Int

BM & HRM 2020-22 | Session 13

Global Value Creation

APALAK KHATUA, Email: apalak@xlri.ac.in
 Let’s revisit: Why Globalize?

• Cross-border Value Creation!

• But, how? Standard response:
– The world is a big place, with lots of volume out there or on the way, and
we need to scoop up our share!
– We’ll cut our costs by chasing volume across borders.
• They are only a subset!
• So, we need to understand – how crossing border might add value?
• Value-creation is crucial even in a single-country strategic decision
• Your margin = Industry margin (from Porter’s five-forces framework)
+ your competitive advantage
• Your competitive advantage = [willingness to pay –cost] for your
company - [willingness to pay –cost] for your competitor

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Levers of Value Creation

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Types of Competitive Advantage
Recap from the core SM course

Willingness to pay

Supplier opportunity cost

Industry Successful Successful low-

Average Differentiated Cost Competitor
Competitor Competitor
Levers of ‘Global’ Value Creation

Captures the differences

across countries

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 How to ensure Global Value Creation?

• ADDING Value Scorecard of Pankaj Ghemawat

– Adding volume or growth
– Decreasing costs
– Differentiating or increasing willingness-to-pay
– Improving industry attractiveness or bargaining
power
– Normalizing (for optimizing) risk
– Generating knowledge and other resources and
capabilities

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Adding Volume: Better-off Tests!

• Look at the true economic profitability: accounting profit –

capital recovery costs

• Probe the level at which additional volume yields economies of

scale (or scope): globally, nationally, at the plant or customer
level…
• Strength of economies of scale or scope

• Assess the other effects of incremental volume – negative

effects?

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Decreasing Costs

• Unbundle price effects and cost-effects – not as a percentage of

revenues

• Unbundle costs into subcategories

• Consider cost increases (e.g., due to complexity, adaptation etc.)

as well as decreases

• Look at cost drivers other than scale/scope – location, capacity

utilization, institutional factors etc.

• Look at labor costs/sales ratios for your industry (or company)

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Differentiating/Increasing Willingness-to-Pay
• Look at the R&D/sales and Advertising/sales ratios for your
industry – Proxy?

• Willingness-to-pay? Or prices paid?

• Effects of globalization on willingness-to-pay?

• Analyze how cross-country (CAGE) heterogeneity in preferences

affects willingness-to-pay for products on offer

• Segment the market appropriately

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Improving Industry Attractiveness or
Bargaining Power
• Account for international differences in industry profitability
• Understand the structural dynamics of your industry à Look
broadly at changes in industry structure
• How you can deescalate/escalate rivalry – multimarket contact!
• Recognize the implications of what you do for rivals’ costs or
willingness-to-pay for their products (Worsening their positions
can do as much for added value as improving one’s own)
• Attend to regulatory/nonmarket restraints (tacit coordination,
lobbying, incumbency, tax loopholes, intermediaries) —and
ethics.

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Normalizing Risk

• Characterize the extent and key sources of risk in your business

– Supply-and-demand-side risk; Financial risks such as foreign
exchange volatility; Competitive risks (allowing a competitor
a profit sanctuary in its home market); Nonmarket risks

• Assess how much cross-border operations reduce or increase risk

• Any benefits that might accrue from increasing risk?

• Consider multiple modes of managing risk – resource

commitment?

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Generating Knowledge (and Other
Resources/Capabilities)
• Assess how location-specific versus mobile knowledge is, and
what to do about it

• Consider multiple modes of generating (and diffusing)

knowledge – personal interactions, working with various
stakeholders, open innovation, imitation, contracting for the use
of knowledge (next module will exhaustively explore this)

• Think of other resources/capabilities in similar terms –

relationship, local partners’ domestic knowledge

• Finally, AVOID double-counting!

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 ADDING Value: Why Abbey?

• ADDING Value Scorecard of Pankaj Ghemawat

– Adding volume or growth
– Decreasing costs
– Differentiating or increasing willingness-to-pay
– Improving industry attractiveness or bargaining
power
– Normalizing (for optimizing) risk
– Generating knowledge and other resources and
capabilities

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Int
BM & HRM 2020 - 22 | Session 13

FDI in India: Facts and

Figures
APALAK KHATUA, Email: apalak@xlri.ac.in
 Evolution of FDI Policy in India
• New Industrial Policy announced on July 24, 1991, was a
major departure in the Indian Economy
– Abolition of industrial licensing system, commonly known as License
Raj, except where it is required for strategic or environmental grounds
• Controversial FERA (1973) to less stringent FEMA (1999)
• Automatic clearance of FDI proposals fulfilling the conditions
laid down
• Foreign ownership up to 100% is permitted in most sectors
– 49% cap in a few sectors like insurance, pension, petroleum refining by
PSUs, infrastructure companies in the securities market
– Prohibited sectors are lottery business, chit funds, manufacturing of
tobacco or tobacco substitutes, gambling and betting sectors
• Export obligation were withdrawn in 2000
Source: NCAER Report 2009
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 FDI Policy Framework

Three primary institutions in India that handle FDI-related issues:

1. Foreign Investment Promotion Board (FIPB)
– nodal single-window agency for all matters relating to FDI as well as
promoting investment in the country
2. Secretariat for Industrial Assistance (SIA)
– entrepreneurial assistance, investor facilitation, receiving and
processing all applications, conveying government decisions,
assisting entrepreneurs and investors in setting up projects and
monitoring the implementation
3. Foreign Investment Implementation Authority (FIIA)
– facilitates quick translation of FDI approvals into implementation,
helps to obtain necessary approvals, sort out operational problems
and meet with various government agencies
Source: NCAER Report 2009
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Foreign Investment Policy

• The Indian government has provided many incentives for attracting

FDI, such as establishing Special Economic Zones (SEZs) where
companies are entitled to certain benefits, exemption from duty on
import, income tax exemptions, value added tax (VAT) rebate on
export, opening up of many sectors for FDI, etc.

• Indian Finance Minister in his 2017-18 budget speech noted:

– Our Government has already undertaken substantive reforms in
FDI policy in the last two years. More than 90 per cent of the total
FDI inflows are now through the automatic route ... Further
liberalisation of FDI policy is under consideration and necessary
announcements will be made in due course

Source: Jaiswal, 2017, Centre for Budget and Governance Accountability (CBGA)
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Foreign Investment Policy
• FDI is permitted in virtually every sector, except those of
strategic concern such as atomic energy or railway operations
• FDI can come into India in two ways.
• Automatic route
– FDI in sectors/activities to the extent permitted under the
automatic route does not require any prior approval from the
Government of India
– The investors are only required to communicate with RBI within
30 days after receipt of inward remittances or issue of shares to
foreign investors
• Prior Government Approval route
– Few sectors require prior government approval
– Proposals are considered in a time-bound and transparent manner
Source: NCAER Report 2009
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Economic Reforms & Route-wise FDI inflows
(in US$ million)

Introduction of
FEMA

Source: NCAER Report 2009

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Why China attracts more FDI than India?

Source: Nagaraj (2003), EPW

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Same story with other Asian economies

Source: Nagaraj (2003), EPW

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Is it India's failure to attract FDIs?

• India yet to build the critical mass of FDI as it is a late

starter
– 1991 as compared to China’s 1979

• The figures of FDI inflows in India and China are not

comparable
– Indian figures of inflows did not follow the IMF’s
manual that was followed internationally during this
period

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Revised Indian FDI data

Source: NCAER Report 2009

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 FDI inflows by component

Source: World Investment Reports

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Foreign Investment in India
A. Direct investment B. Portfolio investment Total (A+B)
Year
Rs. crore US $ million Rs. crore US $ million Rs. crore US $ million
1990-91 174 97 11 6 185 103
1991-92 316 129 10 4 326 133
1992-93 965 315 748 244 1713 559
1993-94 1838 586 11188 3567 13026 4153
1994-95 4126 1314 12007 3824 16133 5138
1995-96 7172 2144 9192 2748 16364 4892
1996-97 10015 2821 11758 3312 21773 6133
1997-98 13220 3557 6794 1828 20014 5385
1998-99 10358 2462 -257 -61 10101 2401
1999-00 9338 2155 13112 3026 22450 5181
2000-01 18406 4029 12609 2760 31015 6789
2001-02 29235 6130 9639 2021 38874 8151
2002-03 24367 5035 4738 979 29105 6014
2003-04 19860 4322 52279 11377 72139 15699
2004-05 27188 6051 41854 9315 69042 15366
2005-06 39674 8961 55307 12492 94981 21453
2006-07 103367 22826 31713 7003 135080 29829
2007-08 140180 34835 109741 27271 249921 62106
2008-09 173741 37838 -63618 -13855 110123 23983
2009-10 179059 37763 153516 32376 332575 70139
2010-11 138462 30380 143435 31471 281897 61851

Note : 1) Data for 2009-10 and 2010-11 are provisional.

2) Data from 1995-96 onwards include acquisition of shares of Indian companies by non-residents under Section 6 of FEMA, 1999. Data on such
acquisitions are included as part of FDI since January 1996.
3) Data on FDI have been revised since 2000-01 with expanded coverage to approach international best practices. Data from 2000-01onwards are
not comparable with FDI data for earlier years.
4) Negative (-) sign indicates outflow.
5) Direct Investment data for 2006-07 include swap of shares of 3.1 billion.
Also see Notes on Tables. Source: Reserve Bank of India
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Financial Year-wise FDI inflows

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Financial Year-wise FDI inflows

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
China and India: A Comparative Perspective

After controlling
China’s ‘Round-
Tripping’ and
adjusting India’s
FDI calculation
according to IFC
guideline

Can you recall the A.T. Kearney FDI Confidence Index?

Source: Kumar (2005), EPW
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Sector-wise FDI Inflows in India

August 1991 – Dec 1999

Jan 2000 – March 2009

Source: NCAER Report 2009

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Sector-wise FDI Inflows in India

Source: Fact Sheet on FDI, Department for Promotion of Industry and Internal Trade, GoI
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Sector-wise FDI Inflows in India

Source: Fact Sheet on FDI, Department for Promotion of Industry and Internal Trade, GoI
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 State-wise Distribution of FDI in India
(Jan 2000 – March 2009)

• FDI equity flows are concentrated in a few states

• Of the total approved FDI flow, Maharashtra accounted for the
largest proportion with 46 per cent, followed by Gujarat with
15 per cent, and Delhi with 7.7 per cent.
• Other significant states are AP, Karnataka and TN.
• Among these states, only a few cities attract FDIs.
– These included Ahmedabad, Bangalore, Kolkata, Chennai, Coimbatore,
Goa, Hyderabad, Jamnagar, Kancheepuram, Mumbai, Pune and
Raigarh.
• Only seven states accounted for over 97 per cent of the total
amount of export-oriented FDI and 83 per cent of total FDI
approvals during 1991-2001.
Source: NCAER Report 2009
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
RBI’s Region-wise Break-up of FDI inflows
(Jan 2000 – March 2009)

Software hub
Strong industrial base

Source: NCAER Report 2009

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 State-wise FDI inflows

Source: Fact Sheet on FDI, Department for Promotion of Industry and Internal Trade, GoI
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 State-wise FDI inflows

Source: Fact Sheet on FDI, Department for Promotion of Industry and Internal Trade, GoI
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Country-wise FDI Inflows in India

August 1991 – Dec 1999

Followed by Japan (2.9), Cyprus (2.5),

Germany (2.4), France (1.4), U.A.E.(1.0)

Jan 2000 – March 2009

Source: NCAER Report 2009
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Country-wise FDI Inflows in India

Source: Fact Sheet on FDI, Department for Promotion of Industry and Internal Trade, GoI
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Country-wise FDI Inflows in India

Source: Fact Sheet on FDI, Department for Promotion of Industry and Internal Trade, GoI
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Identification of Home Countries

Source: Jaiswal, 2017, Centre for Budget and Governance Accountability (CBGA)
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Identification of Home Countries

Source: Jaiswal, 2017, Centre for Budget and Governance Accountability (CBGA)
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Identification of Home Countries

Source: Jaiswal, 2017, Centre for Budget and Governance Accountability (CBGA)
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Double Taxation Avoidance Agreement
• Armenia • Jordan • Mozambique • Sweden
• Australia • Hungary • Myanmar • Swiss Confederation
• Austria • Iceland • Namibia • Syrian Arab
• Bangladesh • Indonesia • Nepal Republic
• Belarus • Ireland • Netherlands • Tajikistan
• Belgium • Israel • New Zealand • Tanzania
• Botswana • Italy • Norway • Thailand
• Brazil • Japan • Oman • Trinidad and Tobago
• Bulgaria • Kazakstan • Philippines • Turkey
• Canada • Kenya • Poland • Turkmenistan
• China • Korea • Portuguese Republic • UAE
• Cyprus • Kuwait • Qatar • UAR (Egypt)
• Czech Republic • Kyrgyz Republic • Romania • UGANDA
• Denmark • Libya • Russia • UK
• Egypt • Lithuania • Saudi Arabia • Ukraine
• Estonia • Luxembourg • Serbia • United Mexican
• Ethiopia • Malaysia • Singapore States
• Finland • Malta • Slovenia • USA
• France • Mauritius • South Africa • Uzbekistan
• Georgia • Mongolia • Spain • Vietnam
• Germany • Montenegro • Sri Lanka • Zambia
• Greece • Morocco • Sudan
Source: http://law.incometaxindia.gov.in/DIT/intDtaa.aspx#

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Double Taxation Avoidance Agreement

• Indian government has provided many incentives for attracting

FDI

• For instance, DTAA is mainly aimed at promoting trade and

investment by eliminating double taxation and making tax
regulations more consistent
• India adopted this policy quite early and signed the first such
agreement in 1969 with Egypt

• Currently, India is party to 90+ DTAAs with various countries

Source: Jaiswal, 2017, Centre for Budget and Governance Accountability (CBGA)
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Double Taxation Avoidance Agreement

• While the stated goals of DTAAs are promoting trade and

investment, among others
• DTAAs have come under criticism for facilitating treaty shopping
and round-tripping – especially due to the disproportionately huge
FDI inflows from jurisdictions like Mauritius, Singapore and
Cyprus, which are regarded as tax havens
• Along with their role in tax avoidance, there are concerns that
these jurisdictions are also being used for tax evasion and black
money
• This has been highlighted in various reports including by
government agencies and news outlets

Source: Jaiswal, 2017, Centre for Budget and Governance Accountability (CBGA)
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Why Mauritius?

• India-Mauritius DTAA was signed in 1982

• According to the DTAA, capital gains arising from the sale of shares
are taxable in the country of residence of the shareholder and not in the
country of residence of the company whose shares have been sold:
– Therefore, a Company resident in Mauritius selling shares of an
Indian company will not pay tax in India.
– Since there is no capital gains tax in Mauritius, the gain will escape
tax altogether
• After several years of negotiations, India in 2016 finally succeeded in
amending the treaties with Mauritius, Singapore and Cyprus.
• India’s finance ministry said the amendment of the treaty would “help
curb tax evasion and tax avoidance” and “double non-taxation” as well
as round-tripping

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 What are the Determinants of FDI inflows in a
country like India?

• India’s strengths as an investment destination depends

on
– Large and growing domestic market with increasing
purchasing power parity
– World-class scientific, technical and managerial institutes
– Cost-effective and highly skilled manpower
– An abundance of natural resources
– A large English-speaking population
– Institutional transitions in terms of openness to international
trade, economic reforms etc.
– An independent judiciary
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Outbound FDI from India
• There is a growing realization that the future growth of Indian
companies will be influenced by the share that they can garner in
the world market, not only by producing in the country and
exporting, but also by acquiring overseas assets

• RBI allows Indian firms to invest in entities abroad up to 200%

(it is not constant) of their net worth in a year
– But money raised abroad does not come under this law

• The actual acquisition values are higher as a significant amount

of fund has been raised abroad.
– For instance, a significant portion of the capital was raised in Singapore for
The Tata Steel/Corus deal

Source: https://www.bis.org/review/r070122c.pdf

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 To sum up…

• Global outlook about India as FDI destination is positive

• However, FDI still plays a relatively small role in domestic
capital formation
• Broadly, MNEs are more export oriented than domestic firms
• Only a few states of India receive FDIs and mostly FDIs are
concentrated in a few sectors
• Regulating FDI inflows to maximize their impact on domestic
sector might not be a bad idea for India à Governments should
ensure efficient, competitive and regulatory regime to provide
level playing fields to both domestic and foreign firms

Source: NCAER Report 2009

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Int
BM & HRM 2020 - 22 | Session 14

Organizational
Structure: A Recap
APALAK KHATUA, Email: apalak@xlri.ac.in

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Organizational Structures!

• Functional (U- Form)

• Divisional (M-Form)
• Matrix or some hybrid structure

Source: Nohria (1995); HBR Note of Organization Structure

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Functional Form
• Activities are grouped together by common function and coordinated
vertically
• Requires a good deal of information processing among the functions:
cross-functional information processing is often the responsibility of
general management (GM). GM also mediates conflicts that may arise
among the functions
• Promotes Economies of Scale – effective in a stable environment
• Not-so-efficient, due to coordination mechanisms across functions, in
responding to environmental changes

Source: Nohria (1995); HBR Note on Organization Structure

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Functional Form

• Williamson’s critique:
– Contribution to each functional department
to corporate profits is neither observable
nor measurable à information asymmetry
– Resource allocation is a bargaining process
between departmental heads – might lead
to managerial slacks
– Leads to agency problems – separation of
ownership and control
Nobel Prize in 2009
– Structure itself is a limit to diversified
growth
Source: Hill (1985) – Williamson and M-Form Firm – A critical review
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Principal-Agent Problem
(Recap from Strategic Management Course)

• Say, in a sharecropping setting, a farmer crops a plot belonging to a

landowner
• Landowners would be principals, farmers would be agents
• What would be the possible contract?
• The farmer should pay a fixed rent - Residual claimant
• Who is bearing the risk?
– A farmer’s livelihood is bound to –nature, health, crop prices
• Safe crop and risky crop?
• What about cooperative farming?
• Separation of Ownership and Control leads a condition where the
interests of owner(s) and managers may, and often do, diverge

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Divisional Form (M-Form)

• Economic historian Alfred Chandler documented the emergence of

multidivisional firms (such as Du Pont, General Motors, Standard Oil
and Sears Roebuck) in the first half of twentieth century
• Williamson labeled this type of organization as M-Form organization
• Structure follows Strategy
• Four basic principles of M-Form organization:
– The firm is organized in separate business units
– Business unit managers are accountable for creating economic
value
– Resources are allocated unequivocally to business units
– The task of corporate parents (i.e., headquarter) is to coordinate
among divisions add value to the activities of the business units

Source: Strikwerda & Stoelhorst (2009); California Management Review

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 M-Form: Williamson’s Argument
• The responsibility for operating decisions is assigned to functionally self-
contained operating divisions.
• Corporate office is principally concerned with strategic decisions
• M-form allows to exploit Financial Synergies & Economies of Scope
(like corporate R&D) à because they have better access to information
• Internal Capital Market: operating divisions are like autonomous profit
centers and head office performs capital market functions à stimulates
entrepreneurship
• H-form: (financial holding) where parent only pursues financial
synergies – risk spreading or reduced cost of capital

• Critique: Rather than creating shareholder value, many parents were

destroying value around late 1980s. For instance, H-form might not
create value if external capital market is efficient
Source: Hill (1985) & Strikwerda & Stoelhorst (2009);
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Theoretical Debate About …
Structure follows Strategy
- Chandler, A.D. Jr. (1962)

Strategy Follows Structure

-Hall & Saias (1980)

Structure follows strategy ... as the left foot

follows the right!
- Henry Mintzberg (1990)

For Further Reading: Galbraith (2012). The evolution of enterprise organization designs.
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Journal of Organization Design
Move towards M-Form Organization!!

Source: CNNMoney
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Int
BM & HRM 2020 - 22 | Session 14

Transnational
Organizations
APALAK KHATUA, Email: apalak@xlri.ac.in

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Strategy and Structures of MNCs

• Where should power be located within the firm?

• Range of replies has generally included
– At a national level (subsidiaries with absolute autonomy)
– At a global level (headquarters with absolute power)
– Or a mixed system?
• Stephen Hymer, a young economist, noted in his dissertation
that organizational paradigms have shifted over time
– Initially with an international division as an ‘appendages to
dominant domestic operation’ à U-Form organization à
M-Form Organization

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Stage I: International Organization

• Most firms began with few key managers working on single

product out of single location
• First moves abroad would be run out of an ‘international
division’
• Very rare nowadays

Domestic HQ

Domestic Functional International

Division Operations Divisions

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Stage II: Functional or ‘U-form’

• Main driver behind internationalization is to achieve ‘monopoly

advantages’ through value chain management
• HQ (the centre) controls all functions in subsidiaries (the
periphery) who simply implement/obey instructions
• Can be applicable in firms with narrow product ranges/little need
for differentiation

Executive

Production Marketing Finance HRM

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Stage III: Multidivisional or ‘M-form’

• Response to global consumers’ differentiated demands

• Need for greater flexibility
• Product Organization: Divisions as independent profit centres due
to lack of product overlaps (conglomerates)
Group HQ

Product Product
Division A Division B

Area 1 Area 2 Area 1 Area 2

Functions Functions Functions Functions

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Stage III: Multidivisional or ‘M-form’

• Geographic Organization: highlights responsiveness to local

circumstances; empowers subsidiaries
• Multi-domestic logic – Can adapted to local contexts but expensive
(duplications)
• Lacks global vision
Group HQ

Area 1 Area 2

Product A Product B Product A Product B

Functions Functions Functions Functions

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Lessons from Philips

• Decentralized Federations
– Was in a better position to respond to the increased demands
from host governments or adapting to shifts in consumer
preferences
– Thus, highly sensitive to its local market
– But faces difficulties in coordinating and controlling
worldwide operations in order to respond to the global forces
• Use of a cadre of entrepreneurial expatriates
• Integration of technical and marketing functions within each
subsidiary
• Decentralized authority and dispersed responsibility

Source: Bartlett and Ghoshal, 1988, California Management Review

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Lessons from Matsushita

• Centralized hub model

– Operations concentrated in the home country
– Ability to capture the opportunities presented by the global
forces
– World was considered as an integrated whole
– Less sensitive and responsive to the countervailing forces of
localization
• Gaining subsidiary input - multiple linkages
• Linking directions to needs - market mechanism
– Technology-driven versus market-driven
• Managing Responsibility Transfer: Personnel Flows
Source: Bartlett and Ghoshal, 1988, California Management Review
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Choosing a Global Strategy
High

Global
Strategy Global
Standard
ization
Pressures for
Cost Reduction

Home
Localizat
Replicati Multi-domestic
International ion
on Strategy
Strategy

Low High
Need for Local Responsiveness

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Global Approach and its shortcomings

• Global Approach was buzzword by 1980s

– GATT and reduction in barriers to trade
– Notion of global convergence to serve global customers and achieve
economies of scale
– Reassertion of HQ power over subsidiaries
– Consequently, less independent thinking by subsidiary managers à
knowledge transmitted only vertically, not horizontally
• MNEs have regionalized more than they have globalized
– In most MNEs region of origin accounts for 70% of total revenues
(Rugman, 2005)
– Clustering or near-sourcing of manufacturing activities
– Strong ‘home bias’: Managers (customers) more comfortable with
familiar environments (brands)
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Multi-domestic Versus Global

Organizational Multidomestic/ Global/ Global International/

Characteristics Localization Standardization Home Replication
Sources of core
Configuration of Decentralized and competencies
Centralized and
Assets and nationally self- centralized and
globally scaled
capabilities sufficient others decentralized

Adapting and
Sensing and
Role of Overseas Implementing Parent leveraging parent
exploiting local
Operations Company strategies company
opportunities competencies

Knowledge Knowledge
Development and Knowledge developed and
development and
Diffusion of developed and transferred to
retained within each
Knowledge retained at the center overseas unit
unit
Source: Bartlett & Ghoshal (1998)
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 So, how to bridge the gap?

• Rejection of excess devotion to any one structure

• Must be capable of both global integration & local adaptation
• Promote two-way flows between HQ/subs and subs/subs
• Search for organizational compromise:
– Centralize some functions (R&D / Manufacturing /
Finance?)
– Decentralize others (Design /Sales / HRM?)
• Thus, efforts to develop a hybrid MNE configuration
– Transnational organization (Bartlett 1986; Bartlett and Ghoshal,
1988)

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Choosing a Global Strategy
High

Global
Strategy Global
Trans-
Standard
national
ization
Pressures for
Cost Reduction

Home
Localizat
Replicati Multi-domestic
International ion
on Strategy
Strategy

Low High
Need for Local Responsiveness

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Choosing a Global Strategy
High

Global
Strategy Global
Trans-
Standard
national
ization
Pressures for
Cost Reduction

Home
Localizat
Replicati Multi-domestic
International ion
on Strategy
Strategy

Low High
Need for Local Responsiveness

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Global Strategies

S4 S1 S4 S1 S4 S1

HQ HQ HQ

S3 S2 S3 S2 S3 S2

Multi-domestic Global Standardisation Transnational

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Case:
Levendary Cafe

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Where should power be located
within the MNC?

OR

What should Foster do about Chen?

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
What is Levendary selling in China?

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 U.S. Coffee Market in late 1980s..

It was a commodity industry, marked by heavy price-cutting and an

ongoing battle for market share – thin profit margins and low growth

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Coffee: An Emotional Experience

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Decline in US Retail Book Industry in 1980s

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Book Superstore: A Total Experience

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Movie Industry & DVDs

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Let’s probe Foster’s ‘Stage Theory’

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Int
BM & HRM 2020-22 | Session 15

Headquarter-Subsidiary
Relationship
APALAK KHATUA, Email: apalak@xlri.ac.in

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Role of Corporate Parent

• Mostly strategies are initiated at the Corporate HQ level

– To determine the overall strategic direction and structure of
the multinational firm as a whole
– To determine the scope of operations by defining the extent
of the firm’s involvement across different operations and
countries
• However, implementation of the strategy are typically done at
the subsidiary-level
• The management team at the corporate level needs to develop a
basis for maintaining an overview of performance across all
subsidiaries

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Role of Subsidiary

• Significance of the subsidiary’s contribution to the overall global

success of the multinational firm
• Over time, the role varies from simply meeting the challenges of
implementing the global headquarter-level strategy to taking lead
responsibility in developing a specific strategy for the subsidiary
• Three factors determine a subsidiary’s strategic role:
– Environment uncertainty
– The need to adapt to local conditions

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Global Approach: HQ Syndrome?

• Assumptions of Global Approach/HQ Syndrome:

1. Managers assume subsidiary roles and responsibilities are
similar in nature
− In other words, assume uniformity and symmetry among
units
2. So broadly two roles for the organization
− HQs managers should try to coordinate key decisions and
control global resources
− Subsidiaries acts as implementers and adapters of global
strategy in their localities

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Consequences of HQ Syndrome
1. Global Approach results in
− overcompensation for the needs of smaller or less crucial
markets
− a simultaneous unresponsiveness to the needs of
strategically important countries
2. Gross underutilization of company’s worldwide assets and
organizational capabilities
3. Control by HQ deprives the country managers to use their
skills and creative energy
• Organization Task is to resolve imbalances between market
demands and constraints on the one hand and uneven
subsidiary capabilities on the other
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Roles of National Subsidiaries

Strategic Importance of LOW

HIGH Local environment

Strategic Contributor
Leader

Competence of
Subsidiaries

Black hole Implementer

LOW
Source: Bartlett and Ghoshal, 1986, HBR
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Roles of National Subsidiaries

Subsidiary operating in a
Serves as a partner of small or strategically
HQ in developing and unimportant market but
implementing Strategic having a distinct
Contributor
strategy Leader
capability

National Organizations
Black hole Implementer in a less strategically
Strong local presence
is essential but the important market has
national environment just enough competence
large, sophisticated to maintain its local
and competitive. operations
Strategic alliances!
Source: Bartlett and Ghoshal, 1986, HBR
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 TNCs and Global Managers

• Transnational corporations should build 3 strategic capabilities:

– Global-scale efficiency and competitiveness
– National-level responsiveness and flexibility
– Cross-market capacity to leverage learning on a worldwide
basis

• In the volatile world of transnational corporations, concept of

universal global manager might not work
• Rather, transnational corporations require specialist

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Global Business Manger

• Basically a Product Division Manger

• One overriding responsibility: to further the company’s global
scale efficiency and competitiveness à capture the full benefit of
integrated worldwide operations
• Strategist + Architect + Coordinator
– Strategist for his organization to enhance global-scale
efficiency and competitiveness
– Architect of its worldwide asset and resource configuration
– Coordination of transaction across borders

Source: Bartlett and Ghoshal, 1992, HBR

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Country Manger

• National subsidiaries are building blocks for most MNCs

• Country managers play a pivotal role in meeting local customer
needs and satisfy host government’s requirements à to be
sensitive and responsive to the local market
• Sensor + Builder + Contributor
– Sensor and interpreter of local opportunities and threats
– Builder of local resources and capabilities
– Contributor to and active participant in global strategy

Source: Bartlett and Ghoshal, 1992, HBR

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Functional Manger

• Building an organization that can use learning to create and spread

innovations requires the skill to transfer specialized knowledge
while also connecting scare resources and capabilities across
national borders
• Scanner + Cross-pollinator + Champion
– Scan for specialized information/weak signals to detect
threat/opportunities worldwide
– Use informal networks to cross-pollinate leading-edge
knowledge and best practice
– Champion innovation that may offer transnational opportunities
and application
Source: Bartlett and Ghoshal, 1992, HBR
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Corporate Manger

• Integrates these many levels of responsibility, playing perhaps

the most vital role in transnational management
• Balance the negotiations among the three
• Leader + Talent Scout + Developer
– Leads in the broadest sense
– Should identify and develop talented business, country and
functional managers
– Once they identify the talent, they have the duty to develop it

Source: Bartlett and Ghoshal, 1992, HBR

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Int
BM & HRM 2020-22 | Session 15

Managing Innovation
Across Borders
APALAK KHATUA, Email: apalak@xlri.ac.in

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Global Approach to R&D

• Challenge is to create a global R&D network

• Categorizing New R&D Sites
– Home-base-augmenting site: Subsidiary à HQ
– Home-base-exploiting site: HQ à Subsidiary
• Choosing a location for the site such as regional clusters of
scientific excellence

How to select the best Site Leader?

– Home-base-augmenting site: Local
– Home-base-exploiting site: HQ
(Kuemmerle, 1997)
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Global Approach to R&D

Source: Kuemmerle, 1997

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Story of Gatorade

• Can be traced backed to Gators, football team of University of

Florida
• American icon – concoction of water, glucose, sodium,
potassium and flavorings
• Product of school’s research lab – replenishment of the
electrolytes and carbohydrates that players lost through sweat
and exertion
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Reverse Innovation

• Epidemic outbreak of cholera in Bangladesh

and elsewhere in South Asia during 1960s
• Centuries-old local treatment – coconut
water, carrot juice, rice water, carob flour,
and dehydrated bananas
• Concepts of Ayurvedic medicine challenged
the conventional wisdom of Western world
• Published in British medical Journal
• Doctors at the university of Florida thought
– if it worked well for cholera patients then
why not healthy football players

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Conventional Assumptions: Questionable?

• Assumption 1: Emerging economies will largely evolve in the

same way that wealthy economies did

• Assumption 2: Products that address developing countries’

special needs can’t be sold in developed countries because
they’re not good enough to compete there

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Innovation: Conventional Wisdom

• Conventional wisdom assumes strategic decisions are the

responsibility of the at Corporate HQ à Hence, R&D facilities
should be close to home/HQ
• Thus, Global Standardization/Approach suggests:
– Innovation has already occurred – mostly @ HQ à Similar to
International PLC model
– MNCs can tap emerging markets simply by exporting lightly
modified/adapted versions of global products developed for rich-
world customers – in short, low-end models with fewer features
• However, what works in the developed market might not get accepted
in emerging markets and more and more sources of potentially
relevant knowledge emerge across the globe
(Kuemmerle, 1997; Govindarajan & Trimble, 2012)
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
The Henry Ford of Heart Surgery

• Transformed health care in India

by performing open-heart
surgery for just $2000,
compared to upward of $20,000
in the United States
• Mortality rate (within thirty
days of bypass surgery) is 1.4%
in NH w.r.t. U.S. average of
1.9%
• Ultra-low price but higher profit
margins than US
• Lower cost of labor – partial
explanation
Source: Wall Street Journal, 2009
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Narayana Hrudayalaya & Reverse Innovation

• Japanese companies reinvented the process

of making cars. That’s what we’re doing in
health care.
• What health care needs is process
innovation, not product innovation.
• Process innovation – standardization,
specialization of labor, economies of scale,
assembly line production
• Reverse Innovation – building a large two-
thousand-bed hospital in the Cayman
Islands (near Miami) to treat uninsured
Americans at 50% below US price
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Health City Cayman Islands

• A multi-care 104-bed hospital in the

Caribbean region (population of
approx. 40 million) - close to Jamaica,
a 1.5 hr flight from Miami in Florida
• IJV between NH and Ascension
Health Alliance (a large private non-
profit healthcare network in the US)
• Aims to have 2,000 beds - $2 billion
project that will be built in phases
over 15 years on a 200-acre site.
• Majority of the clinical staff is from
NH, with doctors trained and worked
in the UK or the US

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
GE: Reverse Innovation in Practice

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Why Reverse Innovation
is so important?

If we don’t come up with innovations in poor

countries and take them global, new competitors
from the developing world – like Mindray, Suzlon,
and Goldwind – will. That’s a bracing prospect.
GE has long had tremendous respect for
traditional rivals like Siemens, Philips, and Rolls-
Royce. But we know how to compete them. They
will never destroy GE. The emerging giants, on
the other hand, very well could.

- Jeffrey Immelt, chairman and CEO of General Electric

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Mahindra and Mahindra in the U. S. Heartland

• M&M tractors (35 HP) were popular in

India - sized appropriately for small
Indian farmers
• In 1990s – one of India’s top tractor
manufacturers
• Ready for new challenge – lucrative US
market; Went to America in 1994
• Dominant brand in US was John Deere
• Known for their enormous machines
(600 HP) for industrial-scale
agribusiness
• M&M aimed for a smaller agricultural
niche - hobby farmers, landscapers, and
building contractors

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Mahindra and Mahindra in the U. S. Heartland

• Few modifications like supersized seats and larger brake pedals

to comfortably accommodate larger American bodies
• Americans thought of M&M as “red,” “foreign,” or “cheap.”
• M&M focused on relationships with small dealerships and
customers – 1999-2006: Sales growth averaged 40 % per year
• Deere sensed that M&M ‘could someday pass Deere in
global unit sales’
• Became desperate - cash incentives to induce Mahindra buyers to
trade for a Deere.
• Mahin fired back with an ad “Deere John, I have found
someone new.”
• M&M has become the number-one tractor maker worldwide
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Reverse Innovation: Clash of Two Models

• GE Healthcare sells an x-ray imaging product

called a surgical C-arm , which is used in basic
surgeries
• High quality, high priced product, designed for
hospitals of developed countries
• Couldn’t penetrate Indian market
• Venkatraman Raja, the head of GE Healthcare
business in India, saw the problem and made a
proposal - to develop, manufacture, and sell a
simpler, easier-to-use, and substantially cheaper
product in India.
• His proposal made sense, and yet, to no one’s
surprise, it was not approved!

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Shifting the Centre of Gravity – The Challenge

1. Where should power be located within the firm?

– Shift power to where growth is
2. Build new offerings from the ground up
3. Build Local Growth Teams from the ground up, like new
companies
4. Customize objectives, targets, and metrics
5. Have the Local Growth Team report to someone high in the
organization

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Reverse Innovation & TNC – Similar?
High

Global
Strategy Global
Trans-
Standard
national
ization
Pressures for
Cost Reduction

Home
Localizat
Replicati Multi-domestic
International ion
on Strategy
Strategy

Low High
Need for Local Responsiveness

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Knowledge Management & TNC
International/
Multidomestic/ Global/ Global
Strategy Home Transnational
Localization Standardization
Replication
Interdependence Moderate Low Moderate High
Adopting and Differentiated
Sensing and
Role of Foreign leveraging Implementing parent contributions by
exploiting local
subsidiaries parent company company initiatives subsidiaries to integrate
opportunities
competencies worldwide operations
Developed at Mostly developed
Development Developed and
center and and retained at the Developed jointly and
and diffusion of retained within
transferred to center and key shared worldwide
knowledge subsidiary
subsidiaries locations
Extensive flow of Extensive flow of
Extensive flow
Limited flow of knowledge and knowledge and people in
of knowledge
Flow of knowledge and people from the multiple directions
and people from
knowledge people in both center and key
HQs to
directions locations to other Source: Peng (2007) adapted
subsidiaries
subsidiaries from Bartlett and Ghoshal

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Knowledge Management: Market
or Hierarchy mode?

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 P&G’s Open Innovation

• Blue or red vegetable-based food

colorings to print images, trivia
questions, and jokes on the chips
• It is now interactive and enhanced
consumer experience
• How they did it?
• It would have taken them to two years
to bring this product
• Discovered a small bakery in Bologna,
Italy which has invented an ink-jet
method for printing edible images
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Open Networks: Make or Buy?

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Lifebuoy se haath dhoye kya?

• Read Your Roti Before

Eating it!
• HUL, along with Ogilvy, has
partnered more than 100
dhabas and hotels at the
Kumbha mela 2013
• The 'Roti Reminder' gets a
consumer's attention at the
exact time when hand
washing is critical - Sudhir
Sitapati, GM - Skin cleansing
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Case:
GE Healthcare

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Int

BM & HRM 2020-22 | Session 16

Blue Ocean Strategy

APALAK KHATUA, Email: apalak@xlri.ac.in

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Strategy: All about Competition?

• Competitive Advantage
– Outperform rivals and capture
greater shares of existing market
space

• Unfortunately competitive strategy is

similar to military strategy
– Limited terrain
– Need to beat an enemy to success

• What about creating new market

space that is uncontested?
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Option 1: Traditional Competitive Strategy

• Red oceans: all industries in existence = known market space

– Industry boundaries defined and accepted
– Competitive rules of game known
– Companies try to outperform rivals; cutthroat competition
– As market space gets crowded, prospects for profit and
growth reduced
– Products become commodities
– Red ocean strategy is a market-competing strategy

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Option 2: New Market Space

• Blue oceans: all industries not in existence à unknown market

space
– Undefined market space, demand creation, opportunity for
highly profitable growth
– Most are created from within red oceans by expanding
existing industry boundaries
– Rules of game waiting to be set
– Competition irrelevant
– Blue ocean strategy is a market-creating strategy

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
The Case of Cirque du Soleil!

• What is Cirque du Soleil?

• Red Ocean Strategy was:

– Benchmarking the
competition
– High-profile “stars”, which
increased costs but who were
largely unknown to the
general public
– Traditional venue
– Traditional audiences

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 What so unique? Blue Ocean Strategy?

• Effectively combined the best of both the circus and the

theater while eliminating everything else - retention of
the symbolic and glamorous aspects of circus, such as the
tent and the more breathtaking aspects, such as acrobats

• Incorporation of more comfort, sophistication, elegance

and theatrical plots; this brought not only the richness of
theatre but a whole new demographic of customers - So,
appealed to both circus customers and noncustomers

• Each show, like a theater production, had its own unique

theme and storyline - This allowed customers to return to
the show more frequently

• Created a new market space!

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Blue Ocean Strategy ?
• 1908: The Model T
• More than 15,000,000 Model T's were
built and sold
• Henry Ford called the Model T- the
universal car, a low-cost, reliable vehicle
that could be maintained easily and could
successfully travel the poor roads of the
era
• Handmade luxury cars were $1500
• Horse-drawn carriages were $400!
• Introduced with a price tag of $850 and
later sold for as little as $260

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 TATA’s Nano Car

Target industry? 4 wheeler or 2 wheeler?

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
The Impact of Creating Blue Oceans
The Profit and Growth Consequences of
Creating Blue Oceans
Red Oceans Blue Oceans

Profit Impact 39 61

Revenue Impact 62 38

Business Launch 86 14

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Although the term may be new, but

BLUE OCEANS have always been with us

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Look Back 30/40 years…

Let us find which industries known today were then unknown…

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Red Ocean or Blue Ocean Strategy?
Red Ocean Strategy
• Competing in existing market
space
• Beat the competition
• Exploit existing demand
• Make the value/cost trade-off
• Align the whole system of a
company’s activities with its
strategic choice of
differentiation ‘or’ low cost
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Blue Ocean Strategy
• Create uncontested market
space
• Make the competition
irrelevant
• Create and capture new
demand
• Break the value/cost trade-off
• Align the whole system of a
company’s activities in pursuit
of differentiation ‘and’ low
costs
 Types of Competitive Advantage

Willingness to pay

Supplier opportunity cost

Industry Successful Successful low- Competitor

Average Differentiated Cost Competitor with dual
Competitor Competitor advantage

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Blue Ocean Strategy: Value Innovation

Costs

Value
Innovation

Buyer Value

The Simultaneous Pursuit of Differentiation and Low Cost

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
BOS: Analytical Tools and Frameworks

1. Strategy Canvas

2. Four Actions Framework

3. Eliminate-Reduce-Raise-Create Grid

4. Three Characteristics of a Good Strategy

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 The Case of [yellowtail]

• American wine industry was 3rd largest in world: worth $20

billion
• Californian makes 66% - the rest is from Italy, France, Spain,
Chile, Argentina, Australia
• Exploding number of new wines with a stagnant customer base
• Top 8 producers had 75% of the market; 1600 had the remaining
25%
• Intense competition, huge marketing expenses, severe price
pressure
• The dominant growth strategy was towards premium wines –
more complexity, better image, more prestigious vineyards,
number of medals won at wine festivals.
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 [yellowtail]

• Casella saw that most US consumers preferred beer, spirits and pre-
packaged cocktails to wine
• Consumers saw wine as a turn-off due to
– It was pretentious
– The taste was too complex
– It could be intimidating
• To differentiate yourself in the market place, you must focus on
alternatives and non-customers to re-define the marketplace
• For example, Casella Wines looked at the Strategy Canvas and
redefined the question: How do you make a fun and non traditional
wine that is easy for everyone to drink?

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Strategy Canvas for US Wine Industry
High

Premium Wines

Budget Wines

Low
Price Above-the-line marketing Vineyard prestige Wine
range
Use of enological terminology Aging Wine complexity
and distinctions in wine quality
communication

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Four Actions Framework
REDUCE
Which factors should be
reduced well below
the industry’s standards?

ELIMINATE A New CREATE

Which of the factors that Which factors should be
the industry take for granted Value created that the industry
should be eliminated? Curve has never offered?

RAISE
Which factors should be
raised well above
the industry’s standard?

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
ERRC Grid for Yellow Tail
(Eliminate-Reduce-Raise-Create)

Eliminate Raise

Enological Terminology Price versus budget wines

Aging qualities Retail stores involvement
Above-the-line Marketing

Reduce Create
Wine complexity Easy drinking
Wine range Ease of selection
Vineyard prestige Fun and adventure

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 A New Value Curve for Yellow Tail
High

Premium Wines

Budget Wines

CREATE
RAISE
Low REDUCE
Price
ELIMINATE
Above-the-line
marketing
Vineyard
prestige
Wine complexity
Wine
range
Ease of
selection
Fun and
Use of enological Aging Easy
terminology and quality drinking adventure
distinctions in wine
communication

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 [yellowtail]

• Only 2 types initially – Chardonnay and Shiraz

• Same bottle for red and white – low logistics costs
• Simple vibrant packaging – lower case letters/kangaroo
• Un-intimidating - Appealed to beer and spirits drinkers
• Fruity, soft on palette, sweetish – great for those who had not
drunk wine before
• They were selling “The essence of a
great land … Australia”
• Australian clothing for the retail staff –
they enthusiastically promoted a wine
they could understand.

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
ERRC Grid for Cirque du Soleil

Eliminate Raise
Star performers Unique Venue
Animal shows
Aisle Concession sales

Reduce Create
Theme
Fun and humor Redefined environment
Thrill and Danger
Multiple production
Artistic music and dance

I N T E R N A T I O N A L M A N A G E M E N T . A P A L A K K H A T U A26
 Strategy Canvas: Cirque du Soleil
High
Ringling Bros. & Barnum & Bailey

Cirque du Soliel

Smaller
Regional
Circuses

Low
Price Animal Multiple Thrill and Theme Multiple
shows show challenge Production
Star Aisle arena Fun and Unique Refined Artistic
performers concessions humor venue watching music and
environment dance

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 NetJets: Fractional aircraft ownership

High
Private Jet
Corporate travel

Commercial Airlines
First and Business-Classes travel

Low
Price (fixed Need for customer Deadhead costs Speed of total Ease of travel Flexibility and In-flight
purchase + to manage aircraft travel time (include. Check- reliability service
variable price (Aircraft M&A) in, customs, etc.
per flight)

I N T E R N A T I O N A L M A N A G E M E N T . A P A L A K K H A T U A28
 Three Characteristics of a Good Strategy

1. Focus - not diffused across all potential aspects of the market

2. Divergence - The shape of the value curve diverges from any

potential competitors

3. Compelling Tagline - It should have a compelling tagline

– [yellowline]: The essence of a great land … Australia
– Southwest Airlines: The Speed of a plane at the price of a
car – whenever you need it

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Strategy Canvas: Southwest Airlines
High

Average Airlines

Car Transport
Low
Seating class Hub Friendly Speed Frequent Point-to-
Price Meals Lounges point departure
choice connectivity Service

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
For Further Reading ...

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Blue Ocean Strategy: A tool for
analyzing Adaptation strategy?

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Int

BM & HRM 2020-22 | Session 17

Adaptation Strategy (Contd.)

APALAK KHATUA, Email: apalak@xlri.ac.in
Case:
Must ZEE TV
Zee vis-à-vis Star @ Indian Context

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Can we apply CAGE Framework?

© 2011Pankaj Ghemawat

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 How Star can Adapt?

Source: Redefining Global Strategy by Ghemawat

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Adaptation: Who Wants to Be a Millionaire?

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 The Launching of KBC…

• Same basic set, music, and rules in the Hindi version

• Participants, questions, and marketing had to be adapted to local
conditions
– Hiring of dominant Hindi-language actor of the era as host
– Taking him and other talent to UK to see local version of
show being taped
– Development of catchphrases in India
– Heavy investments in marketing for debut of show

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Strategic Alliance – To Bridge the Gap?

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 December 2001
It's a Star Show All The Way in Cable & Satellite Homes
Start
Channel Date Day Programme TVR
Time

Star Plus 27-Dec-01 Thu 10:30 PM KYUNKI SAAS BHI KABHI BA 10.75

Star Plus 25-Dec-01 Tue 10:30 PM KYUNKI SAAS BHI KABHI BA 10.31

Star Plus 26-Dec-01 Wed 10:29 PM KYUNKI SAAS BHI KABHI BA 10.15

Star Plus 27-Dec-01 Thu 10:00 PM KAHAANI GHAR GHAR KI (F) 9.28

Star Plus 24-Dec-01 Mon 10:29 PM KYUNKI SAAS BHI KABHI BA 8.97

Star Plus 25-Dec-01 Tue 10:00 PM KAHAANI GHAR GHAR KI (F) 8.94

Star Plus 24-Dec-01 Mon 10:00 PM KAHAANI GHAR GHAR KI (F) 8.55

Star Plus 26-Dec-01 Wed 9:59 PM KAHAANI GHAR GHAR KI (F) 8.33

Star Plus 28-Dec-01 Fri 9:00 PM KHULLJA SIM.SIM 6.45

Star Plus 25-Dec-01 Tue 9:00 PM KAMZOR KADII KAUN 6.11

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Why Good Companies go Bad?

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Why Good Companies go Bad?

• Common explanation
– Managers fail to notice changes
– Corporate governance
• When the back wheel is in rut
• No matter how hard you try, you
just can’t get out of it
• Rather than escape you only dig
yourself in deeper
Trap of Active Inertia?

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 When Business Conditions change…

• The most successful companies are

often slowest to adapt
• Competitive Advantage no longer
arises from market share, scale and
first-order capabilities in producing
or delivering
• Once wining formulas instead bring
failures
• What is the dynamics of failures for
successful companies?

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Dynamics of Failure

• Leading companies can

become stuck in the
modes of thinking and
working that brought
them their initial success
• How Great Managers
Remake Them?
• Where does sustainable
competitive advatage
come from?

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
IBM –Mainframe or PC: Difficult Choice ?

Tyranny of Served Market?

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Cross-investments in LG Group
(Showed more than 5% of equity ownership as of Dec 1997. Dark circle for Company of
more than 3 trillion won in assets investment)

Cross-investments in LG Group
(Showed more than 5% of equity ownership as of Dec 1997. Dark circle for Company of more
than 3 trillion won in assets inves

Source: Chang (2006)

 Cross-investments in Samsung Group
(Showed more than 5% of equity ownership as of Dec 1997. Dark circle for Company of more than 3 trillion
won in assets investment)

Cross-investments in LG Group
(Showed more than 5% of equity ownership as of Dec 1997. Dark circle for Company of more
than 3 trillion won in assets inves

Source: Chang (2006)

 Cross-investments in Hyundai Group
(Showed more than 5% of equity ownership as of Dec 1997. Dark circle for Company of more than 3 trillion
won in assets investment)

Source: Chang (2006)

Family-owned Pyramidal Business Houses

Actual stake of the family

51.00%

26.01%

13.27%

6.77%

3.45%

1.76%

Source: Adapted from Morck & Yeung (2003)

 Family-owned Pyramidal Structure
Source: Ghemawat & Hout (2001) Differences in Business Ownership and
Governance around the World

• In a pyramid structure, an apex firm holds a controlling interest in two

or more holding companies which in turn hold controlling interests in
several operating companies in the next tier down
• Further tiers can be added to maximize the control leverage of the apex
firm—the more tiers, the lower the percentage of capital the owners of
the apex firm have to contribute to maintain control of the bottom tier
corporations
• The controlling owners’ actual cash flow interest in firms lower in the
pyramid is lower than in firms in higher tiers because of the pyramided
fractional ownership
• Outside shareholders own a portion of all firms except the apex
• The controlling owners can further conserve capital by owning less
than a majority of total shares but giving their own shares
disproportionately high voting rights or by issuing nonvoting shares to
outside shareholders

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Corporate Ownership around the World
Source: LaPorta et al. (1999) Journal of Finance

• “The controlling shareholders typically have control over

firms considerably in excess of their cash flow rights. This
is so, in part, because they often control large firms through
pyramidal structures, and in part because they manage the
firms they control. As a consequence, large firms have a
problem of separation of ownership and control, but not the
one described by Berle and Means”

• Can you remember our principal-agent discussion?

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Equity Ownership of Tata Group Listed
Firms - 2000

Source: Kakani and Joshi (2008)

Equity Ownership of Tata Group Listed
Firms - 2005

Source: Kakani and Joshi (2008)

 What was Vijay Mallya’s actual stake in
Kingfisher Airlines?
Vijay Mallya’s Actual Stake in
Kingfisher Airlines is:

1.87 + 51.49*24.46 = 14.36%

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Corporate Ownership around the World
Source: LaPorta et al. (1999) Journal of Finance

• The seminal work of Berle & Means (1932) noted “the prevalence of
widely held corporations in the United States, in which ownership of
capital is dispersed among small shareholders, yet control is concentrated
in the hands of managers” – most studied organizational form in MBA
schools

• However, if we “look outside the United States, particularly at countries

with poor shareholder protection, even the largest firms tend to have
controlling shareholders. Sometimes that shareholder is the State; but
more often it is a family, usually the founder of the firm or his
descendants”

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 FIIs object to Crossholdings!
• Tata’s sprawl is made possible in part by its structure. Although Tata Sons, the
parent company, is not listed, most of the operating companies are—and they are
usually majority owned by outside shareholders. So, Tata Sons owns just over a
quarter or so of Tata Steel, for example, or of Tata Motors. Those businesses own
small stakes in each other and, jointly, 13% of Tata Sons. Such cross-ownership
means that while understanding what is happening at individual Tata companies is
fairly easy, judging (and managing) the direction of the entire group is fiendishly
hard -The Economist, 24 Sep 2016

• FIIs object to Tata Steel crossholdings within group, tell independent directors to
avoid such holdings -Economic Times, 16 Nov 2016

• There are a dozen big operating companies, some of which are listed. These are
controlled by a private holding company which owns stakes in them of 20-75%.
That holding company is in turn controlled by murky and secretive charitable
trusts -The Economist, 19 Nov 2016

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Any link between Equity-interlocking
and Globalization?
… the Tata stake had become diluted down to
single figures. In the case of Tata Steel, for
instance, we owned only 2%. Earlier, there
wouldn’t have been anybody barring the
government, who could have endeavoured to
displace us. And there was no Indian group at that
time that would have had the funds to make an
open offer, and probably no way a foreign company
could have bought into any of our companies.
That, in a manner of speaking, changed by 1991.
There were Indian groups that had that kind of
money and there were ways that foreign companies
could invest in our various companies. We are
vulnerable today and have to protect ourselves by
increasing the group ownership in each of our
major companies.
– Ratan Tata, in the early 1990s
 Int

BM & HRM 2020-22 | Session 18

Arbitrage Strategy
APALAK KHATUA, Email: apalak@xlri.ac.in

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Arbitrage Strategies: Exploring
Differences

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Arbitrage: What? Why?

• Arbitrage treats differences across borders as opportunities,

not as constraints
• It implies seeking absolute economics, rather than the scale
economies gained through standardization
• Case of Wal-Mart
– 2,200 international stores; $63 billion in sales (1/5th of the company
total); $3.3 billion in operating income (closer to 1/6th of the total)
in 2006
– In 2004, the company claimed to buy $18 billion worth of goods
directly from China and save $3 billion through arbitrage

Source: Redefining Global Strategy by Ghemawat

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Mega brands versus Lego

Mega, Canada based : molding

outsourced in China

Outsourced molding
to Flextronics
Lego, Denmark based : molding in
Denmark and Switzerland

Source: Redefining Global Strategy by Ghemawat

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 CAGE and Arbitrage

Probably the image of French culture has long underpinned the international
success of French haute couture, perfumes, wines, and foods.

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 CAGE and Arbitrage

World’ s largest brewer Brazil’s Brahma Beer

from Belgium
Source: Redefining Global Strategy by Ghemawat
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 CAGE and Arbitrage

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 CAGE and Arbitrage

• Round tripping: Hong Kong route for mainland Chinese

businessman
• Previously, Mauritius route to enter India
• Enron, enlisted the help of U. S State Department, which
obligingly threatened to cut off development assistance to
Mozambique – one of the poorest country of the world – if it
granted a gas deal to South African competitor instead of an
Enron led consortium

• What about Political Lobbying in contemporary India?

Source: Redefining Global Strategy by Ghemawat

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Tax Avoidance: Arbitrage?

Country A Country B Country C

(Production Base) (Tax haven) (Place of Sale)
30% tax rate 5% tax rate 30% tax rate
Real Transaction
Real operation Cost: $800,000 NA Revenue: $900,000
Gross Profit $100,000 ($50,000 declared in country A; $50,000 declared in
country B)
Tax Calculation $50,000*30% $50,000*30%
Total Tax $15,000 + $15,000
PAT $100,000 - $30,000

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Tax Avoidance

Country A Country B Country C

(Production Base) (Tax haven) (Place of Sale)
30% tax rate 5% tax rate 30% tax rate
Tax Evasion Transaction
Real operation Cost: $800,000 NA Revenue: $900,000
Fictionalized Declares export to B Declares export to C Declares payment of
operations at $700,000 at $1,000,000 and $1,000,000 to B
payment of $700,000
to A
Profit Calculation -$100,000 $300,000 -$100,000
Tax Calculation $0 $300,000*5% $0
Total Tax $0+ $15,000 + $0
PAT $100,000 - $15,000 – Transportation Costs (?)

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 French Tax Structure

• Under tax treaties, including one between France and Ireland,

business units such as Google Ireland—the company’s
headquarters for Europe, the Middle East and Africa —don’t
have to pay income tax in a country where orders come from if
they have no “permanent establishment” there
• A unit that just does sales preparatory work rather than close
deals usually doesn’t count
• France’s corporate tax rate is nearly that high, with a headline
rate of 33.3%. Most other EU countries’ range between that and
20%. Ireland, to which Google directs the revenue from search
ads that French marketer's line up, has a 12.5% rate.

Source: Wall Street Journal, October 2014

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Google’s Tax Strategy
• Google says its French marketers indeed don’t close deals :
– Customers in France buy their ads from Google Ireland
– Customers buy the ads themselves using an automated system with
auction pricing

Source: Wall Street Journal, October 2014

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Google’s Tax Strategy

• Relatively little Google profit remains in Ireland to be subject to

even this 12.5% rate.
• The Irish subsidiary that receives revenue from European marketers
turns around and pays billions of euros in royalty fees for Google’s
intellectual property to a Google unit in the Netherlands.
• That unit then pays nearly all those fees to another Irish Google
unit.
• This separate Google Irish unit, although registered in Ireland, is a
tax resident of Bermuda.
• And in Bermuda, there is no corporate income tax.

Source: Wall Street Journal, October 2014

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Google – Market Power?
• Investigators at France’s tax agency, according to people familiar with its
probe of Google, argue that this structure is a facade and Google Ireland
does have a permanent establishment in France to sell ads
– “… when you look at the profit that they make in France, and the number of
customers they have, and the tax they pay, it’s outrageous,” says French
Deputy Minister for Digital Affairs Axelle Lemaire
– “We have a hard time believing that some 150 well-paid salespeople with
advanced degrees employed by one particular company in France are
nothing more than busboys for Ireland,” a French tax official, Alexandre
Gardette, said last year, without specifying which company he was talking
about
• Google Inc. Chief Executive Larry Page met with France’s premier and
quietly pressed home a message: Google has invested heavily in France
and is willing to do more

Source: Wall Street Journal, October 2014

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 CAGE and Arbitrage

• Daily Flower market auctions of 20

million flowers and 2 million plants in
Aaalsmeer of Netherlands

• Why not countries like India or China?

• Customers are in United States or

Europe

• Geographic distance matters for

perishable products

Source: Redefining Global Strategy by Ghemawat

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Bases of Cross-Country Arbitrage

• Cultural: country-of-origin effects à Image of Grolsch in the

USA, Levendary Café, Cultural aspects of Ethiopia; Zee
• Administrative: optimizing vs. different taxes, regulations,
institutional protections à Embraer, Endaka, Star TV
• Geographic: overcoming vs. taking advantage of distance à
Haier
• Economic: differences in product prices, costs of labor,
knowledge à Endaka, GE, TCS, Zara, Li & Fung

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Case:
Tata Consulting Services:
Selling Certainty

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Sources of India’s success in IT?

• Any other example like IT services in India?

Firm strategy
and rivalry

Domestic
Input
conditions demand
conditions

Related and
supporting
industries

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Global IT Industry & India’s Export

Source:
IT Industry Outlook 2019
India's export of ICT-enabled services: An all-India Survey : 2016-17

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Sustainability of India’s advantage

• Indian wages at ___% of U. S. levels

• Annual Indian wage growth – ?
• Annual U. S. wage growth – ?

• So, the Indian cost advantage will get wiped out within _____ years

• Exchange Rate:
– 2006: 1USD = INR 45
– 2012: 1USD = INR 55
– 2014: 1USD = INR 60
– 2016: 1USD = INR 65
– 2018: 1USD = INR 72
– 2021: 1USD = INR 76 (as of today)

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
‘Experience Certainty’ - Moving
Away from Arbitrage Strategy ?

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Latin America: ADDING Value?

• ADDING Value Scorecard of Pankaj Ghemawat

– Adding volume or growth
– Decreasing costs
– Differentiating or increasing willingness-to-pay
– Improving industry attractiveness or bargaining
power
– Normalizing (for optimizing) risk
– Generating knowledge and other resources and
capabilities

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Arbitrage and Sustainability

• Some things are worth doing even if they don’t yield sustained
competitive advantages—if doing without would imply sustained
competitive disadvantages - sustained competitive disadvantages?
• Data on past and current levels of cross-border integration suggest
that country-level differences are substantial and likely to remain
that way for the next few decades
• The most sustainable form of arbitrage is to create firm-specific
advantages at exploiting differences rather than simply relying on
country-level differences

Source: Redefining Global Strategy by Ghemawat

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Int
BM & HRM 2020-22 | Sessions 19

Global Supply Chain

Management
APALAK KHATUA, Email: apalak@xlri.ac.in

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Globalization of markets and production

Ghemawat (2007)
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Case:
Li & Fung
(Trading) Ltd.

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Li & Fung
North America Customers European Customers

Others

Approximately 2,000 customers in major developed markets

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Li & Fung

• Honk Kong based Global multinational - one of

the most extensive global supply chain networks

• Business depends on international differences in

labor costs and managerial capabilities

• Network of 2000 suppliers (in over a dozen east

Asian countries)

• Provides quality-conscious, cost-competitive,

consumer goods for customers around the world

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Global Supply Chain Management

• SCM = all operations involved in sourcing, producing,

transporting, assembling and finalising product / service

• Global SCM – MNE buys/receives inputs from anywhere in

world

• The puzzling question: Should MNE source inputs from own

unit located abroad or from external supplier? (recall the
‘offshoring’ story of Indian IT sector)

• International Outsourcing!

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Logics for International Outsourcing

• Should MNE focus on ‘core competencies’ and narrow the

‘boundaries of the firm’?
– Shrinking balance sheet raises flexibility, cuts fixed costs
– Take advantage of suppliers’ own competitive advantages
(economies of scale / specialization / technology)
– Modern IT systems help to integrate supply chains

• By outsourcing non-essential function, MNE freeing itself to

concentrate on its strengths

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Demerits of Outsourcing!

• MNE becomes dependent on suppliers / loses knowledge

• It might be problematic if:

– adverse currency / raw material price movements
– opportunism by supplier (forward integration)
– poor quality supplies
– supplier has negative image (CSR issues such as child labour)
– delivery uncertainty (lead times of long distance sourcing),
especially for Lean production or Just-in-Time production
systems

• Can be mitigated through ‘suppliers parks’ (immediately adjacent to MNE’s overseas plant) or RFID technology for real-time tracking/inventory management software

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 International Outsourcing Options

• In-sourcing – Regaining control over value chain, brings back in-

house function to reduce dependency/vulnerability
• Multi-sourcing – break outsourcing needs up to smaller contracts;
getting suppliers to compete
• Near-shoring – Reducing time-to-market; delays inherent to long-
distance procurement
• Bulk buying/purchasing: centralization of purchasing for all units
worldwide; improve bargaining power
• Requires high performance logistics to succeed; Growing
integration of SCM and logistics

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Li & Fung’s Global Network

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Complexity of Logistics

• Logistics happens at all levels of the supply chain

• Logistics requires specific knowledge about geography and
infrastructure, as well as documentary and regulatory
requirements, customs administration, banking practices etc.
• Most MNCs do not posses these competencies
• Patchy infrastructure/institutional contexts in many BRICs
• ‘Focused factories’ / fragmented SCM approaches lead to rise in
volumes of inventory shipments
• Complexities à third party logistics specialists
– Transport mixing shipments for different firms àlower costs
– Familiarity with platforms (i.e., export processing zones)

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Why does this company exist?

• Process orchestration - it is more than sourcing products or

components. It involves:
– Breaking up the processes/ stages of the supply chain
– Farming them out to different companies in different
locations
– Managing these dispersed processes

• It requires designing the entire supply chain, drawing players

from the networks, optimizing and managing the whole
process

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
An order from European retailer to
produce 10,000 jackets
We might decide to buy yarn from a Korean producer
but have it woven and dyed in Taiwan. So we pick the
yarn and ship it to Taiwan. The Japanese have the best
zippers and buttons, but they manufacture them mostly
in China. Okay, so we go to YKK, a big Japanese zipper
manufacturer, and we order right zippers from their
Chinese plants. Then we determine that, because of
quotas and labor conditions, the best place to make
garments in Thailand. So we ship everything there. And
because the customer needs quick delivery, we may
divide the order in five factories in Thailand. Five weeks
later we received the order, 10,000 garments arrive on
the shelves in Europe, all looking like they came from
one factory…
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 This is Dispersed Manufacturing !

Lining
Assembly Design
Taiwan
Chinese Mainland USA

Made BY Hong Kong Shell

Korea

Label, elastic, Filler

studs, toggle Chinese Mainland
and string
Hong Kong
Zipper
Japan

Production slicing: identify the best location/ country to undertake each stage of
process, adding value along the way & integrating the entire supply chain
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Organization & Management of Supply Chain

1. Take responsibility for the whole chain (whether you own it

or not)

2. Building the company around the customer

3. Think like a big company, act like a small one
4. Manage a loosely coupled network

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Discovering Value along the Supply Chain

Product Sourcing Logistics Wholesale

Information Management
Design Retail

$1 $4

The cost that is spread throughout the distribution channels

– the “Soft $3”

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Global Supply Chains, China & COVID-19

• Companies in the United States, Canada, Europe, and Australia have

been hit with supply chain shocks as the flow of materials from China
was disrupted by the pandemic. Additionally, in the USA ...
– Pressure from the employees who are wary of traveling to China
– Customers are concerned (rationally or not) about the safety of foods and
other items from the country
– Investors want to reduce over-dependence on China
– Politicians want companies to rapidly decouple from China
• USA-China trade war, have triggered a rise in economic nationalism
• Consumers will continue to want low prices (especially in a recession),
and firms won’t be able to charge more
• So, supply chains should be more resilient without weakening their
competitiveness. In this context, if China is falling in attractiveness,
what is filling its place? à The answer, it seems, is India!

Source: Shih (2020) HBR; Govindarajan & Bagla (2020) HBR

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 India: An alternative to China?
• Traditionally American executives have thought of India as a source
of spices, textiles, apparel, jewellery and handicrafts
• However, India has moved up in the value chain beyond these items
– The cabin of Marine One, the presidential helicopter is fabricated for Lockheed
Martin’s Sikorsky unit in India
– The Ford EcoSport was manufactured in Chennai, India for the USA market
– NASA is collaborating with the ISRO for their most expensive imaging
satellite ever to be launched, NISAR
– India exports shrimp, processed foods, and agricultural products to the USA
– 3.2 million Apple iPhones built in India will be exported from the country
– India already provides almost 40 percent of the generic drugs sold in the USA
• The only alternative country, apart form China, that can have the
scale, the skills and the space to service American demand
effectively is India. Source: Shih (2020) HBR; Govindarajan & Bagla (2020) HBR

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Sourcing from India: The USA perspective

• American companies don’t need to invest in land and buildings or hire

employees in India à These companies can start out as a buyer than as
an investor à This gives more flexibility, reduces overhead, and limits
initial risk
• India is a diverse country with a federal structure à Regulations vary
from state to state à Some states, such as Andhra Pradesh, Gujarat,
Karnataka, Maharashtra, Tamil Nadu, and Telangana, are more eager to
help local and global entrepreneurs than othersà Flow of goods can
still be a challenge
• While Indians do speak English, you still need a cultural interpreter
and business guide helping you
• India permits 100% FDI in most sectors, so you don’t have to share
your IP rights or trade secrets with a local partner

Source: Shih (2020) HBR; Govindarajan & Bagla (2020) HBR

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Improving Resilience of Supply Chains

• COVID pandemic has exposed many vulnerabilities in supply chains

and raised doubts about globalization
• Identify your vulnerabilities - whether your manufacturing capacity is
flexible and can be reconfigured and redeployed as needs evolve or
whether it consists of highly specialized and difficult-to-replicate
operations
• Diversify your supply base - The USA-China trade war has motivated
some US-based firms to spread their production base to Southeast
Asian or Latin American countries à However, logistics will be
complex
• Holding intermediate inventory or safety stock? However, what would
be the cost-benefit analysis
• Process Innovation? Automation?
• Revisiting the trade-off between product variety and capacity flexibility
Source: Shih (2020) HBR; Govindarajan & Bagla (2020) HBR

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Int

BM & HRM 2020-22 | Session 20

Aggregation Strategies
APALAK KHATUA, Email: apalak@xlri.ac.in

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Case:
ZARA: Fast Fashion

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Aggregation Strategies : Overcoming
Differences

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Aggregation
• Finding similarities among countries (more aggressively than
traditional adaptation strategies do, but less aggressively than
complete standardization would) and producing a standardized
products for these markets
• Various grouping devices to create greater economies of scale
than country-by-country adaptation à How to tap greater
economies of scale across national borders?
• Inventing and implementing cross-border mechanisms that
operates at level somewhere between individual country and the
whole world - Optimizing global production and supply
• However, aggregation also tends to increase organizational
complexity

Source: Ghemawat (2007)

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Intra-regional trade, 1958-2003

Source: Ghemawat (2007)

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Intraregional Goods Trade Flows, 2017
(Recap from earlier session)

The Future of Asia, McKinsey Report 2019

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Intraregional share of FDI
(Recap from earlier session)

The Future of Asia, McKinsey Report 2019

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Intra-regional Trade

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Regional Strategy Archetypes
Intraregional

Source: Ghemawat (2007)

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Aggregation Strategies

• Regional or Home Focus

– Nearly 90% of the Fortune Global 500 still in this category
– Companies, such as Toyota, stayed regionally or domestically
focused for long periods
– Regional focusers can run out of room to grow or fail to hedge risk
adequately
• Regional Portfolio
– Strategies that involve more extensive operation outside a single
region à faster growth in non-home regions
– Regional presence through acquisitions rather than organic growth.
For instance, GE’s build-up in Europe
– Some (not all) resource allocation and monitoring roles from
corporate HQ to regional entities such as regional HQ
Source: Ghemawat (2007)
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Aggregation Strategies

• Regional Hubs
– Spread fixed costs across the countries within a region
– Regional bases or hubs that provide a variety of shared resources or
services to the local (country) operations à be hard for any one country to
justify, but may still be worth investing from cross-border perspective
– Both more localized and more standardized à More responsive to
interregional variation due to proximity to suppliers and customers
• Regional Platform
– Spread fixed costs across regions: interregional platforms
– Platform is typically emphasized for back-end activities that deliver scale
and scope economies
– Not to reduce amount of product variety on offer, but instead to deliver
variety more cost effectively
– Worked better if the industry capital and R&D intensities are high

Source: Ghemawat (2007)

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Regional Strategy Archetypes
Intraregional Interregional

Source: Ghemawat (2007)

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Aggregation Strategies

• Regional Mandates
– Awarding of boarded mandates to certain regions to supply
particular products or to perform particular organization roles in
order to tap economies of specialization as well as scale
– For instance, Whirlpool sources most of its small kitchen
appliances from India à higher value to weight/bulk ratios
– Also, in consulting, engineering, financial services, and other
service business
• Regional Networks
– To achieve complementarities across different regions, but complex
– It involves integration as well as the division of labour among
resources located in different regions
Source: Ghemawat (2007)
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Industrial Models

• Different ‘industrial models’ have been dominant

paradigm at different times in history
• Henry Ford Model
– Mass production targeting standardization /efficiency
– completely tailor-made à same car for everyone
– “You can have the Ford T in any color, as long as it is
black”
– Hence, lower retail costs but product uniformity
• Alfred Sloan Model
– Flexible mass production
– Variant of Fordism but differentiates via postponement
or platform strategy
– "A car for every purse and purpose"

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
1924: A Car for Every Purse and Purpose

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 General Motors

• Historically vertically integrated and produced internally more than 50% of the
components (whereas it was less than 30% for Toyota)

• GM’s relationship with suppliers was ‘adversarial’ in nature à Trust between

GM and its supplier was low
– For instance, it was alleged, after a supplier helped GM to develop a new
part, while absorbing part of the development cost – GM then shopped the
proprietary design to competitors, searching for the best production prices
– In early 1990s, facing poor financial performances, GM started demanding
double digit price reductions à Combative policies with suppliers
– Harold Kutner, VP of worldwide purchasing in the mid-1990s, said, “I have
spent my whole life kind of beating up suppliers on their performance”

• GM’s internal manufacturing plants as well as suppliers’ plants were scattered

around the USA à didn’t have a face-to-face contact
Source: Buyer-Supplier Relationships by M.J. Enright
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Toyota

• Part of a keiretsu structure (similar to Indian business houses) à This

federation of companies is usually dominated by a large firm, such as
Toyota
• Suppliers are either affiliates (where the parent company has ownership
stakes) or independent firms
• High level of commitment between supplier and buyer thru’ equity
investment, implicit long-term contracts, employee co-location, and
customised plant investment
• Most plants were located within 35 miles of Toyota HQ and technical
centre à multiple JIT deliveries/day.
• Consequently, inventory-to-sales ratio in early 1990s was about 1/4th of
General Motors à Allowed them to efficiently implement its Lean
Production System – commonly known as Toyota Production System
Source: Buyer-Supplier Relationships by M.J. Enright
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Globalization @ Toyota

Phase 1: For its first 50 years, it followed

a strategy of regional focus: it had
essentially one production base, in Japan

Phase 2: But in the 1980s, it started to build more of a

regional portfolio by making its first significant
foreign investments in a second major region, in USA

Phase 3: In the 1990s, Toyota began to create regional hubs that were
meant to make regions more free-standing and less dependent on Japan by
putting in regional design centers and allowing, for the first time,
production of a limited number of locally exclusive models.

Source: Ghemawat (2007)

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Globalization @ Toyota
Phase 5: It began awarding some plants or regions
(inter)regional mandates for scale-sensitive parts
and systems such as engines and transmissions.
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
Phase 4: The 1990s was also roughly when a
series of strategic initiatives aimed at
achieving more coordination across the
regional building blocks—interregional rather
than intraregional strategies—began. Toyota
moved towards more (inter)regional
platforms by promoting “global cars”
(Corolla, Camry, Yaris, Hilux) with more
commonality across regions while
consolidating the number of major product
platforms.
Phase 6: It envisages an even more
extensive (inter)regional network going
forward—but one still overlaid on the
regions as the fundamental building blocks
because of concerns about protectionism
Source: Ghemawat (2007)
 Int

BM & HRM 2020-22 | Sessions 20

Balancing AAA Strategies

APALAK KHATUA, Email: apalak@xlri.ac.in

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Differences Across AAA Strategies

• Competitive Advantage: Why globalize at all?

• Coordination: How to organize across borders?

• Configuration: Where to locate overseas?

• Controls: What to watch out for?

• Change blockers: Whom to watch out for internally?

• Corporate Diplomacy: Which external issues might arise?

Source: Ghemawat (2007)

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Levels of Global Strategy

Source: Ghemawat (2007)

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Industry Expenditure Intensities

Advertising economies of R&D ratios relate to

scale operate primarily at the aggregation. It is more likely
local or regional level. Thus, to be characterized by global
in a way it captures local economies of scale or scope
responsiveness/adaptation

Labor expenses-to-sales ratios are

an obvious proxy for the prospects
of labor arbitrage. Might not be the
case of Oil companies
Ghemawat (2007)
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
AAA Competitive map of diagnostic imaging

Source: Ghemawat (2007)

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Int

BM & HRM 2020-22 | Session 20

A Quick Wrap up
APALAK KHATUA, Email: apalak@xlri.ac.in

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 INM Course Structure

• Introduction: What is Globalization? What are the myths?

• Module 1: Globalization & Role of Institutions
– Trade theory, Strategic Trade, WTO, Diamond Framework,
Exchange Rate Risks
• Module 2: Foreign Market Entry Strategies
– CAGE & ADDING Value Framework
– Entry modes: Low Resource à High Resource Commitment
• Module 3: Organizing MNCs: Strategy or Structure?
– Strategy-Structure, HQ-Subsidiary, Transnational, R&D network
• Module 4: Competing Across Borders
– Adaptation, Variations in ownership structures, Arbitrage,
Aggregation, AAA Framework

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Institutions Matter!

Aviation Industry: Embraer vis-à-vis Bombardier

Endaka + Japan’s Automakers

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Challenges of Entering Foreign Markets
M&A in Banking Sector (ADDING)

Entering
Ethiopian
Market

Globalization of Home
Brewing
Appliances: Haier & FDI
Industry
(CAGE)

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Strategy-Structure & Knowledge Management

Fast-food Industry HQ-Subsidiary

relationship: Levendary Café

Medical Equipment &

Reverse Innovation: GE
Healthcare

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Strategies to Compete Across Borders

Media: Zee à Star

Aggregation in
Fashion Industry:
ZARA & Li & Fung

Adaptation &
Ownership Structure of
Family Businesses

Arbitrage: Indian IT Sector & TCS

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
 Takeaways from the INM course
• This INM course was an attempt to explore different facets of complexities
faced by the top management of MNCs competing in a volatile global world!

• Anti-globalization/nationalist sentiment is impacting the FDI trends

• The institutional contexts are complex due to changing trade/immigration
policies, cultural diversity, and so on!
– Institutions are mostly evolving in developing countries
• ‘Rules of the Game’ are different across countries
• Global business environment is becoming more volatile after COVID-19
• The focus of this strategy course was Trade liberalization and its impact on
MNCs
• Trade liberalization is different from Capital Market Liberalization

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A
A Tale of 'Bogus' Tweet: In April 2013 more than £90 billion
was temporarily wiped off the US stock market after hackers
broke into the Twitter account of the Associated Press and
announced that two bombs had exploded at the White House,
injuring Barack Obama.
I N T E R N A T I O NSource:
AL M https://www.theguardian.com/business/2013/apr/23/ap-tweet-hack-wall-street-freefall
A N A G E M E N T . A PA L A K K H AT U A
 Thank You!
Hope the content of this INM course was
worth the trouble.

I N T E R N AT I O N A L M A N A G E M E N T . A PA L A K K H AT U A