code

•The minimum size of a compulsory public offer has been increased from 20% to 26% 

•The 25% threshold (up from 15%) substantially improves headroom and means that investors can now acquire up to 24.99% holding without triggering a public offer.

• In the old code, promoter groups with majority or higher stakes were restricted from increasing their holding (barring a one-time 5% acquisition) even if they were below the 75% mark and the company needed equity — Fortunately, The new code allows promoters to increase their stake in 5% annual blocks all the way upto 75%.

Difference between New take over code and old code • open offer trigger above

25% • Open offer size increase to

26%• Creeping Acquisition 5%

allowed to promoters up to 75%

• Scrapping of Non compete fees to promoters

• Open offer trigger above 15%

• Open offer size 20% • Creeping acquisition

allowed 5% for promoters holding between 15-55%

• Non compete fees for promoters Allowed

Cooperation

1. Mergers 2. Takeovers

3. Joint Ventures4. Strategic Alliances

Joint Venture

•  Two or more businesses joining together •under a contractual agreement to

conduct a specific business enterprise with both parties sharing profits and losses.

•The venture is for one specific project only,

•Parryware with Roca to form Parry Roca•Bharti-Walmart•Sony-Ericsson is a joint venture by the

Japanese consumer electronics company Sony Corporation and the Swedish telecommunications company Ericsson to make mobile phones.

Joint Venture Strategies

•Absorption- Acquire another company•Consolidation- Combine and form new

company

•Joint ventures- partnership or consortium for a specific purpose

Types of JVS

•Same industry, different industry, international, national

• In one of their countries or third country

•Why JVs

•Easier to achieve objectives because of partnership

•Reduce competition•Diversification- different industries•Need for technology•Circumvent legal and regulatory hurdles-

international•Threats and opportunities

•Activity uneconomical to do alone •Sharing of risk•Complementary competencies •To overcome local environment roadblocks•Complement each other : Roca –

technology, Parryware- Distribution•Government regulations= India does not

allow 100% FDI in wholesale cash and carry-Walmart and Bharti

Government relaxes FDI caps –July 17th •  FDI cap in telecom raised to 100% from 74%; up to 49%

through automatic route and beyond via FIPB

* No change in 49% FDI limit in civil aviation

* FDI cap in defence production to stay at 26%, higher investment may be considered in state-of-the-art technology production by CCS.

* 100% FDI allowed in single brand retail; 49% through automatic, 49-100% through FIPB

• * FDI limit in insurance sector raised to 49% from present 26%, subject to Parliament approval

* FDI up to 49% in petroleum refining allowed under automatic route, from earlier approval route

• In power exchanges 49% FDI allowed through automatic route, from earlier FIPB route.

* Raised FDI in asset reconstruction companies to 100% from 74%; of this up to 49% will be under automatic route

JV must for entry into India as 100%FDI not permitted in some sectors

•* FDI limit increased in credit information companies to 74% from 49%.

•  FDI up to 49% in stock exchanges, depositories allowed under automatic route

* FDI up to 100% through automatic route allowed in courier services

* FDI in tea plantation up to 49% through automatic route; 49-100% through FIPB route

* No decision taken on FDI cap in airports, media, brownfield pharma and multi-brand retail.

JV low risk option to enter into a new market

•Motorola entered India in JV with Blue Star, which had a reputed brand name and a vast distribution network.

Opportunity to leverage their core strengths

•Xerox entered India in venture with Modi- early lead in the photocopier market leveraging on the brand name of Modi

Examples of JVs

1. Cummins and TELCO – Manufacture Telco engines

2. Ashok leyland and Singapore telecom- - AL plans to enter telecom and handset manufacture

Benefits and Draw back of JVs

Benefits :Minimise risk, less investment, access to foreign

technology, access to new markets, synergies, larger equity base

Disadvantage :Problems in partnership, cultural,behavioural…Time in negotiating the JVAligning thinkingLonger DMLess freedom and flexibilityIPR concerns

Case study-JV- lack of strategic fit

•70;30 JV between Hotline (india) and Haier(China)

•Haier wanted to focus on imports and Increase stake to 49%

•Hotline disagreed• JV broke up even before operations

started•Haeir reentered as 100% FDI subsidiary

JV – Case study-redundant partner

•TVS and Suzuki (Japan) formed in 1983 and broke in 2001

•Uneasy relationship between the partners

•TVS increased stake•Suzuki was not contributing enough•Suzuki wanted own manufacturing•Suzuki no longer useful to TVS

JV- breach of terms of JV

•Danone and Wadia(Brittania) JV in 1995•Wadias accused Danone of using Brittania

‘tiger’ brand for products outside India.• This not permitted as per the terms agreed•Danone invested in a bio-nutrition firm

Avaesthagen• Foreign company needs the consent of its

Indian partner before pursuing business ventures in similar area.

•Wadia objected to the above…..

JV- lack of synergy

•40:60 JV between Godrej Boyce and GE (USA) formed in 1993. broke off in 2001

• JV failed to meet projected revenues (of Rs 35 billion vs actual Rs 8 billion)

•GE wanted to increase stake•GE accuse the indian partner of lack of

professionalism

Broken JV

• Indian partner has to issue NOC for the foreign partner to pursue other entry avenues

• Indian partners try to ruin the chances…•Wadia-Danone, Modi-dysney, TVS-suzuki…

Strategic Alliance:

•  Any cooperative effort between two or more• independent organizations to develop, • manufacture, or sell products or services

• Involving anything from getting a better price for goods by buying in bulk together

• to seeking business together with each of you providing part of the product.

• The basic idea behind alliances is to minimize risk while maximizing your leverage.

Strategic alliances –

•Unite to pursue common goals•Companies otherwise are independent•Partner firms contribute in a key strategic

area : technology, product, marketing …•Pooling of resources for mutual gain

• all JVs are strategic alliances also. But all SAs need not be JVs because SAs can happen without equity participation

• Liberalisation has spurred the growth of SA

• Access to technology, markets, funds, quality standards

• Funding, New Products, Risk sharing, higher ROI,Validation, market access

How Strategic Alliances Create Value

Improve Current Operations

Shaping the Competitive Environment

Facilitating Entry and Exit

ValueCreation

How Strategic Alliances Create Value

Improving Current Operations

Exploiting economies of scale

• a partner brings increased market shareand/or manufacturing capacity

Learning from partners• a partner brings technology and/or

market knowledge

Risk and cost sharing

• a partner bears a portion of the risk and/orcost of the alliance

How Strategic Alliances Create Value

Shaping the Competitive Environment

Facilitating technology standards

Facilitating tacit collusion

• partners may agree on a standard and avoida market battle for the standard

• partners may communicate within an alliancein subtle, legal ways whereas the samecommunication between competitors outsidean alliance would be illegal

How Strategic Alliances Create Value

Facilitating Entry and Exit

Low-cost entry into new industries

Low-cost exit from industries

Managing uncertainty

Low-cost entry into new geographic markets

• a partner provides instant access and legitimacy

• a partner is an informed buyer

• alliances may serve as ‘real options’

• partners provide local market knowledge, access,and legitimacy with governments and customers

Pyramid of alliances

Evaluating your partner in a SAPartner A Partner B

Contribution

Benefit

Issues in SA

•Get experienced expert to negotiate the deal

•Upfront and milestone payments/invesments/royalty/loan

•R&D funds•Control of IPR•Dispute resolution

What if it does not work out

•Prenuptial agreement – how to divide the assets

•Money, fixed assets, product, IPR…..

Types of SA

Procompetitive alliances – value chain related – supplier-buyer-intermediary

Noncompetitve –same industry, different product range, territory - airline companies share routes…

Competitive –Rival firms – Precompetitive –firms from unrelated

industries =biotech + pharma

SA – examples…

•Nortel and Microsoft form SA – shared vision of unified communication

•Nortel – world class network quality and reliability

•Microsoft – ease of use•Takes silos – email, instant messaging,

telephony, e-conferencing and uses advanced technology to make it more efficient and easy

•Symantec and microsoft SA•Symantec has apps that run on windows

platform•Use each other’s technology•Symantec reduces the cost of windows

management•Channel partners who sell both symantec

and microsoft..have more benefits

•Facebook and microsoft –•Microsoft will sell advertising for

facebook globally•Uses microsoft digital advertising solution

Examples of SA

•Network 18 and Sun •Wipro and IBM•TCS and Cisco•ETS and NIIT•Air India and Lufthansa

SUN18

COLORS, MTV, Nick, Vh1, Homeshop18, CNN-IBN, CNBC-TV18, CNBC-Awaaz, IBN-7, IBN-Lokmat, Disney, Disney XD, Hungama, SUN TV 

Strategic Alliances

• Starbucks partnered with Barnes and Nobles bookstores to provide in-house coffee shops

• Starbucks partnered with Pepsico to bottle, distribute and sell the popular coffee-based drink, Frappacino

• Eli Lilly partners with the Belgium-based company Galapagos to develop treatments for osteoporosis. With Canada's BioMS medical group for a novel treatment for multiple sclerosis. In Japan, Lilly is partnering with Kyowa Hakko Kogyo Co., Ltd., to bring a targeted cancer treatment to market.

• Lilly will have the exclusive license to develop and sell the product worldwide except in Japan, and the two companies will share rights in certain Asian countries.

Internationalisation

•Type of expansion strategy where firms market their products or services beyond their domestic market

•Types – International, Multidomestic, global and transnational

International – International company offers standardised

product to different countries without any differentiation

Eg Coca cola, P & G

Multidomestic strategy ( Localisation)

• Multi-domestic Strategy▫Strategic & operating decisions are

decentralized to the strategic business unit in each country to tailor products to the local market.

eg Mc Donalds

Global –

Assumes more standardization of products across country markets

Low cost approach standard undifferentiated product across all countries

Economies of scale , production in favourable locations

Transnational• The firm seeks to achieve both global efficiency

and local responsiveness

•Low cost and customised

•Eg Indian software companies

Entry modes for International strategies

•Export•Contractual- Licensing, Franchising,

Technical agreement, BOT

• Investment entry- J.V, S.A,Subsidiaries

International Strategy

•Globalization drivers – Assess dual pressures:

▫Global efficiency – standardization

▫National/local responsiveness - adaptation

“Forced” Standardization

•Coca-Cola in Chinese: “bite the wax tadpole”

•Coca-Cola 30 liter bottle??

•U.S. carmakers’ left-hand drive cars

Effective Standardization

Coca-Cola’s “transnational polar bears”

McDonald’s “Big Mac”

Barbie: The “All-American” Girl Goes Overseas

•Barbie is 41 years old•Sold in 130 countries•National adaptations:▫Physical features▫Costumes▫Activity sets

•Standardized physique:▫Scaled to 6’2”, 110 lbs.▫38-18-28

Effective Adaptation

•McMutton Pie in Australia

•Wendy’s shrimp sandwich in Japan

•Campbell’s non-condensed soups in the UK

•Coca-Cola’s 175 ml containers in Japan

Cadillac Seville 1997 Asian edition

Right-hand drive, shorter seats, closer pedals, 10” shorter, retractable mirrors

International Strategy:Managing Dual PressuresP

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ExportStrategy

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ExportStrategy

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MultidomesticStrategy

GlobalStrategy

TransnationalStrategy

Foreign Market Entry Modes

•Export•Licensing•Joint Venture•WOS▫Acquisition▫Greenfield

Licensing vs Franchising

•McDonald's sells a franchisee : a franchisee must follow all of their rules, including how to cook the food, how to advertise, what the staff say to customers, and other aspects of the business. If McDonald's introduces a "Road Kill Burrito", a franchisee is obligated to put it on the menu and serve it. The franchisee largely does not determine day to day operations. 

Licensing •Caterpillar dealers have a license to use the

Caterpillar name and sell Caterpillar equipment and parts. While they cannot (generally) sell competing equipment, how each dealer runs the business is largely left up to them. When Caterpillar introduces a new product line (for example, light duty rentals), the dealers are not obligated to introduce that product or service. The licensee can largely determine the day to day operations.

WOS-Wholly Owned Subsidies

• In a wholly owned subsidiary, the parent company  owns all of the shares  of the company and there are no minority shareholders.

•Eg ford India, hyundai India

Examples

•AV Birla – manufactures carbon black in Thailand and exports it to 30 other countries

•Blue Dart with Fedex – S.A•Archies – Franchising

•68 % of Coca Cola’s revenues are generated outside north America.

•Failure of Parker Pen in the 1980s - standardised, high quality product, std Advertising, pricing and distribution

•For low priced products like cigarettes, soft drinks, etc population more important than income – China and India attractive markets

•Coke waited for 15 years to make its entry in russia, Pepsi had a 100% russian market share

•Coke entered Russia in 1987 and had a 50% market share by 1996

•Upscale prestigious segment- l’oreal, oriflame( narrow global market)

•Swiss watch Co. – watches from 50$ to 1 lakh $

Case Study on Internationalisation-TOYOTA

•Toyota started off with exporting in a big way

• In order to get around import barriers such as local content regulations and import quotas,……

Toyota - Transnational Strategy •Toyota chose a Transnational strategy

•Why transnational ??

•Cost – competition•Local – local govt regulations, needs of

roads, customers •

•1960s – Exporting •1980s- JV•1986- WOS•Americanisation of Toyota •Toyota crisis in 2010•Cost vs quality

Examples of Global marketing

•Brand name – Coca Cola•Product Design – Mcdonald(US),

toyota(Japan)•Positioning – Unilever(GB)•Distribution – Benetton ( Italy)•Customer Service -Caterpillar (US)•Sourcing – Toyota, Honda( Japan)

•Electral from FDC – sold in many countries

•Coca cola – strong brand name•McDonald – restaurant system that can

be set up anywhere in the world.•Orchid hotels, Hubli – now in Singapore,

UK, USA,Belgium, Dubai…

Advantages of Global Marketing

•Economies of scale in production and distribution •Lower marketing costs •Power and scope •Consistency in brand image •Ability to leverage good ideas quickly and efficiently •Uniformity of marketing practices •Helps to establish relationships outside the "political arena" •Helps to encourage ancillary industries to be set up to cater for the needs of the global player

Global Marketing:What It Is ?An important task is to understand the extent to which marketing plans & programs can be extended worldwide, and the extent to which they can be adapted.This thinking resulted in the concept of “Global Localization”.A successful global marketer needs to “Think globally and act locally.”

Coke’s success in Japan is a classic example of Global Localization. By adapting sales promotion, distribution and customer service to the local needs, the company achieved a 78% share of the soft-drinks market.

The company built a complete local infrastructure with its sales force, vending machines etc .Coke’s success was due to its ability to be as much of an insider as a local company but still reap the benefits resulting from world-scale operations

•Global marketing essentially means widening business horizons to encompass the world while scanning for opportunity and threat.

Global Marketing:What It Is Not ?

•Global marketing does not mean to develop standardized, high-quality world products and market them using standardized advertising, pricing and distribution.Parker Pen’s failure in the world market is one such example.

•Global marketing does not mean entering every country in the world. The decision to enter outside markets depends on the company’s resources, managerial mind-set and the nature of opportunity and threat.

Global Market Segmentation

• It is the process of dividing the world market into distinct subsets of customers that behave in the same way or have similar needs or…

•Process of identifying specific segments like country groups or individual consumer groups of potential customers with homogenous attributes who are likely to exhibit similar buying behavior.

Global Market Segmentation

Global companies may segment the markets as per one or more criteria:

1.Geography2.Demographics (national income and size of

population)3.Psychographics (values, attitudes and

lifestyles)4.Behavioral characteristics and 5.Benefits sought

Another method of global segmentation is:6.Vertical segmentation and7.Horizontal segmentation

Geographic SegmentationIt is dividing the world into geographic segments. Advantages: Proximity and easier to visit on the

same trip.Limitations: Despite being in the same region,

markets need not be similar. eg. Japan and Vietnam are both in East Asia but Japan

is a high-income, postindustrial society and the other is an emerging, less developed preindustrial society.

Hermann Simon ranked geography as the lowest in market segmentation, after Application, Customer group, Product/Technology, Price level and Quality.

Demographic SegmentationThis is based on characteristics like: Age, Gender, Income, Education & Occupation.New demographic factors like: Aging population,

fewer children, working women, higher incomes and living standards suggest the emergence of global segments.

National income is the major indicator of market potential for most consumer & industrial products.

Annual per capita income varies widely from a low 81$ in Congo 38587 $ in Luxembourg.

For low price products like cigarettes, soft drinks etc, population is more important than income. China & India with a population of 1.3 & 1.0 billion are attractive target markets.

Psychographic Segmentation•This involves grouping people in terms of their attitudes, values & lifestyles. Data obtained from Questionnaires require respondents to indicate the extent to which they agree or disagree with a series of statements.

Psychographic profiles of Porsche’s American customers

Porsche AG, the German sports-car maker turned to Psychographics after sales declined from 50,000 in ‘86 to 14,000 in ‘93.

Data was used to develop advertising tailored to each type.

Porsche’s U.S sales improved by nearly 50% in ‘94

Category % of all owners

Description

Top Guns 27% Driven & ambitious, Power minded

Elitists 24% Old money, Personality not asscd even with an expensive car

Proud patrons

23% Proud to own the car as a reward

Bon Vivants 17% Jet setters and thrill seekers

Fantasists 9% Car is a form of escape, don’t care about impressing others

Behavior Segmentation• Focuses on whether people buy and use a product as well as how often and how much they use it. Users can be categorized in terms of usage rates: Heavy, Medium, Light and Non-user Consumers can also be segmented as per user

status: Potential, nonusers, ex-users, regulars, first-timers

& users of competitor brands.

Financial institutions has also to consider Consumer behavior towards saving and spending money.

Japan has the highest number of cash dispensers, followed by Switzerland, Canada and the United States.

Benefit Segmentation

This focuses on B, the numerator in the Value equation, V = B/PV= valueB= perceived benefits - perceived costsP= price

This approach can achieve excellent results by virtue of marketers’ superior understanding of the problem a product solves or the benefit it offers irrespective of geography.

eg. Nestle found that cat owners’ attitudes towards feeding their pets are the same everywhere.

A campaign was created for Friskies cat food based on the appeal that dry cat food better suits a cat’s universally recognised independent nature.

Vertical vs. Horizontal Segmentation

•Vertical SegmentationThis is based on product category and price points.In medical imaging market X-ray, C T scan, MRI etc. are

segmented based on price.

•Horizontal Segmentation For the same product, market can also be

segmented by the health care system that is regional, national & global.

This approach worked well in domestic as well as outside markets.

Global Targeting

• Targeting- It is the act of evaluating and comparing the identified groups and then selecting one or more prospect/s with the highest potential.

• A Marketing Mix is then devised which creates the maximum value to the customers, while providing the best return on sales to the organization.

3 basic criteria for Targeting are: 1. Current Segment Size & Growth Potential 2. Potential Competition 3. Compatibility & Feasibility

Current Segment Size & Growth Potential

• Is it large enough for the Company to make a profit ?

• Does the segment has a high growth potential for being attractive in terms of the Company’s long term strategy ?

• Is the global segment attractive enough for a standardized product to be marketed in several countries.

eg. Billion plus members of the global MTV-generation is a huge market in terms of size.

China alone offers attractive opportunities to many industries.

eg. Financial services, personal computers, passenger cars etc.

Potential competition

• Is the segment characterized by strong competition ?

• Is the local brand offering a tough fight to the new Company ?

• Inspite of an established, can a new Company make inroads ?

eg. Fuji launched despite Kodak being already present as the brand leader in the 2.4 billion $ U.S color film market.

Now, after two decades Fuji’s U.S mkt. share is in the 10 to 16 % range.

• Fuji currently enjoys a 25% mkt. share in Europe whereas Kodak has only 40% of the color film market.

Compatibility & Feasibility

• To reach global markets, does the Company has adequate resources and money to spend on distribution, travelling etc. ?

• Whether the segment targeted is compatible with the company’s overall goals and established sources of competitive advantage. ?

Coke waited for 15 years to make its entry in Russia, while Pepsi already had a 100% Russian cola market.

After entering in 1987, Coke has achieved a 50% mkt. share by ‘96.

Global Target Market Strategy

• Standardized Global Marketing Similar to mass marketing in a single country.

Involves creating the same marketing mix for the potential buyers.

Uses extensive distribution in the maximum number of retail outlets.

Objective : greater sales volume, lower production costs & greater profitability.

Coca-Cola uses the appeal of youthful fun in its global advertising.

Sponsorship is global and is adapted to events that are popular in specific countries.

Concentrated Global Marketing

• In this type, marketing mix is devised to reach a single segment of the global market. Such companies define their markets narrowly. They go for a global depth rather than a national breadth.

In Cosmetics, this approach has been used successfully to target the upscale, prestigious segment. eg. Oriflame, Lo’real etc.

Winterhalter ( a German company) is a silent leader in the dishwasher market. It focuses exclusively on hotel chains, restaurants etc.

This narrowing of market has been one of their most important strategic decision as well as the foundation of their success.

Differentiated Global Marketing

• In this the marketing strategy is a variation of concentrated global mktg.

• It involves targeting two or more distinct mkt. segments with different mktg. mixes. This allows a wider market coverage.

In the SUV segment, Rover has Range Rover for the elite class and the Land Rover Discoverer which is lower priced. The company has a concentrated strategy for each segment.

Swiss Watch Co. (SWC) offers watches ranging from 50$ worldwide to the expensive one (Blancpain) costing 1.0 lakh $.

Global Product Positioning

• It is the location of the product in the minds of the customer. This depends on many factors,

many of which are controlled by the marketer. It is the way to reach the target customer.

• Global positioning is most effective for the high-touch/ tech consumers.

Manhattan Bank launched a 75 million $ global advertising campaign with the theme “profit from experience”.

The business and private banking clients of the bank “span the globe and travel the globe. Hence, a uniform experience globally results in less confusion.

Global Product Positioning

•High-Tech PositioningPersonal computers, video and stereo equipment etc

are examples for this type of promotion. They are frequently purchased on product features. Buyers are already have adequate technical knowledge or are keen to know more.

These products can be categorised as:technical products -ex. Computers, chemicals,

financial services.special-interest products -Characterized by shared

experience & high involvement among users.demonstrable products- Mode of use needs to be

shown at selling points –ex. Microwave ovens, Food processors, Gas geysers etc.

Global Product Positioning

•High-Touch PositioningBuyers in this segment are highly involved. They share a

common language and set of symbols relating to themes of wealth, materialism and romance.

Products that solve a common problem- provide benefits linked to life’s little moments. ex. quenching thirst with a soft drink

Global village products- products have a global appeal by virtue of their country of origin. Sony is synonymous with Japanese quality, Mercedes projects German engineering.

Products that use universal themes- advertising themes & product appeals are across the globe. BMW car has its own inhouse BMW magazine which reinforces the high-touch concept.

Examples of Global Marketing

Strategy Company/Country

1.Brand Name Coca-Cola (U.S)

2.Product Design McDonald’s(U.S), Toyota(Japan)

3.Positioning Unilever (Great Britain)

4.Packaging Gillette (U.S)5.Distribution Benetton (Italy)

6.Customer service Caterpillar (U.S)

7.Sourcing Toyota, Honda (Japan)

Brand Name as a Strategy

•Coke from Coca-Cola is the best known strongest brand in the world.This has been made possible only due to the Company’s s willingness and ability to back its flagship brand with a strong local marketing effort.•Electral from FDC Ltd. is another Indian ORS brand sold in many countries.This brand is a popular ORS worldwide and is approved by global NGOs for the treatment of rehydration.

Product Design as a Strategy•McDonald’s has designed a restaurant system that can be set up anywhere in the world.

•India’s own Kamat group of hotels which set up its first hotel in Hubli in 1948 have now expanded world over with restaurants in Belgium, Japan, Singapore, United Kingdom, USA and Dubai. They also pioneered the concept of Ecotel revolution in India as ORCHID Hotel in 1997 and are now eyeing global markets like South Africa, China, Pakistan etc.

Positioning as a strategy

•Unilever uses a teddy bear picture to position the benefits of softness for its fabric-softener product in various world markets across the globe.

Packaging as a strategy

•Gillette uses the same packaging for its flagship brand Gillette Sensor Razor everywhere in the world. This unique and distinct packaging has made this a leading global brand in this segment.

Distribution as a strategy•Benetton uses a sophisticated distribution system to quickly deliver the latest fashions to its worldwide net-work of stores.Benetton produces approx. 130 Million garments every year, sold in about 120 countries through about 5000 stores offering clothes that have style, quality and in relevance to the market today.Benetton’s turnover is about 1.9 Billion Euros.

Customer service as a strategy

Since its inception 80 years ago, Caterpillar has grown to be the world’s largest manufacturer of construction and mining equipment, diesel and natural gas engines and industrial gas turbines.

It’s major success is due to a network of dealers that supports a promise of “24 hour parts and service”.

Caterpillar is proud to be the leader in building the World’s infrastructure and in enabling progress for millions of people around the globe.

Sourcing as a strategy

•Toyota and Honda’s success was based on exporting cars from its factories in Japan.

Now, both companies have invested in manufacturing facilities in the United States and other countries from which they export to all over the world.

Importance of Global Marketing

•In the first quarter of the 20th century, there were thousands of auto companies in the world and more than 500 in the United States alone.•Today, fewer than 20 companies remain worldwide, and only 2 are American.•In most industries, the companies that will survive and prosper in this century will be global enterprises. Some companies that do not respond to the challenges and opportunities of globalization will be absorbed by more dynamic enterprises; others will simply disappear.