#internationalisation strategy

Internationalisation:Entry Positioning Strategy

Shishir K. JhaFaculty, Shailesh J. Mehta School Of Management

The international business environment is constituted by:

Context: Global Power Relations Global constraints facing developing countries Constraints of technology, access and new trade

policy New International Division Of Labor

&

• Opportunity: Problem Solving What are the opportunities for firms within these

constraints?

Strategies for Local Firms As They Globalize

PRESSURE TO GLOBALIZE FOR THE INDUSTRY

Where Is The Industry In The Following Spectrum?

Companies with enormous fixed costs & high standardization

Companies with lower fixed costs and meeting

local consumers needs



Aircraft Engines, Memory ChipsTelecommunications Switches,Cement, Steel

Beer, Retail Banking,Restaurants, Cosmetics






Aircraft Engines, Memory ChipsTelecommunications Switches,Cement, Steel

Beer, Retail Banking,Restaurants, Cosmetics




More Relative Globalization Tendency Less

GLOBAL POSITIONING STRATEGY

StrengthOfGlobalizationPressure

How Transferable Are Firm Assets With Respect To Location

High

Low

Product/Service CustomizedTo Home Market Transferable Abroad




High

Low

Product/Service Customized Product/ServiceTo Home Market Transferable Abroad

Defender ExtenderShanghai Jahwa vs Revlon Jollibee Foods vs McBimbo vs Pepsi Televisa, Asian Paints

vs ICI




High

Low


Contender Cemex, Acer, Samsung, Raba, Ranbaxy


vs ICI




High

Low


Dodger ContenderSkoda, Vist Cemex, Acer,

Samsung, Raba, Ranbaxy


vs ICI

Strategies for Effective Global Positioning of Companies from Developing Countries

Dodger Contender

DefenderFocuses on leveraging market segments where MNCs are weak.

Extender

Pressure to Globalize in the Industry

High

Low

Cutomised to Home Market Transferable Abroad

Transferable Assets


Dodger Contender

DefenderFocuses on leveraging market segments where MNCs are weak.

ExtenderFocuses on expanding into markets similar to those of the home base, using competencies developed at home


High

Low


Transferable Assets


Dodger ContenderFocuses on upgrading capabilities and resources to MNCs globally, often by keeping to niche markets

DefenderFocuses on leveraging market segments where MNCs are weak



High

Low


Transferable Assets


DodgerFocuses on a locally oriented link in the value chain, enters a JV or sells out to MNC

ContenderFocuses on upgrading capabilities and resources to MNCs globally, often by keeping to niche markets

DefenderFocuses on leveraging market segments where MNCs are weak



High

Low


Transferable Assets

Questions For Positioning ♠ As a firm grows to become a Global Contender, what should its

Strategy be with respect to its Defender positioning?

♠ How are developing countries [like China and India] dealing with the pressure to allow for FDI [in terms of creating domestic competitive capacity?]

Watermelons Of ParraStriking a balance between the foreign and domestic markets.

A story from Manohar Parrikar, the chief minister of (the Indian state of) Goa..

Parrikar comes from a little Goan village called Parra, which was apparently famous for thequality of its watermelons many years ago. People from faraway towns would travel to Parrato buy watermelons; there was something special about them. What people didn’t knowwas that they never sampled the village’s very best watermelons. Those were saved for thevillage’s children.

When the crop was harvested, they could eat as many watermelons as they wanted to, butthere was one condition: They could not throw away the seeds. The kids had to collect all theseeds, and the next year villagers would use those seeds to grow another great crop.

Then, the times changed. Watermelon prices soared and the villagers’ priorities shifted fromgrowing great watermelons to maximizing profits. They started selling all the finest water-melons instead of giving them to their children. The villagers’ profits shot up, but the qualityof the watermelons started declining. So much so that today, there are no good watermelonsto be found in Parra.

Cemex [www.cemex.com ] Cemex S.A. de C.V. is the world's largest building

materials supplier and third largest cement producer.

Revenue: $14.98 billion (2012) Employees: 44,000 (2012) Annual cement production capability: 95 million

tons (2012)

Founded in Mexico in 1906, it has operations extending around the world, including production facilities in 50 countries in North America, the Caribbean, South America, Europe, Asia, & Africa.

Sales: 33% from its Mexico operations, 25% from the U.S., 15% from Spain, and smaller percentages from its plants around the world.

In 2004, Cemex received the Wharton Infosys Business Transformation Award for their creative and efficient

use ofinformation technology.

Haier & Galanz: Internationalisation

Chinese Characteristics

♣ From 1980 to 2010, China’s (GDP) grew at an average annual rate of nearly 10%, lifting hundreds of millions of people out of extreme poverty and creating an urban middle class.

♣ By 2010, the Chinese economy was the world’s second-largest, measured by GDP at PPP terms.

♣ China - the world’s leading white goods manufacturer since 2007 and, in 2010, was home to 49% of global capacity.

Prof. Shishir K. Jha, Shailesh J. Mehta School of Management, IIT Bombay

Examples of Disruptive Technologies [Galanz (China)]

● Entered the microwave market in 1992: different decision from other Chinese companies, which served as mainly manufacturing contractors for foreign companies selling in other markets.

● Only 2% of Chinese households owned microwave ovens. Most families could not afford them and few had kitchens large enough to accommodate units built with Western users in mind.

● Licensed microwave technology from Toshiba & built core competence in manufacturing, followed by heavy, sustained investment in R&D and design, to develop a simple, energy efficient microwave oven that was small and affordable.

● Played a leading role in discovering new applications of microwave ovens for: stir-frying, deep-frying, steam cooking, serving as a sterilization cabinet & performing other functions.

● Company’s global market share in microwave ovens [in 2007] was more than 40%.

Haier’s Spectacular Growth♣ A low-cost Chinese OEM [Qingdao Refrigerator Factory], climbed from the

verge of bankruptcy into a world-class household brand name in two decades’.

♣China’s largest white goods manufacturer.

♣By 2008, surpassed Whirlpool as the world's top refrigerator producer in terms

of sales (Euromonitor).

♣By 2012, top spot in Euromonitor's Global Major Appliances Brand rankings for

the 4th consecutive year (Global Brand Market Share rises to 8.6%).

Source: http://finance.yahoo.com/news/haier-ranked-1-global-major-141300271.html

Haier: Broad Contentions

• Growth Curve: – Grow from being a local company to becoming an international company,

and eventually become a truly global brand? – Would product diversification and design strategy help to improve Haier’s

bottom line and develop its brand name?

• Observe, Digest, Imitate and eventually Design independently [China: “efficiency seeking market”].

Haier: Broad Contentions

• Three thirds goal (1997): – 1/3rd revenue from goods produced and sold in China, – 1/3rd goods produced in China and sold overseas, – 1/3rd goods produced and sold overseas.

• Summary: Need to shift mode of traditional enterprises from “production-storing-selling” (enterprise-centric) to “demand manufacturing and delivery” (user centric) mode to satisfy the tailored needs of users.

Haier: Domestic Growth (1984-1991)

♣ Qingdao Refrigerator Factory: a township and village enterprise (TVE), whose 800 workers collectively owned its assets and shared any profits remaining after the payment of local and national taxes and appropriate reinvestment in the company.

♣ TVEs emerged in China during the 1980s, initially on an experimental basis before private enterprise emerged in an organized way.

♣ Zhang (December 1984), a minor bureaucrat in Qingdao, took control of a loss-making refrigerator firm, Qingdao Refrigerator Factory, (1956), a collective-owned enterprise with sales of US $1.88 million and losses of over US $171,000.

Haier: Domestic Growth (1984-1991)

♣ 1st day at work: received 53 resignation due to lack of salary payment. Borrowed money to pay workers.

♣ Orders workers to smash 76 faulty refrigerators. ♣ Resisted ramping up output, focusing instead on quality and brand building.

Won a gold medal (1988) for quality in a national refrigerator competition.

♣ 3 looming issues on taking over Qingdao Refrigerator Factory — Quality, Product Specialisation & Production Innovation.

Haier: Early Decisive Challenge• Acquired 500 acres of Qingdao land for a new industrial park. Land cost RMB

80 million [$ = 6.22 RMB (Yuan)] and construction costs were estimated to exceed RMB 1 billion, while Haiers 1992 profits were just RMB 51 million. �

• Promised bank loans of RMB 1.6 billion didn’t come through due to Chinese government tightening credit. Turned desperately (1993) to Shanghai’s nascent stock market, listing 43.7% of its Qingdao Haier Refrigerator Division.

• The IPO (limited to Chinese investors) raised RMB 369 million. If we had not been successful with our IPO, Haier would have disappeared.

Internationalisation: Early Challenges♣ Export to Germany in 1989: Retail shops refused to carry Haier brand. ♣ Arranged for a blind quality check: Haier’s brand, Blueline, received eight

points while the German brand, Lieber, received six points. ♣ Results shocked the German distributors but gained their recognition, and

after that Haier started exporting in 1990.♣ Took one year to get an interview at Walmart but succeeded very well

once approved.♣ Fragmented white goods sector (with no manufacturer commanding more

than 10% of the world market). – Only a few of the big players had their products presented in all key markets – GE, Whirlpool and AB Electrolux had a global orientation while others had a

strong regional position or were leaders in a specific product range.

Haier: Internationalisation: 1998-2005♣ International Strategy: Get in, Stay in and Take over♣ Introduce innovative products for niche consumer markets and then expand into

bigger ones – “Loose brick in the wall” (enjoy higher margins instead of pursuing OEM): Mini dual-compartment refrigerators for offices, college dormitories and

hotels. Specially designed bottom drawer that children could reach into to grab

ice cream. Electric wine cellars for customers who lacked regular cellars.

♣ Global Competitors: America’s Whirlpool, Sweden’s Electrolux & Japan’s Matsushita, in terms of capital, technology and manpower.

♣ Haier’s Path: Speed & differentiation. Largeness (global production volume) will give way to “strength” - Zhang Ruimin, CEO, Haier.

Haier: Internationalisation: 1998-2005♣ Global expansion strategy (ten target markets with head office everywhere):

1. Brand Reputation as opposed to OEM for the world’s biggest brands.

2. Succeed in US and Europe first as opposed to easier Asian markets.

♣ Haier summarized group performance with three numbers: 1, 8, and 28 (2011). No. 1 white goods manufacturer in China since 2001 and the leading

refrigerator manufacturer worldwide by Euromonitor. 8 times its 9% increase in revenues since 2010. 28 was the rank of Haier Electronics Group (Business Week’s 2010 list

of the most innovative firms).

Customer Proximity♣ Stories of satisfied customers, such as that of taxi driver Chu Xiaoming, were

repeated throughout China (replaced broken fridge while repairing it). 1. Develop the products customers need 2. Develop products that help build its image.

♣ Replicating the home market model (large manufacturing facilities, own distribution networks and large, cheap sales forces.) is too expensive, time-consuming and beyond its knowledge.

♣ Instead establish facilities in the sales market: the added expense of producing goods abroad will be outweighed by the ability to respond more promptly to changes in local consumer behaviour.

Diversification

Year Factories Overseas

ManufacturedProducts

CountriesSold

Subsidiaries R&D And Design Centres

Employees

1995 302006 13 96 100 240 12 50,0002010 242011 24 240 10 70,000

Domestic And Global SalesYear Domestic Sales Global Sales

[GS]Chinese Fridge Producers

Share of 10 largest firms

1984 3.48 mn RMB1989 410 mn RMB 100 50%1991 $ 125 mn1995 80%1996 60%* (top 3)1997 70% of GS $ 1.38 bn 2001 $ 7 bn2004 30% of small fridge &

50% of wine coolers of US

2005 83% Of GS $ 13.3 bn 5th largest white goods makers

2011 $ 23.3 bn Largest white goods mfr.

Mid-Game Strategy

1. Making “no-regret” high return moves while avoiding ‘big bet’ high risk moves [needs pace, flexibility and timing].

2. Alliances with foreign companies such that both Haier and foreign companies can take advantage of each other’s market presence in their respective locations.

The End

#internationalisation strategy

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lower fixed costs

firm assets

comers strategic reasons

following spectrum

local firms

different world

local consumers needs6pressure

local consumers needs7pressure