PACE University , Lubin

School of business

Global Business
Strategy and
Operations
Final Exam

Andrey V. Semenov
04.05.2010
 Describe several methods of cooperation among Multinational Corporation and explain the
associated potential benefits.

Indicate whether BP used cooperative arrangements for it`s growth and transformation.

Select a company about which we did not have a case study listed on our course outline and
indicate how it used cooperative arrangements in order to grow sales or to retain market
share.

For years the traditional wisdom among multinational corporations

was that bigger is better. Large MNCs could lower their production
costs by producing massive volumes to serve global markets. By
achieving such "economies of scale," they gained a crucial
advantage over their competitors. In today's turbulent markets,
however, size does not always matter. Big banks have been merging
across borders to make them even bigger, but their success rates
have been dismal. In the oil and gas industry, traditional leaders
such as BP and Shell now face serious challenges from smaller
upstarts that have carved out industry niches in exploration or
lubricants. The success of Enron in transforming itself from a
sleepy, domestic-pipeline operator in Texas to an international
force in gas and power generation shows how potent this new
challenge can be and it`s collapse give us a example how fast it
can be diminished.

New competitors are emphasizing the power of intangible

resources such as intellectual property and a flexible
organizational structure that allows firms to respond better to
their customers' diverse needs. These emerging multinationals are
beginning to develop and link together expert teams within the
corporation in ways that resemble the activities of the hot-spot
clusters that lie outside the corporation. In contrast to
traditional economic models of competition, these companies have
found that economies of scale can best be achieved at the
corporate level rather than the production level.

The message is clear to the major incumbents: transform or die.

At a time when size and market shares are growing in importance
for some MNCs, for others the value of incumbency has never been
less.

MNC`s are the primary players today in the world's most dynamic
industries and the driving force behind the global economy.
Privatization is reaching deep into the farthest comers of Latin
America. Russian firms seek international capital by listing
themselves on the New York Stock Exchange. Africa, rich in
resources but desperately poor in other respects, sees in foreign
investment the only hope for an otherwise dismal future. Indeed,
the business of the world today is business.
 These are not the times for narrow balance-of-power
considerations. As even an unchallenged superpower like the United
States has seen, efforts to block the flow of trade and investment
to nations such as Iran and Cuba are not just increasingly
ineffective but costly. MNC`s - once made vulnerable to the
expropriation of property or blockage of funds, and forbidden to
trade with hostile countries and to buy and sell freely the latest
high technology and scarce commodities - are now more likely to
guide foreign policy than follow it. Individual donors such as
George Soros and Ted Turner surpass the world's impoverished
ministries of foreign affairs with their gifts to countries and
world agencies.

The field of international business concerns the study of the

international activities of firms, including their interactions
with foreign governments, competitors, and employees. It seeks to
address not only the question of why firms go overseas but also
how they do it. The globalization of markets, and rapid changes in
economic and political systems, have forced scholars to rethink
the meaning of international business concepts such as location,
competitive advantage, and transmission of knowledge among
countries. Because multinational corporations dominate trade and
world production, international business focuses on the ability of
managers to coordinate and organize people - despite large
variations in their national origins and culture - within the
boundaries of a single firm that spans borders.

The United States has a healthy balance of payments on these

transactions and for many years was the principal source of
licensing technology in the world economy. Many critics understood
these licenses as "giving away" U.S. technology. Japanese
industrial policy in the 1950s and 1960s is often the example used
as a warning of the consequences of selling technology to firms
that later return as formidable competitors. However, a MNC`s will
frequently sell licenses to its own subsidiaries abroad or to
joint ventures, thereby establishing property rights that can
prevent the diffusion of technology to competitors or former
partners. Budget deficit that US have now give us good example
were it could lead (chart 1):
 Historically, IBM has often refused requests by countries to
license its technology, out of the belief that certain key
technologies should be kept under proprietary control. This policy
has generally worked to the company's benefit. If, for example,
IBM had licensed its technology to Indian firms during the 1970s,
it could conceivably be in a worse position today to establish
brand label recognition in India. In contrast, Texas Instruments
ultimately came out the loser in tough negotiations in Japan that
led it to license its semiconductor-manufacturing technology to
Japanese firms that later became dominant competitors. But these
examples tend to exaggerate the dangers. It is improbable that
IBM's licensing could have created Indian competitors (it could
have set a dangerous example for other governments or permitted
leakage of computer technology to military programs). Technical
change occurs so frequently these days that transferring current
technology - without including the capability to improve it - is
not a threat in the future. Countries seeking to expand may offer
their partners licenses for technology that will become quickly
outdated, but only if these partners cannot innovate faster than
they can.

Consider McDonald's. When McDonald's set up operations in Russia,

it had to train its Russian suppliers to bake the right kind of
bread and to deliver it on time, every time. This training was
costly and brought the best of Western-quality management to these
suppliers. They were then able to use these same techniques to
sell bread to Russian customers. Of course, McDonald's chose to
own its Russian operations. This choice was based not on the
dangers of franchising (i.e., the internalization argument
fashionable in the 1980s) but on the recognition that company
knowledge could be more safely, easily, and effectively
transferred to Russia through channels managed inside the firm - a
crucial consideration if McDonald's has the intention, as it does,
to clone this knowledge for use in establishing operations
throughout Russia.

For Multinational leaders such as BP and Shell took many years

to build their empires, helping create the impression that growth
is slow and dependent on physical assets (such as sprawling
factories) to erect high barriers to the entry of new competitors.
But what about Microsoft (software), Cisco (computers), Fresenius
(dialysis treatment), Enron (energy), Ispat Steel, and many other
firms that have built billion-dollar international businesses in
just a few years? They have relied on human skills to promote
growth and remain competitive. These multinationals possess
organizational hierarchies that are ideally suited to the creation
and deployment of human resources and intangible assets such as
patents or brands. By combining these attributes with a reputation
for reliability, these new specialists have taken and will take
business away from much larger incumbents.

But for now MNCs Are Bigger than Their Assets: The reach and
influence of multinationals, large and small, is far greater than
the official statistics suggest. Policymakers can, therefore,
seriously underestimate the extent to which national economies
have become intertwined with others. There are at least two
sources for this misconception: the way in which cross-border
investments are estimated and the manner in which the "boundary"
of a firm is defined.

The official figures for the flow of FDI - the historical cost-
accounting basis for the asset base of multinational corporations
- show an annual flow of nearly $400 billion. The United Nations,
however, has recently begun to question these figures and has
estimated that if one includes the capital mobilized by local
borrowings and the equity shares of partners, the "real" figure is
closer to $1.4 trillion per year. In other words, a corporation's
"presence" in a country goes beyond the assets that it chooses to
locate there.
And for corporate arrangements, and whey role in firm grows and
retaining market share, well lets look at example from footwear
industry:

The three leading sportswear companies in the world are Nike,

Adidas and Reebok. In August 2005, Nike was the leader in global
market share with 32.9% compared to the recently constituted
Adidas-Reebok organization that had 26.3% market share. In the
largest market in the world, the United States (US), Nike had
36.3% market share in August 2005. Following the acquisition of
Reebok in August 2005, the market share of Adidas-Reebok in the US
jumped to 21.1% from 8.9%.

We know that athletic shoe segment is highly competitive in

nature with the major players such as Nike, Adidas, Reebok and New
Balance striving to retain their market share and the smaller
players such as Puma trying to gain market share. Important
features of this competitive segment are heavy advertising,
celebrity endorsements, brand awareness programs etc. Until the
1970s, Adidas, the German sports company, was the market leader in
the US due to its product innovation. In the 1970s and 1980s, Nike
& Reebok grabbed their share by redefining the product offering
and aggressive marketing. Adidas failed to retaliate. Their market
was undergoing several crises due to changes in leadership. In the
1990s, though Adidas was revived by a turn-around specialist, it
was not a challenge to Nike.

Adidas expected its takeover of Reebok to give increased clout

with dealers' leverage of endorsement deals and sponsorships and
access to wider consumer base. The Adidas-Reebok merger vaulted
the combined entity into the second place in the American
athletics shoe market behind Nike. The takeover of Reebok doubled
the German group's North America sales. The Adidas Group's
purchase of Reebok North America showed an obvious attitude to
ensuring that the Corporation's overall objectives will be
achieved. With the acquisition, a focus on increasing the band's
apparel offerings and sharpening the brand's image has been set.
This allows for an expansion of global position and gaining a
broader presence in key markets. To emphasize this fact, Adidas
has now replaced Reebok as the official apparel supplier to the
American National Basketball Association for the next 10 years.
With the two company's combined strengths, an aim to widen the
organization’s overall profile and global dominance is now more
than ever possible

This is the best example that came to my mind .

Does the “ P&G Japan : The SK-11 Globalization Project “ case provide an example of
mergers and acquisition oriented globalization strategy ? Why and how yes or why and
how not ?

Does the “ BRL Hardy : Globalizing an Australian Wine Company “ case provide an
example of mergers and acquisition oriented globalization strategy ? Why and how Yes or
why and how not ?

Select a company about which we did not have case study listed on our course outline and
indicate how it used friendly or unfriendly , hostile mergers and acquisitions , or both , as
parts of it`s globalization strategy .

Lets` start from the end : )

The business press uses the terms ‚mergers‛ and ‚acquisitions‛

interchangeably, they are not the same. Acquisition is the
purchase of a firm. The purchase does not have to be 100 percent
ownership. It could be a majority ownership (greater than 51
percent of the acquired firm’s stock) or a controlling interest
(enough stock ownership to control management and strategic
decisions at the acquired firm). Acquisitions can be friendly
acquisitions or unfriendly acquisitions. In a friendly
acquisition, the management of the acquired firm wants the firm
to be acquired. In an unfriendly acquisition (also called
hostile takeovers), the management of the target firm does not
want the firm to be acquired.

For example :

Warren Buffett, the CEO of Berkshire Hathaway, writes very

readable and ‚folksy‛ letters to shareholders in his company’s
annual reports. In the company’s annual report for 1995, Buffett
recalls how the company acquired Helzberg’s Diamond Shops, a
Kansas City, Missouri-based jewelry chain. As Buffett was
walking down the street in New York’s Fifth Avenue one day, a
woman hailed him by name and proceeded to tell him how she was
grateful for having invested her money in Berkshire Hathaway.
Upon hearing Warren Buffett’s name, another gentleman who was
walking by stopped to ask Buffett if he could have a few words
with him. The man was Barnett Helzberg Jr. Helzberg wanted
Berkshire Hathaway to buy his family firm as he, Barnett
Helzberg Jr., was tired of running it and wanted a different
‚parent‛ for the firm. The details of the deal were ironed out
during that serendipitous meeting and shortly thereafter
Berkshire Hathaway announced this friendly acquisition.

So, In a friendly takeover of control, the target’s board and

management are receptive to the idea and recommend shareholder
approval. To gain control, the acquiring company generally must
offer a premium to the current stock price. The excess of the
offer price over the target’s pre-merger share price is called a
purchase or acquisition premium. U.S. merger premiums have ranged
between 38 to 44 percent since 1970. Internationally,
acquisition premiums show a wider variance, ranging from 10
percent for Brazil and Switzerland to 120 percent for Israel and
Indonesia. The wide range of estimates may reflect the value
attached to the special privileges associated with control in
various countries. For example, insiders in Russian oil
companies have been able to capture a large fraction of profits
by selling some of their oil to their own companies at below
market prices.

The purchase premium reflects both the perceived value of

obtaining a controlling interest (i.e., the ability to direct
the activities of the firm) in the target, the value of expected
synergies (e.g. cost savings) resulting from combining the two
firms, and any overpayment for the target firm. Overpayment is
the amount an acquirer pays for a target firm in excess of the
present value of future cash flows including synergy. Analysts
often attempt to identify the amount of premium paid for a
controlling interest (i.e., control premium) and the amount of
incremental value created the acquirer is willing to share with
the target’s shareholders. An example of a pure control premium
is a conglomerate willing to pay a price significantly above the
prevailing market price for a target firm to gain a controlling
interest even though potential operating synergies are limited.
In this instance, the acquirer often believes it will be able to
recover the value of the control premium by making better
management decisions for the target firm. It is important to
emphasize that what often is called a control premium in the
popular or trade press is actually a purchase or acquisition
premium including both a premium for synergy and a premium for
control.

The offer to buy shares in another firm, usually for cash,

securities, or both, is called a tender offer. While tender
offers are used in a number of circumstances, they most often
result from friendly negotiations (i.e., negotiated tender
offers) between the acquirer’s and the target firm’s boards.
Self-tender offers are used when a firm seeks to repurchase its
stock. Finally, those that are unwanted by the target’s board
are referred to as hostile tender offers.

An unfriendly or hostile takeover occurs when the initial

approach was unsolicited, the target was not seeking a merger at
that time, the approach was contested by the target’s
management, and control changed hands (i.e., usually requiring
the purchase of more than half of the target’s voting common
stock). The acquirer may attempt to circumvent management by
offering to buy shares directly from the target’s shareholders
(i.e., a hostile tender offer) and by buying shares in a public
stock exchange (i.e., an open market purchase).

Friendly takeovers often are consummated at a lower purchase

price than hostile transactions. A hostile takeover attempt may
attract new bidders, who otherwise may not have been interested
in the target. Such an outcome often is referred to as putting
the target in play. In the ensuing auction, the final purchase
price may be bid up to a point well above the initial offer
price. Acquirers also prefer friendly takeovers, because the
post-merger integration process usually is accomplished more
expeditiously when both parties are cooperating fully. For
these reasons, most transactions tend to be friendly.

So that about :‛ P&G Japan : The SK-11 Globalization Project‛

Ten years after entering Japan, P&G had accumulated over $250
million in operating losses on declining annual sales of $120
million by 1983. The decision facing the president of P&G
International: exit, retrench or rebuild the operation?
Ironically, the initial entry was a success story with P&G Japan
achieving an operating breakeven in their fifth year and market
leadership in a number of categories. However, in the late
1970's market share and profit in all categories declined
disastrously. Management changes failed to reverse the trends
until an objective examination of the entry strategy, approach
to the Japanese consumer, competition, technology and internal
organization were made. By 1983, accelerating losses forced P&G
to decide whether to exit or stay.

Traces changes in P&G's international strategy and structure,

culminating in Organization 2005, a reorganization that places
strategic emphasis on product innovation rather than geographic
expansion and shifts power from local subsidiary to global
business management. In the context of these changes introduced
by Durk Jager, P&G's new CEO Paolo de Cesare who was
transferred to Japan, where he took over the mandate of heading
up Max Factor Japan. He was particularly encouraged by the
growth and expansion of SK-II, a premium, highly profitable skin
care product developed in Japan. SK-IIÕs initial success in
Taiwan and Hong Kong set him thinking about whether he should
propose turning the Japanese brand into a global brand by
further expanding it into China and Europe. The fact that P&G
was in the midst of a bold reform, shifting decision-making
power and profitability responsibility from local subsidiaries
to global business management units posed a major constraint to
de CesareÕs globalization proposal. De Cesare had to consider
whether SK-II had the potential to become a global brand. Also,
he had to consider which market to enter and how the brand
globalization strategy should be implemented in the newly
reorganized P&G global operations. Within the familiar Max
Factor portfolio he inherits is SK-II, a fast-growing, highly
profitable skin care product developed in Japan. Priced at over
$100 a bottle, this is not a typical P&G product, but its
successful introduction in Taiwan and Hong Kong has de Cesare
thinking the brand has global potential , will he succeed we’ll
see ….

In my mind reason why SK-11 was so successful is quite simple

, they introduced something new , something unknown and priced
it highly , I’m not sure is it cosmetics SK-II so powerful
because of it`s special ingredient , or just people see that
they want to see when they pay for the miracle ( I think manage
to sell 5 oz bottle for 130$ is miracle by itself ) but they
strategy is clear - accelerate, concentrate, adapt, and in the
case of international M&As, consider cultural differences. The
human and cultural issues that separate the 17% from the 83% are
not about some abstract values or the "soft stuff", but the
concrete reality of productivity, economic value and sustained
growth.

Now let`s look at ‚ BRL Hardy : Globalizing an Australian Wine

Company‛ :

The roots of BRL Hardy’s success , in my mind , lay in global

expansion. The company’s strategic vision is to become the
world’s first truly global wine company. As CEO and managing
director of BRL Hardy Europe, Carson’s contribution and
achievements had been significant with a 10 fold increase in
sales volume, in a tenure spanning just seven years. He
successfully turned around Hardy’s U.K. business by implementing
cost cutting initiatives and ensuring strong systems, policies,
and control. Millar, CEO and managing director at BRL Hardy
followed a decentralized approach to management. He believed in
delegation and adequately integrated culture and management
style into the merged corporation.

The U.K. market contributed significantly to BRL Hardy’s

revenues and represented 40% of Australian wine exports. In
U.K., the fighting brands, namely, Stamps and Nottage Hill, were
positioned at price points of $4.5 and $ 6.60 respectively. As
low price good quality wines, they accounted for 80% of the
value and volume of the Hardy brand sales. As the image of these
brands began to erode, Carson decided to relaunch them by
relabeling and repositioning the wines. Carson insisted that
sales performance in U.K. depended on efficient labeling that
should not be completely dictated by the Australian management.
Although management was skeptical about local control over
branding, labeling, and pricing decisions, the move
significantly boosted the fighting brands’ sales.

As the fighting brands gradually moved up the price points,

there was an opportunity for an entry level wine that could be
priced lower than $7 . In line with the company’s vision of
becoming an international wine company, Carson decided to tap
non-Australian wine sources and develop a line of branded
products that could utilize the company’s strong distribution
channels. This strategy would provide vital scale economies,
minimize harvest risk, capture rationalizing suppliers, and
avoid currency-driven price... and even so the wine industry is
a highly competitive industry that has yet to see emerge a true
global company with a global brand , BRL Hardy’s position within
this industry is presently, similar to many other companies,
that of a small global-volume supplier and distributor that has
a large footprint within its ‚country-of-origin‛, Australia.

From our examples we can see that Cross border M&A activity
is quite common. For example, Unilever (a Dutch company)
acquired the U.S.-based Ben & Jerry’s. Ford Motor Company
acquired the U.K.-based Jaguar. In general, issues related to
domestic M&A activity (both the acquisition process and the
implementation process) are relevant in an international context
as well. The implications for acquirers and the implications for
targets apply in the international context just as they do in
the domestic context.

Host governments may present additional challenges and

opportunities in the international context. Managers of firms
that enter foreign countries through their M&A strategies need
to be aware of these issues. Governments tend to protect their
national interests when dealing with foreign-owned firms. For
example, in the United States an airline cannot have more than
25% foreign ownership. Governments may have currency laws that
prevent a foreign-owned firm from taking money out of the
country. Labor laws may be different from those in a firm’s
domestic market. Such differences may be rooted in culture and
tradition that may prove to be difficult to recognize and/or
understand. Managers would do well understand what the
differences in government involvement are as they enter foreign
markets.

The major issue in cross-border M&A activity is that the

cultural differences between the firms are likely to be
exacerbated by deep-seated country cultural differences. In
other words, when firms A and B are in the U.S., they are likely
to have some cultural differences, but all the participants
share a common culture outside the respective firms. The
cultures within the two firms, although different, are based on
this common national culture. On the other hand, if a firm
acquires another firm in a foreign country, the cultural
differences could be even wider because of differences in the
underlying national cultures.

Geert Hofstede’s cultural dimensions are likely to be familiar

to students who have had a ‚Principles of Management‛ class or
an ‚International Management‛ class. Hofstede identified 5
dimensions upon which cultures differ:
� social orientation (individualism vs. collectivism)

� power orientation (power respect vs. power tolerance)

� uncertainty orientation (uncertainty acceptance vs.

uncertainty avoidance)

� goal orientation (aggressive goal behavior vs. passive goal

behavior)

� time orientation (long-term outlook vs. short-term outlook)

For example, compensation practices are impacted by the

country’s social orientation. Titles and organizational chart
may mean more in a power respect culture than in a power
tolerance culture. Firms engaged in international M&As must
recognize that there is an added degree of difficulty involved
in such transactions that make the whole process more
challenging.

A Chinese shipping company has established an office in the

western U.S. This office was initially staffed with Chinese
managers and U.S. employees. When the Chinese managers were
ready to promote a U.S. employee, they would give the U.S.
employee the additional job responsibilities that accompanied
the promotion without giving the employee the additional pay
that went with the promotion. This was difficult for the U.S.
employees to accept because in the U.S. culture the pay for a
promotion is usually received at the same time the additional
responsibilities are received.

This example highlights a difference in the time orientation

between the Chinese and U.S. cultures. The U.S. employees had a
short term time orientation compared to the Chinese managers who
wanted to see if the U.S. employee could handle the additional
responsibilities before bestowing the higher pay on the U.S.
employees.

The popularity of M&A activity runs contrary to the research

on the value created by these transactions. The essence of the
research findings is that stockholders of target firms gain
while those of bidding firms do not. However, the popularity of
M&A activity is not so perplexing when the long term results of
the strategy are considered. Remind students that the
outstanding long term results of Wells Fargo were the result of
Wells Fargo pursuing an M&A strategy with attention to detail
and spreading its core competencies to its targets. another key
take away from this chapter should be the importance of post-
merger integration. The long-term success of an M&A strategy
depends heavily on a firm’s ability to recognize the challenges
of integration and respond with the appropriate structure,
controls, and compensation policies.

Although M&A activity is popular, perhaps even glamorous in

the business world, at the end of the day the ability of an M&A
strategy to generate competitive advantage and above normal
returns comes down to the basic logic of the VRIO model. If the
economies being exploited are valuable, rare, costly-to-imitate,
and the firm is organized to exploit the economies, then
competitive advantage is likely. An M&A strategy can create
significant long term value for a firm. In fact, some firms with
aggressive growth goals must rely on M&A activity to achieve
that growth. Such firms cannot afford to fail at M&A activity.

At least I believe it is so .
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INTERVIEWS WITH STEVE MILLAR AND CHRISTOPHER CARSON
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