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The primary reason for investing in international markets is to generate AA returns on investments; to take advantage of Intl R&D investments MERGERS AND ACQUISITIONS Smaller firms use M&A strategies to grow in their existing markets and enter new markets; External Enviro influence type of M&A activity firms pursue. Firms choose to use one or both of 2 basic types of international strategies: business-level(CL) and corporate-level international strategy(CL). Firms use M&A strategies to improve their ability to create value for stakeholders including shareholders At a BL, firms follow generic strategies: cost, diff, focused cost, focused differentiation, or integrated cost leadership/differentiation; Shareholders of acquired firms often earn AA returns from A’s while shareholders of acquiring firms typically earn returns that are close to zero In an BL strategy, home country is most important source of competitive advantage; as continues growth, becomes less important In 2/3 of all acquisitions, the acquiring firm’s stock price falls immediately after transaction is announced; reflects investors’ skepticism about the likelihood that the acquirer will to achieve the synergies required to justify the premium Market size: Huiyuan A merger: a strategy through which 2 firms agree to integrate their operations on a coequal basis. Few true mergers; one party is usually dominant in various characteristics ROI: resource. Global demand Acquisition: one firm buys a 100 percent, interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio. (Most common – Scale: SAIC+GM, volkwagon greater market power); Takeover: the target firm does not solicit the acquiring firm’s bid; takeovers are unfriendly acquisitions. Location: Low cost labour Hostile acquisitions deliver significantly higher shareholder value than friendly acquirers for the acquiring firm; willing to pursue buying another company even when that firm is not interested in being bought. Reasons for Acquisitions: Increased Market Power: Right: Reasons for Strat Alliance by Exists when a firm is able to sell its goods above comp. levels or when the costs of its primary or support activities are lower than those of its competitors. Market type; Derived from the size of the firm and its Res and Caps to compete in the marketplace; share of market Examples: Slow: US Steel and Nicor; Most acquisitions that are designed to achieve greater market power: buy a competitor, a supplier, a distributor, or a business in a highly related industry to allow the Fast: Microsoft and Nokia; exercise of a core competence and to gain competitive advantage Entertainment Horizontal Acquisition Vertical Acquisition Related Acquisition Star Alliance Porters determinants of National Advantage (BLEVEL In same industry; similar characteristics; exploiting Supplier or distributer of good/ service; forms new Create value through synergy by integrating Res cost/ revenue synergies Toy+FAO Schwarz+online controls of value chain IE CVS/caremark and Caps: Boeing+eXMeritus securely share info Factors of Production Demand Conditions Related/ Supporting Ind. Strat/ Structure/ Rivalry Firms seeking growth and market power through acquisitions must understand the political/legal segment of the general environment :P&G+Gillette. Sell off biz Basic: natural and labor resources; Adv Size and nature of buyers Ex: leather processing in Italy Structural characteristics of economy Overcoming Entry Barriers/ Cost of New Product – increase speed to market/ lower risk: factors: digital comm. & educated needs; large market can is related to shoe and leather that contribute to national adv; ; workforce: korea produce the demand industries effects of political and governing Overcoming Entry Barriers Cost of New Product/ speed2mkt Lower Risk Either Generalized or Specialized; if both necessary to create scale bodies; Germany tech training, japan Acq. Is more effective than entering market if barriers; Acq’s provide more predictable returns and Outcomes are easier to estimate Acq’s; less higher barriers = Acq.; fast access 2 market; cross-border faster market entry; firms products and risky; Acq’s should be strategic rather than good efficient facilities : china cooperative+ competitive Acq. (Tata group) with HQ is diff countries; pol/legal in performance can be assessed beforehand: defensive in nature Pfizer+Wyeth International corporate-level Strategy: china make it hard Pharmaceutical firms Multi-domestic strategy Global Strategy Transnational Strategy Strategic and operating decisions are decentralized; Standardized products w/ strategy dictated from Both global efficiency and local responsiveness; tailor 2 local markets/region; more regional autonomy; home office; econ of scale; global integration/ more efficient mgmt; effective implementation Increased Diversification (CiscoRiverhead protego) Reshaping competitive scope Learning/Developing New Caps expands local market share; local responsiveness efficiencies; lower risk; best: regional integration leads to higher performance; Easier to introduce products in markets already To reduce negative effect of rivalry on finances, Gain access to new capabilities; can broaden (-) Less knowledge sharing for corp as a whole; (-)Forgo growth in local markets; no adaption; (-)Hard cause of conflicting goals; Starbucks uses being served; uncommon for firm to develop new firms acquire to lessen dependence on products/ knowledge base and reduce inertia; can acquire products to diversify; used for both related and markets; P&G acquired Gillette – stronger diverse talent through cross-border acq’s; should aim different strategies; UNILEVER does this this strategy CEMEX cement: internetlogistic, supply presence in men market to acquire companies with different but related unrelated divTN; more related firms are, more likely ENVIRONMENTAL TRENDS successful (horizontal/ related acq) complementary caps;(Genzyme/ Biotech) Liability of Foreignness Regionalization Firm must choose if better to be global or more regional markets; most large PROBLEMS WITH M&A: integration difficulties; inadequate evaluation of target; large/ extraordinary debt; inability to create synergy; too much diversification; managers costs associated with issues firms face when entering foreign markets (Econ, overly focus on ACQ’s; too large = bureaucracy; 20% of M&A’s are successful, 60% are disappointing, 20% failures admin, cultural, geographic); greater if more cultural differences retailers are better at focusing on particular region NAFTA Greater acquisition success accrues to firms that (1) select the “right” target, (2) avoid paying high premium (3) effectively integrate the operations of the acquiring and Mode of Entry target firms; The post-acquisition integration phase is the most important determinant of shareholder value creation Exporting Licensing Strat. Alliances Acquisition Wholly Owned Sub Due diligence is a process through which a potential acquirer evaluates a target firm for acquisition: in areas as diverse as the financing for the intended transaction, High cost, low Low cost; low risk; little Shared costs, resources; problems Quick access to new market; AKA: Greenfield; complex; differences in cultures b/w the acquiring and target firm, tax consequences of the transaction, and actions that would be necessary to successfully meld the two workforces. control; low risk; control; low returns; of integration; can create new high cost; complex; merging costly; time consuming; high The failure to complete an effective due-diligence process may easily result in the acquiring firm paying an excessive premium for the target company small biz start(50% common among smaller capabilities; needs trust; influences problems; debt financing; risk; max control; AA returns; In times of high or increasing stock prices due diligence is relaxed; firms often overpay by 2018); cost firms; paid royalty; expand by cultures; equity based alliances few acquisitions if more preferred in service industries Without due diligence, “the purchase price is driven by the pricing of other ‘comparable’ acquisitions rather than by a rigorous assessment of where, when, and how leadership’ (transpo, returns from prior are best corruption – JV instead; and when human intensive management can drive real performance gains; Direct Costs: legal fees and charges from I-bankers who do DD for acquiring firm tariffs, exchange) innovation PMI cigarette GM+SAIC joint venture social diff; Walmart DE UK UPS+FedEx Junk bonds: risky acquisitions are financed with money that provides a large potential return to lenders To secure a stronger presence in international markets, acquisitions or Greenfield ventures may be required Firms using an acquisition strategy must be certain that their purchases do not create a debt load that overpowers the company’s ability to remain solvent The decision regarding which entry mode to use is primarily a result of the industry’s competitive conditions, the country’s situation and government policies, and the firm’s Synergy exists when the value created by units working together exceeds the value those units could unique set of resources, capabilities, and core competencies create working independently; Synergy is created by the efficiencies derived from economies of scale and economies of scope and by sharing resources across the International diversification: strategy through which a firm expands the sales of its goods or services across the borders of global regions and countries into different businesses in the merged firm.; A firm develops a comp advantage through an acquisition strategy only when generates private synergy geographic locations or markets; general provides greater economies of scope and learning -> AA returns Private synergy: combining and integrating the firms’ assets yield capabilities and core competencies that could not be developed by combining and integrating either As international diversification increases, firms’ returns decrease initially but then increase quickly as firms learn to manage international expansion firm’s assets with another company; Private synergy is possible when firms’ assets are complementary in unique ways Successful use leads to strat competitiveness; facilitate innovation; sustain large scale R&D Transaction Costs: incurred when firms use acquisition strategies to create synergy; direct (legal) or indirect (time) Issues include: higher coordination and distN costs; mgmt problems; trade barriers, logistic, cultural diffs. Overdiversification leads to a decline in performance, after which business units are often divested; even when a firm is not overdiversified, a high level of diversification Political RISKS Economic can have a negative effect on its long-term performance; too much diversification leads acquisitions to become subs for innovation Related to instability in gov’t; war; gov’t regulations; legal authorities; Interdependent with political risks; security risk of foreign firms acquiring key A firm using acquisitions as a substitute for internal innovations eventually encounters problems potential nationalization; corruption; changes in Gov’t policy natural resources; weak IP rights; currency changes; investment losses Managers become involved in Acq’s when: (1) searching for viable candidates, (2) completing due-diligence processes, (3) preparing for negotiations, and (4) managing COOPERATIVE STRATEGY: the integration process Firms use 3 means to grow and improve their performance—internal development, mergers and acquisitions, and cooperation. Effective Acquisitions: With complementary assets, the acquiring firm can maintain its focus on core Cooperative strategy is a means by which firms work together to achieve a shared objective. businesses and leverage the complementary assets and capabilities from the acquired firm; targets are Cooperating creates value for a customer at a lower cost and establishes good position often selected and “groomed” by establishing a working relationship prior to the acquisition Strategic alliance is a cooperative strategy in which firms combine resources and capabilities to create comp adv; leverage existing and develop new resources/ capabilities for new comp. adv A competitive advantage developed through a cooperative strategy often is called a collaborative or relational advantage We can note that firms form strategic alliances to reduce competition, enhance their competitive capabilities, gain access to resources, take advantage of opportunities, build strategic flexibility, and innovate 3 strategic Alliances Joint Venture Equity Strat. Alliance Non-Equity Strat. Alliance 50/50; 2+ firms create new company and share 2+ with diff % of new company; combine 2+ firms; contractual; NO new company; share resources and capabilities; formed to improve ability resources and capabilities; many foreign direct resources and capabilities; less formal, less to compete in uncertain markets; Siemens AG and investments; NTT DOCOMO and Baidu – commitment; bad for complex projects that need tacit Fujitsu LTD = Fujitsu Siemens Computers games on mobiles; 80% Baidu knowledge; EX: licensing, outsourcing; supply; HP licenses Restructuring is a strategy through which a firm changes its set of businesses or its financial structure; Alliances between firms with current excess resources and capabilities and those with promising capabilities help companies compete in fast-cycle markets to effectively Restructuring is a global phenomenon transition from the present to the future and to gain rapid entry into new markets. 3 types of restructuring strategies: downsizing, downscoping, and LBO’s A firm uses a business-level cooperative strategy to grow and improve its performance Downsizing is often used when the acquiring firm paid too high of a premium to acquire the target firm; involves loss of human capital; more tactical ST in individual product markets; formed when believe combining resource and capabilities with others will create comp. advs that can’t create by itself Downscoping has better effect on firm performance because firms commonly find Dscoping causes them to refocus on their core business; 1. Complementary strategic alliances: firms share some resources and capabilities in complementary ways to develop competitive advantages; used to focus of joint LT better ST/ LT outcomes; desirable LT outcomes is due to reduced debt costs and emphasis on strategic controls; A firm that is simultaneously Dscoping and Dsizing becomes product development/ distN opps. smaller by reducing the diversity of businesses in its portfolio. Vertical Horizontal Firms use LBO’s to build resources and expand rather than restructure distressed assets Share resources and capabilities are different stages of value chain to create Share resources and capabilities from the same stage of value chain to create Management buyouts (MBOs), employee buyouts (EBOs), and whole-firm buyouts, are the three types of LBOs. MBO’s - > have been found to lead to downscoping, increased strategic focus, improved performance; growth; Dsizing typically does not lead to higher firm performance; In fact, lower returns comp. adv; greatest probability of creating sustN. Comp. adv comp. adv; hard to maintain; push and pull Because LBO’s result in significant debt, completed in mature industries where stable cash flow Competition response strategy: used to respond to competitors attacks: strategic, not tactical, LT Uncertainty reducing strategy: to hedge against risk and uncertainty, especially in fast-cycle markets INTERNATIONAL STRATEGY Competition reducing strategy: often illegal type of co-op strategy. 2 types: explicit & tacit collusion; lowest probability of creating sustN comp. adv Many firms choose direct investment in assets in foreign countries over indirect investment because it provides better protection for their assets International diversification can extend product life, provide incentives innovation, and produce AA returns. Explicit Tacit An international strategy is a strategy through which the firm sells its goods or services outside its domestic market; creates new opportunities; secure key resources; 2+ firms negotiate directly with intension of Several firms indirectly coordinate their production/ pricing- observing each other’s actions/ responses; can fixing amount/ price of products lead to less comp. in other markets firms operate in; airline loss in quality/ timeliness technology; 3 Basic benefits: increased market size, increased Econ. Of Scale and Learning, Location; also extend life cycle of product The size of an international market also affects a firm’s willingness to invest in R&D Firms following a FDI strategy using alliances as a follow-the-leader approach may not have strong strategic or learning; tacit collusion

A firm uses a corporate-level cooperative strategy to help it diversify products offered/ markets served Owner and manager often still same; agency problems less existent; banks are Obligation, family, & consensus affect corp. governance; obligation is return attractive compared with M&A because they require fewer resources and have greater flexibility and of service; keiretsu (group of firms that cross-share) is like a family major shareholders; more than 2,000 employees required to have 2-tiered (relationship investments); consensus calls for expenditure to win hearts and board structure; rarely major private ownership; not dedicated to the Can be used as a way to determine whether the partners might benefit from a future MorA. Corporate Level Cooperative Strategy: (below) maximization of SH value minds; banks are highly influential Diversifying Strategic Alliance Synergistic Strategic Alliance Franchising The governance mechanisms are designed to ensure that the corporation’s top-level managers make strategic decisions that best serve the interests of the entire group of Firms share Res and Caps to diversify into Firms share Res and Caps to create Econ of Scope; Firm uses franchise as a contractual relationship to control stakeholders; At least the minimal interests or needs of all stakeholders must be satisfied through the firm’s actions sharing of Res and Caps; success based on how well can NEW product or market areas; Itochu and synergy among multiple functions/ firms; Renault replicate success ;Subway Drummond and Nissan Organizational structure: formal reporting relationships, procedures, controls, & authority and decision-making processes difficult, especially due to uncertainty about cause-effect relationships in the global economy Corporate-level cooperative strategies commonly are broader in scope and more complex, making them relatively more costly When a structure’s elements are aligned the structure facilitates effective use of the firm’s strategies firm’s structure specifies the work to be done and how to do it, given International Cooperative Strategy: A cross-border strategic alliance is an international cooperative strategy in which firms with HQ in different nations decide to combine resources and capabilities to create athe firm’s strategy or strategies; Structural stability: capacity firm requires to consistently and predictably manage its daily routines Structural flexibility: opportunity to explore competitive possibilities &allocate resources to activities that will shape the competitive advantages for future; An effectively comp adv; multi-nationals typically outperform domestic firms flexible organizational structure allows the firm to exploit current competitive advantages while developing new ones that can potentially be used in the future; Once in Limited growth opportunities and foreign government economic policies are key reasons to use CBSA’s place, organizational inertia often inhibits efforts to change structure CBSA’s can help foreign partners from an operational perspective, because local partner has more info about competitive success factors Organizational controls guide the use of strategy, indicate how to compare actual results with expected results, and suggest corrective actions to take when the difference Research suggests that firms with foreign operations have longer survival rates than domestic only firms is unacceptable; When fewer differences separate actual from expected outcomes, the org’s controls are more eff...