International Business

Lecture 1 - Analyzing Industries Global Environment

Key topic: Business strat in geographic context
- What is international strat?
o Global value creation growing the advantage a company has with respect to its competitors by
capitalising on similarities and differences across geographic contexts.
o Business strategy is in the context of one product, while corporate strategy looks at market strategy.

- How do you take advantage of differences and similarities among countries, to develop or sustain value?
- 2 core assumptions
o Orgs expand into new markets when doing so will allow them to general more business then you would at
home.
o If you look at the data, the data is not particularly consistent with the idea that leaving home market
generates profits/business.
o Data shows companies make more profits from domestic opportunities
The answer is not obvious the risks you take moving away from your context are clear but often
violated.

Liability of foreignness
- LOF is the vulnerability facing orgs that venture outside of their familiar territory
o Regulations
o Caps on foreign ownership
o Costs of communication
o Cost of adaptation
o Learning curve
Most issues are institutional. For example, China puts a cap on level of foreign ownership. Brexit
euro places regulations on financial mechanisms.
These are costs of doing business in different context.
Cultural differences.
o If you tried to jump into the French mkt e.g. you have to learn how they do that.
That may cost to learn. Margins may be smaller as a result.
At the same time, there is also a liability of consistency.

Paradox of consistency core assumption of the class

o A company that thinks it wants to move out of its home market usually has found some way to create
and capture value in its home market.
o Most often, a company considering moving to a new market is going to take that competitive advantage
and figure out how to do it in that new market.
o That results in the paradox of consistency
E.g. NFL has been interested in expanding into Europe. They thought that their success in the US
market could be carried across to Europe.
History behind the sport
Competitive advantage international context is cost. Arbitraging across cost.
The whole is greater than the sum of the parts
Brand loyalty. Tying products together.
Competitive advantage can come from cost or a whole list of intangibles. That have to
come together as a package.

- Strategy
o Strategy allows us to achieve competitive advantage
o What is strategy?
Corporate decision-making made by the corporate suits of the business.
 About long term choices that create and sustain a competitive position.
Creating superior value (i.e. having a competitive advantage) attracts and retains
customers
The strategy is what people in the Corporate suite do specifically, they come up with
the long-term strategic planning that determines how to make a company succeed in the
long term.
Sun Tzu Chinese general 12th C. Very famous because wrote a book on strategy
which laid out the differences between what is strategy and tactics with respect of
warfare.
o Good because differentiates Grand strategy, strategy, and tactics.
o Bad war context to destroy an enemy. Business can involve game theory.
Better analogy is an ecological one? Surely, no due to Darwinism.
How to integrate is probably a better analogy. You want to remain
sustainable.
Strategy is not about winning, it is about how to survive in a
competitive environment.
A strategy in a military context allies and axis each had a different strategy.
o Nato v Soviet Union
Different strategies etc.
Different to tactics, strategy is high-brow and over-arching. Tactics are short term moves.
o In a business context,
Grand strategy choosing which advantage to build and where to deploy this advantage.
Strategy positioning the firm with respect to what and to whom you sell and its value chain
Tactics winning a client, selecting a supplier, and pricing a product.

- Porters 5 forces
o What are the threats either in the value chain or the product market that will make a product successful or
not.
o Define: what is sustainable competitive advantage?

- Value capture
o See slide
 Customer first piece of creating value customer needs to pay less then what they would be
willing to pay.

o What happens in between is what we are most interested in. We want to maximise what we are getting
from the customer and the supplier.
o The difference between the P bought and P cost to make is the value created.
o Value capture is the % that the company is taking. You take that middle piece out how big is the wedge.
Therefore, the value created less the value captured by the customer and supplier, is the value captured by
the intermediary.

Types of competitive advantage

o Competitor with dual advantage e.g. Apple.

o What is the difference between value capture and profit?
o Many factors influence willingness to pay 1st in market, advertising, and marketing.
o A company has a competitive advantage when it captures more value than competitors

- There are essentially 2 generic strategies:

 - Corporate Strategy
o Horizontal or vertical diversification or integration
o Has to do with the scope of activities
o GM different to Suzuki.
GM have made decisions as to what to make etc.

What we want to do in this class is assume that companies have figured out the strategy in their home market. We want to
look at them move into foreign market. We want to see liability to foreigners.

3 Generic International Strategies

- Deploy Deploy depends on similarities. Companies seek to aggregate demand across multiple markets
o Key here to segment the mkt into different customer groups (e.g. luxury) and figure out how to find that
same customer group
LVHM Moet champagne no matter where you go the marketing/image is the same in
whatever country. Same as Apple. Stores all look the same etc taking a similar segment of each
country.
- Develop companies seek arbitrage knowledge across countries opposite to Deploy Develop depends on
differences in the sense that you arbitrage across them.
o Companies create and capture value by identifying where a potential new capability resides and
integrating those capabilities to improve products or reduce costs.
o Vodafone acquiring knowledge by purchasing a small Japanese phone company. Commented [LM1]: How is this knowledge different to
- Deepen companies use their international presence to make their core competitive advantage more sustainable. companies that have knowledge but go into new countries
Going inter effects their competitive advantage, but in same way it is the defining feature of their competitive that do not have knowledge.
advantage.
o allows an organization to enhance existing products or create new ones (increasing willingness to pay), or
improve its production or procurement (decreasing costs)
o Most commonly, this involves arbitering labour costs.
o Aggregating production in order to create economics of scale and scape.
Logoplaste the company aims to be global as it uses its common suppliers regardless of where
they export.

Comic Case Study

- How does this company make money?
o What is its strategy?

- Jazzs competitive strategy:

o Competitive differentiator
- Stenzs
o low-cost competitor

What is the logic of purchasing Stenz. We are in a context of eat or be eaten.

 - Deepen creating common platform
- Develop incorporate some aspects of Strenz defensive product to differentiate Jazzs
- Deploy untapped high-end market

Within a product market. Jazz would have muddied their strategy. Commented [LM2]: Is there no right answer?

1. Come up with three arguments for Jazz buying Strenz...

Economies of scale
Hostile takeover lower purchase price
Larger market
Diversification
Higher operating margins for Jazz

2. ... and three arguments against the purchase.

High end Jazz untested in new region

LECTURE 2 READING

Mauro F. Guillen & Esteban Garcia-Canal,

How to Conquer New Markets with Old Skills

- Companies afraid to venture overseas

o They are aware that they do not have cutting-edge technologies, dominant brands, or novel products
- However, research shows that companies lacking strong technological knowledge or brand assets can still
succeed in overseas markets by drawing on other capabilities.
o Spanish multinationals are doing well abroad without technological or brand-related advantages.
o These Spanish multinationals are making acquisitions to extend their reach but focused them on just a few
industries and geographic areas (Deploy they find similarities in small market segments and move into
them). They then strengthened their positions by drawing on their homegrown political and networking
skills project execution knowledge, and vertical integration expertisecapabilities that many companies
in emerging markets also possess.

Their strategies
- As they went global, Spanish firms tended to avoid the risky and expensive strategy of opening their own
facilities abroad, instead favoring alliances, joint ventures, and acquisitions.
- Spains multinationals also tended to focus their foreign expansion efforts by geography. Nearly 90% of Spains
outward foreign direct investment has been aimed at Latin America or Europe.
- Found similarities - Latin America was a region where Spanish companies had natural advantages, such as
cultural similarities, shared language, and connections, and nearby markets elsewhere in Europe afforded
opportunities to increase sales and develop new capabilities.

Skills they have from succeeding in the Spanish market- ALSAs movement in China
- They learned not to react passively to policy risks but to actively manage relationships with local officials and
forge personal connections to gain information that allowed them to anticipate shifts.
- Look for similarities here they LOOK FOR AREAS THAT HAVE HIGH REG &RED TAPE China was
particularly desirable: Spanish firms have deliberately chosen to operate in countries where government officials
possess broad powers to grant licenses and issue regulations, precisely because of their political expertise.

ALSA considered this joint venture a good platform from which to learn how to operate in China and build relationships
not only with local partners but also with government administrators, who have to approve every project developed in the
country.

Speed
- Speed was once denounced as a sure way to ruin a company attempting to internationalize.
 - Companies with overseas ambitions should attain scale quickly, gaining invaluable experience and building
stronger competitive capabilities. In a fast-paced international economy, the risks of falling behind or failing by
waiting too long to break out of the home market exceed the hazards inherent in any process of globalization.

Competitive advantage
- One of Spanish enterprises most potent global weapons has been project executionspecifically, the ability to
set up plants or complex facilities quickly and at low cost.
- Ability to work in environments with a lot of read tape and regulations
- Speed - Spanish multinationals, however, have demonstrated the value of moving quickly on more than one front.
In a fast-paced international economy, the risks of falling behind or failing by waiting too long to break out of the
home market exceed the hazards inherent in any process of globalization.

Lecture 2 - Pursuing Economies of Scale and Scope

Key topic: Pursuing Economies: Scale and Scope

Economics of business

- Should the company go into the new market?

o Cost structure etc
o Culture
As you move into a different culture what degree does the company understand the culture.
Can you arbitrage/take advantage
o Political aspects
o Marketing making on global scale
o Ethics

- We will focus on the low-cost approach. All companies have a competitive advantage which allows them to fit
into the ecosystem of their new environment. Some companies differentiate their product to increase the
willingness of the public to pay. Low-cost, willingness to pay remains around the same, but the company captures
value by lowing cost.

- How do companies go about lowing costs?

1. Cheaper factor inputs using market power or arbitrage strategies lower costs of labour and market. You
capture more value and generate greater profit.
2. Creating economics and scale and scope - Using existing labour and capital more effectively.
Economies of scale
Cost savings realised from growing the volume of sales of a product.
Economies of scope
Cost saving realised from growing the number of products a company sells.
 o Varying just the colours of a pen factory. Adding products are making initial
product more valuable.

- Factor inputs of production

o Labour
o Land and infrastructure
o Physical capital
o Production inputs
Components and raw materials
OEMs they put components together
Some of these are fixed cost items and variable costs this becomes important when looking at
economics of scale.
Short run vs long run costs
o short run costs are the costs that you occur during the lifetime of a physical
factory.
o Fixed Costs: Costs that dont vary with the number of goods produced in the short run.
o (Sunk Costs: Costs that cant ever be recovered if production is interrupted. E.g. advertising costs or
educating staff in new technology.
o Variable costs: Costs that do vary with the number of goods produced in the short run.
There are variable costs that are somewhat sticky. In certain contexts, you can treat labor as a
variable cost. In other contexts, sticky between change of demand and labour. This can be
because of regulation.

- Average cost v marginal cost

Average Costs: Total costs per unit produced
Marginal costs: Change in total cost when another unit is produced.

- Diminishing Returns
o The Short-Run is defined as the period of time over which a firms physical capital is fixed.
o Since short-run costs are determined by the productivity of the variable resource in the short-run (labor),
diminishing returns assures that at first Average Total Costs decline as output increases.
o But beyond a certain point, diminishing returns sets in and the additional output attributable to more units of
the variable resource declines. Inevitably, a firm will experience higher and higher average costs as its output
continues to grow, since its only able to vary the amount of labor used, not capital. I.e., marginal costs
increase with additional output.

At start of production, cost drops because of productivity of workforce. Then costs will increase. E.g. adding more
students to a class the returns will diminish. The flexible cost will outstrip the capacity of the fixed costs. At the point
marginal cost increases, Sciences Po would then buy a new building or cut acceptance rates.
- However, in the long run you can learn how to spread fixed costs over larger quantities of product.
- The Long-Run is defined as the period in which a firm can adjust all its inputs: land, labor and capital.
- Economies of Scope arise when fixed costs are spread over larger quantities of production.
- At first, efficiency is improved as the firm grows, but at some point it becomes too big for its own good and costs
start to rise as productivity of resources (land, labor and capital) is inhibited due to the firms complexity and size.

Core Competencies
- Should you add segments to your core competencies. E.g. adding a marketing segment. Will this bring returns to scale
or not.

Difference between core competencies and competitive advantage

- Your core competency is whatever you or your company does that generates revenue. This could be the same for
others in your industry that do the same thing. A competitive advantage would be something that makes you better at
providing that service or product, when compared to others with the same core competency.

Daewoo

Strengths
- Diversified
- Effective @ low cost
o Arbitrage
o Top down management
- Effective at trade
- Negotiation strength

Economies of Scope it can deploy the same strategy in different contexts at a broad range of products.
- Internally financed via an investment bank
- Core competency is what makes you competitive it gives you a competitive advantage.

Why go international?
- Extend a products life style
- Gain easier access to raw materials
- Opportunities to integrate

READING LECTURE 3

Pankaj Ghemawat, Arbitrage: Exploiting Differences: Strategies for Global Value Creation

- Arbitrage is a way of exploiting differences.

Cultural arbitrage
- Favourable effects related to a country or place of origin.
 o E.g. French cultures image of affluence and quality and US based fast-food chains. Also perisstant
association of Brazil with football, carnival, beaches and sex all scream youth is a case of cultural-
arbitrate potential that companies have just begun to recognise.

Administrative arbitrage
- Legal differences and political differences. Tax differentiation. Fox News in Cayman Islands.

Geographic arbitrage
- No longer as pertinent. The great trading companies have declined. However, some companies have found ways of
staying in business.
o E.g. Li & Fung use parts from different countries to make products much cheaper.

Economic arbitrage
- Differences in labor costs and capital costs
- Variations in more industry-specific inputs such as knowledge or in the availability of complementary products.
o E.g. cheap labor

Arbitrage can add volume, decrease costs, improve bargaining power

Lecture 3 Cultural Arbitrage

Key topic: Cultural Distance

Supply chain
- A supply chain is the series of steps that a product or service goes through from raw materials to the final customer
connected through transportation, information, and financial relationships.
- Terminology around supply chain should be able to be used with facility. Upstream/downstream/vertical/horizontal
etc.
- Imagine a river moving from left to right with goods moving from left-to-right and money is getting handed back
right to left. But, we are thinking about the consumer as the end result of this.
- When we talk about forward integration we are moving towards the customer. Aka downstream and the opposite is
upstream, which is moving towards raw materials or in a service industry ideas, we are moving backward.
- While vertical integration avoids the transaction costs of using the market, it imposes an administrative cost
- Not all companies should vertically integrate e.g. UPS should not make their own vans as the transaction costs
avoided by UPS will be trivial compared with the inefficiencies incurred in manufacturing its own vans. Thus, most of
the worlds leading retailersWalmart, Gap, Carrefourdo not manufacture.

- This gets confusing because it assumes only a linear framework. When we talk about vertical vs horizontal, we flip it.

In economic terms, we turn it. SO now when the talk about horizontal and vertical vertical is moving from the
bottom to the top. If we want to talk about moving horizontally, one oil company buy another. If Exxon buys a
pipeline, they are moving in a vertical direction towards the customer they are integrating forward (downstream)
towards the customer.
 .

Each step on the way generates value. If gas is sold for 2 euro, it probably took 10c to get, 10c to transport,
etcrefineries capture value, transporters etc. Total price is value created, the proportion created every step of the
way is the value captured. Refineries may capture more value because they have more power we want to create as
much value as we can, and then capture as much as we can.

Value Chain
- Not the supply chain. Value chain is the set of activities that a company undertakes to create value and capture value.

- Value chain occurs within a company. As shown above, it is basically the supply chain within the company.
o Inbound logistics how do we get whatever we are producing to market
o Operations
o Outbound logistics we need to get it out the door
o Marketing and sales move towards the customer
o Service

The diagram above is arranged form left-to-right: Away from customer ---- toward customer (even in value chain)
- If we think about the value chain inside a company, we need to look at the business strategy. The business strategy is
the positioning yourself vis--vis companies in your part of industry with respect to the choices you make when
emphasising particular activities in the arrow above.
- Companies pair the factors. Pairing them in different ways leads you to a set of core competencies. That is to say, you
create a capture value through the activities of your value chain BY the emphasis you put on different ones, the way
that you learn and adapt over time to compete and survive in an industry, leads you to a certain set of core
competencies e.g. some companies may pair operations with technological development (strong in R&D and strong
in manufacturing). They are pairing up this stuff so that they have a SUSTAINABLE advantage over their
competition.
o Others might not produce anything, they might just source things, put parts together and market it. E.g. you
can buy the whole bike or you can go to a website that sources different bike parts and market them they
dont produce anything. Competitive advantage, how they compete, is due to the companys successes in
the certain core competencies.

Core competencies

- What we have is a supply chain with different kinds of producers or companies each has its own value chain (set of
activities which they concentrate). This allows them to compete against other countries in the same position in the
supply chain.

We create value along the way, you capture value based on your Core C, by doing that you are creating and
capturing value in a sustainable way.

Flashback
- As we saw last week, within your CCs, you may choose to engage in a deploy approach to internationalisation.
- So your business strategy will be based on how you position yourself vis--vis other competitors.
- You may be a differentiator, meaning consumers are willing to pay more for it. Or you could position yourself as a
low-cost producer, or position yourself to focus on a particular niche.
- Whatever your business strategy is if you take a deploy approach to internationalisation you are doing 2 things:
o 1. You are aggregating your CC across different international borders. The goal there is to take what you
are good at and deploy it across markets where your CC is going to have a sustainable ROI. And then you
need to pair that with adaptation. So you aggregate your core competencies to realize economies of scale and
scope. You are in an industry whereby if you create more of it or if you pair production items you are
aggregating economies of scale and scope across international boundaries.
o However, there will be adaptation need. So in additional to core strategy, on the edges: how much of the core
strategy is really core (you cant get rid of to maintain competitive advantage), and how much can we change
and tweak (add or subtract to adapt) etc.
So the key insights form that part of the course is to find similarities across markets. If you are
doing well in your own market, what are similarities in the other mkt that will allow you to deploy
your approach and allow you to adapt probably minimally so that you can handle it.
 2. Then it becomes a judgement call for example, Daewoo they had a strat but made the wrong judgement call as
to how much they were willing to adapt. So they could have taken their core strat and deployed it and adapted it a
little bit, but to be successful they would have had to adapt it too much in order to keep it worth their while.

We now move to the develop approach

We look at the Develop approach opposite of the deploy approach. The deploy approach is about finding similarities
across markets that you can exploit, but the develop strategy involves finding differences across markets to create and
capture value and find arbitrage opportunities.
3. Finding different kinds of differences
a. Differences in willingness-to-pay
b. Differences in knowledge arbitrage approach can take advantage of tacit knowledge tacit = knowledge
not written down. Differences with respect to knowledge.
i. Bought SMS company in Japan that had knowledge over consumer habits.
ii. Companies have R&D in Silicon Valley. Just something in the air in that geography that
they want to take advantage of.
c. Differences in costs obvious if cheaper to transport from one country rather than another

What is arbitrage?
- Starting point when looking at arbitrage is the strong assumption that comes out of Economics.
o Philosophy of realism. Economics as a discipline begins with idea that there is a fundamental truth that is
underlying whatever we perceive as reality. If we get rid of filters that get in the way that stop us from seeing
the truth, we can then see the true value of something.
o Thus, the law of one price - the efficient mkt hypothesis states that when you assume things such as: no
market transaction costs, no transportation costs, and everyone has the same knowledge (no one is hiding or
obscuring information) then what SHOULD happen is that ultimately an object, aka this bottle of water,
should have one price regardless of the market.
Eugene Fama explored this theory using the stock market as these variables had less effect.
4. Spiel on Bloomberg terminals.

Example of arbitrage

If 1.00USD=0.75GBP only in London no risk

Arbitrage works because theory of Law of one price does not actually exist. Violations with the conditions that stop the
law of one price allow for arbitrage.
- Technology lets us get close to the law of one price, but not perfectly there. Small arbitrage opportunities surface.

Globalization

- Globalization as a world we are moving towards a situation where we are supposedly coming close to a context
where we are getting the law of one price. This not only in money markets and stock, but also in the real world.
Transportation costs are coming down from shipping improvements etc. Info costs and info differences across
different markets are becoming less.
o He uses the example of how we are science po are being taught with the same info as anyone else at any other
credible university.

The strong version of globalisation implies cross-border convergence of:

- Info
- Transportation
- Transaction
- Culture
- Administration
- Geography
- Economics

On top of that, there are a variety of other factors that can lead to opportunities of arbitrage (see reading). If you are in
finance, youd be focused on the top 3 (Info, transportation and transaction).
- When we talk about arbitrage, we have to look at ALL the factors listed above.
- Globalisation = all of these are supposedly converging towards some sort of uniformity. This is a theory, but in
reality, there are differences within these factors that allow one to arbitrage.
- Thomas Freidman The World Is Flat whatever can be done will be done. Either it happens by you, or too you.
Peruvian guy who makes plates and sold on the computer. He then found out that they could be made cheaper in
China. He needs to go ahead or someone else will and it will be done to him.
a. Potentially wrong naive for us to think world is becoming flat, as we need to take advantages of the
arbitrage opportunities to make money.

Culture

Economics approach the world with an ontology of realism. That there is an underlying truth and correct price of
something underneath the layers of variables. Through Price we can engage in commensuration if I want to say this
bottle of water has value to me given my preferences, and this table has some kind of value or my time in front of all you
has some valueetc. it would be difficult to say that my time would be worth X amount of bottles of water. How do we
do that in an efficient way? We use price. And the whole idea of the law of one price etc, is that the actual value of
everything we see around us can be reduced in a concrete way to its exchange value, its price, and in that way we can
translate from one thing to the next.

However, if we approach something from a cultural perspective, we reject the idea of realism and instead we favour an
ontology of relativism. The value cannot be determined outside the context in which it exists. The bottle of water has 1
meaning in one context, and therefore has a particular value, and if you take that to another context, it is valued at
something else.

Value of the same car or carpet will be different depending on the context in which it exists. Commented [LM3]: Thoughts - Difference between value
and market value? Water in a country with contaminated
water.

He uses our decision to come to France as a potential example of the strategy of arbitrage.

Cultural Arbitrage: French Grands Cru

Examples of cultural arbitrage strategies
- Opportunity to go to Beijing Prof went to wine tasting.
- The wine in France was way less expensive than in China Commented [LM4]: How do market forces influence this?
Lack of supply? Cost of bringing it over, tax.
France
-Currently, China levies three taxes on bottled wine
imports, namely customs duty, value-added tax (VAT) and
consumption tax.
-Prevailing rates of tax (payable in Rmb) on bottled wine
imports:
-1. Customs duty: 14%
CIF x 14%
-2. VAT: 17%
[CIF + customs duty] x 17%
-3. Consumption tax: 10%
[(CIF + customs duty) / (1-10%)] x 10%

Looking at different companies - Weve talked about competitive adv of different companies, countries have competitive
advantages as well. Different countries do better at things that other countries. For example, France is good at is
renowned for its engineering and luxury. Well focus on luxury big brands include; LVMH and LOreal etc.

What is it about France that make it particularly good in luxury?

- Political-Historical English during 100yr war exported wine back to England. Then Louis XIV.

Wine glass example

LOreal
1909: Founded in Paris
1959: Licenses products in the US through Cosmair Beginning of channeled marketing
1988: Focuses its business into five categories: Hair color, Hair Care, Skin Care, Color Cosmetics, and
Fragrances
1996: Acquires Mabeline (US), Unisa (Chile), Jade (Germany)
1999: Acquires ethnic cosmetic companies: Soft Sheen (African origin) and Carson Products.
2000s: Acquires Mininurse (China) and Kiehls (US), the Body Shop (UK) and Shu Uemura (Japan)

Competitive advantage - LOreal

1. Core Competencies - What activities in its value chain does it emphasise in order to create and capture value
sustainably that is the medium-to-longer term.
a. Targeted marketing
b. Clear brand channels - distribution
c. Glamour
d. Strong R&D
i. 3.5% of revenues into R&D
2. If we were to characterise its Generic business strategy = DIFFERENTIATOR certainly in early days, it was
creating and capturing value by creating products that were increasing consumers willingness to pay.
3. Initially, their Core Competency was marketing (glamour) and creating products that pushed the envelope.
 4. From 1959 to present, LOreal has engaged in the process of internationalisation in 1959 they licenced their
products in the US (through Cosmair). LOreal Realised glamour only gets them so far, so through Cosmair they
develop different channels.
a. 1988 they focus into 5 channels
b. At this point they are still LOreal (and licencing).
5. Then in 1996 Acquires Maybelline (US), Unisa (Chile) and Jade (Germany) at the end of 1990s they move into
the ethnic markets.
6. 2000 they then purchase smaller boutique brands like Kiehls (US) and Body Shop (UK)

7. Ultimate question what kind of international strategy approach are they taking?

When they move into a non-French market, how are they creating more value than the value that is being created
by local producers.
- What is LOreals philosophy does it have when it enters new markets in terms of generating more value than local
competition?
- Galmour has always been apart of LOreals image, so it might be adding French Glamour. But it may not
be. Is that what they are selling?
- What else? It is a turn-around artist. The company is pretty good at adaptation.

Strategy is deploying strategy

- They move in, throw a lot of cash, and do a lot of R&D.
- Marketing
- Targeting
The core of what they are doing is core. They are super good at marketing, they know how to channel, they know how to
glamourize, they know how to introduce high R&D their idea of glamour at the beginning has changed. Are they selling
France in Brazil? It depends on the channel. If they are in France it will be marketed towards the French and this would be
different for each context. Therefore, they have a formula and they then inject it into a new context. But ARE THEY
TAKING ADVANTAGE OF ARBITRAGE OPPORTUNITIES (and thus also using the develop strategy?)

Core is a Deploy strategy

- They are taking in economies of scale and scope
o By becoming bigger and more global it becomes cheaper for them to do what they do.
o Global brand allows them to take advantage of economies of scale. Dont have to advertise as much.
o Slight adaptation necessary, but not as much.
o Economies of scope eyeliner and lipliner etc complementarism. They can advertise them together and
produce them together.

Brazil Example
We want to learn and take the knowledge that we have developed and invested in in Brazil and bring it to France. We are
going to take a reputation and when we target French teenagers, we are going to adapt to the French market by taking
advantage of differences in cultural perceptions and cultural knowledge.

READING LECTURE 4

Reading: Jordan Siegel, Borrowing Institutions Module Note

- Prior work in strategy has typically held that companies view institutions in their home markets as stable and difficult
to change.
- Prior teachings often focuses on the need for companies to innovate in terms of product and held the companies
themselves to be constants.
- However, recent studies show that decisions to borrow, adopt or arbitrage foreign institutions have led to dramatic
increases in companies resource access and/or profitability across a range of institutions.
- Recent experiment by Siegel and Larson (2009) has shown that institutional characteristics are influential in
determining he relative profitability of a company as it introduces it cores business model to different countries.
o Study found that institutions were responsible for an economically large 18% country to country variation in
nominal ROA.
 o Institutions are the formal or informal rules of the game that affect companies competitive behaviour and
resource access.
Formal institutions corporate law and securities law. Informal meritocracy and egalitarianism.
o Research shoes that weak institutions prevent companies from receiving outside financing. Thus, they remain
smaller and less advanced. Small markets, less publicly listed companies, low valuations etc.
- South Korea American vs Japanese hiring of women after the democratization of Korea. Japan hired women
according to their core processes back home, while the Americans hired and promoted women far more than back in
the US. The Japanese multinationals were more successful.

- In summary companies do not only make money via unique product market strategy. They also can secure
sustainable long-term competitive advantage by borrowing formal and informal institutions from other countries.

Lecture 4 - Borrowing Institutions as a Source of Competitive

Advantage
Aggregation: performing the same strategic activity across a diverse set of foreign markets.
Adaptation: modifying an existing business model to foster success in a foreign environment.
Learning: using knowledge from one market to improve ones product or service.
Arbitrage: exploiting persistent differences between markets to create value.

Arbitrage strat has to involve some kind of crossing of the boarder.

- If you are buying resource and selling it - that is arbitrage. E.g. something in one country is worth a lot more in
another country you are taking advantage of arbitrage opportunities. If you use a cultural selling point and sell it in
another country.

This week it should be more simple, when you think about how a company arbitrages across different regulatory
environments.

In the news analysis

- Tesla may be about to get a big win in China.
- Tesla are not taking advantage, but aggregating across markets.
- Blackrock moving into Tel Aviv this is learning strategy.

Business operate 2 environ simultaneously.

 however, the competitive environment is not the only environment you operate in. Last wk, we talked about the
cultural environment, there is also the non-competitive environment, such as regulators, legislatures, courts etc. This is
usually to ensure social stability. Allows 2 groups who have conflicts to settle their differences in a structured legal way.
- In the political process, you have a lot of other forces that are not purely logical.

Institutions
- Markets differ with respect to the formal and informal rules that enable and constrain economic interactions.
o Formal institutions are written in law and regulation and are legally enforceable. E.g. labor regulations,
financial disclosure regulations, enforcement of legal contracts.
o Informal institutions exist as standards of practice and rules of thumb that are enforceable through the
decision of potential partners to engage in transactions. E.g., Acceptable practice with respect to bonuses and
pay differentials among employees.

Economic law of 1 price. Under perfect mkt conditions we should expect over time for 1 price to emerge. There should
be no differences in price over geography and time. Price should reflect its actual value.
- Collapse of the Soviet Union ended the great 20th century debate between communism and capitalism setting the stage
for the era of globalization.
- Marx had predicted a dictatorship of the proletariat. But the Washington Concensus suggested, instead, that the end
game of history is a combination of liberal democracy and market-based economic principles
- Francis Fukuyama said end goal was probably western liberal democracy and free-markets. This idea became
important in guiding international economic policy in the 1990s in the beginning stages of globalisation. Out of this
comes the creation of the WTO and strengthening the OECD. If we see that there is a convergence towards 1 set of
global institutions wrt the free flow of people, currency etc across borders- then we should push towards that
- Principles of this WTO trade should be:
o Trade will be without discrimination
o Trade should be freer, with trade barriers negotiated downward
o Trade should be predictable
o Trade should be more competitive
o Trade should be more beneficial for less developed countries, encouraging development and economic reform
- This draws on aggregation we take what we are good at and we deploy it. Economies needs to look more and more
similar so that companies will have an easier time doing what they are good at across all markets.
- This idea was challenged, however.
o There have been distinctions as to how capitalism should be organised.
o Suggests that economic development is a matter of maturing markets involving the gradual extrication of
economic from political/cultural influence.
o Is there really an ideal toward which all societies are converging? If so, what determines the nature of that
model?
 o There have long been distinctions among so-called liberal western democracies with respect to how they
organize their version of democracy as well as their version of market-oriented capitalism.
- There was an analysis as to the variets of capitalism.
o The nature of economic institutions is shaped by the meta-strategies of companies and their need to
overcome various collective action problems:
Financing
Industrial relations
Education and training
Coordination of inputs
Social welfare
Innovation
o Core idea of this argument (mid 1990s) was that there were 2 stable forms of capitalism that emerged it was
logical to have differences between capitalistic societies. Two modesHall and Taylor referred to them as
ideal-types which defined the ends of a spectrumhad emerged that not only address these various
coordination needs, but that also generate positive feedback mechanism among the various coordination
requirements.
Liberal Market Economies: Firms coordinate with other actors in the economy primarily through the
mechanism of competitive markets characterized by relatively short-term relationships and formal
contracts e.g. United States these markets favour radical forms of innovation.
(a) Liberal Market Economies: firms coordinate with other actors primarily through competitive
markets, characterized by arms-length relations and formal contracting. Relationships among
firms, between firms and unions, and for financing are mediated by market mechanisms,
especially price.
(b) Because of its fluidity and the pressure to deliver short-term profits, the liberal market
economy model is good at creating new, often radical, innovations.
Coordinated Market Economies: Firms coordinate through long-term strategic interaction.
Institutional arrangements create a context in which credible long-term commitments are
possible with regard to information, monitoring and enforcement between firms, unions and
providers of financing e.g. Japan or Germany
(a) Coordinated Market Economies: firms coordinate through long-term strategic interactions.
National institutions create a context in which it is possible to generate credible long-term
commitments with regard to information sharing, monitoring, sanctioning and deliberation
among firms, unions, providers of financing and others.
(b) Because it facilitates long term (patient) returns on investment and stronger possibilities for
coordination in the labor market, the coordinated market economy model is good at
implementing incremental innovations that refine existing product.

Institutional complementarities
- It is useful to go a step further to define more specifically what I mean by social structure. Any social arenaa
market, an organization, this school, the sports league you compete inhas a social structure. Certain people trust
each other and distrust others. Certain people are obligated to others or depend on them for one reason or another.
Certain people resemble each other or have a similar background or recognize each othernot because they have met
previouslybut because they wear external symbols which represent a particular identity or affiliation. These are all
components of social structure because they are the stuff of relationships.
- The relationships you personally are party to is your immediate social neighborhood and of course, the people you
know are to some extent likely to know each other. Those people have their own social structures and unless you are
living in a prison or some other total environment closed off from the rest of society, their personal social
neighborhoods are likely to overlap with yours, but only partly. They will likely expand beyond. Aggregating over all
of the relationships in a particular place and time results in a lattice work of relationships. Again, the real stuff here is
not simply who knows who but what is contained in those relationships: trust, obligation, dependency and identity.
- Nevertheless, what we can readily observe and measure is the structurethe networkthat these relationships create.

Functionalism and the Law of One Price

- Change happens when existing rules no longer function. New rules adapt to new context.
Rational: Institutional change happens when rational people get together to fix rules that dont produce optimal
outcomes.
Evolutionary: Change happens through evolution. Rules that arent competitive die and are replaced by more
robust ones. Countries that have a set of institutions that are not adapted to what global competition has created
will die off.
You GET A convergence by these 2 approaches.

The Iron Law of Oligarchy: Sticky Institutions

Power, the ability to influence the decisions of others, is distributed unevenly within social structures.
Those with power seek to maintain institutional rules that maintain their power. Institutional change happens
when the power structure can no longer reproduce itself leading to a struggle for control.

If you list yourself of the Ghanaian stock exchange - -

Facilitates other countries arbitrage activities.

Increase market share at home while enhancing its positioning as bridge to West Africa.
Position Expand EPACK by registering it in the US or EU.
Possibly merge with RenCap and/or seek a Western investor
Become an asset manager for Ghanas pension fund
Expand into Nigeria and other Anglophone Countries
Form a strategic partnership with Nigerian Banks.
Raise financing to expand into the Nigerian market
Open more offices in Anglophone countries
Expand into Francophone Africa
Encourage companies in Francophone countries to list in Ghana.
Raise funds by emphasizing the safety of Ghana-domiciled investments
Partner with telecoms company to build West Africa infrastructure

READING LECTURE 5

Mauro F. Guillen, What Is the Best Global Strategy for the Internet?
 Lecture 5 - Global Coordination and Market-making
Key topic: Two sided-markets, platforms and standards

What is the goal of strat figure out how to generate and capture value over a period of time.

Today we focus on difference between create and capture.

- What do companies do to capture it? At the same time, I want to add the last of our broad categories of strategy to this
context.

Arbitrage taking advantage of differences across borders.

- Cultural arbitrage - People are willing to pay more for prestige e.g. French products, in China.
- Economic arbitrage - Regulatory differences

Coordination/market making.

- In general, we have been talking about one-sided market. You buy something and sell it to someone else. Mkts dont
always work like this. A company acting like a MM looks at one side of the market and coordinating those activities
across to another market. What makes this interesting? There is a need for coordination in market making for actors
on both sides of the mkt. This is something youd talk about in a regular strategy course. What makes it relevant for
our course, once we get out of the national context, we likely will run into a situation without strong rules and/or
market norms and there is a need often for some kind of actor to step in.
Product supply chains
- So far we have done physical tangible products.

- Wholesaler is an intermediary. The real money is made in the intermediary. Where the supply chain narrows (see
below). They are able to extract profits out of the supply chain. They are capturing value the most.
- This depends on the market players.

One-Sided Market Strategy: Intermediation and Disintermediation

Disintermediation figuring out how to go around the bottle-neck. E.g. Bikes are modular, no company makes all the
parts for a bike. The entity along the supply chain the puts the bike together is avoided. If you purchase the parts online
- Popular disintermediate strat is for online companies to sell the products before the intermediary.
- Also trader joes goes to the vineyard itself. They skip over the wholesaler who would add value for itself.

How does this relate to market making? Lets look at the 2 assumptions we have relied on to this point.

Assumption #1 supply chains move left to right

Some supply chains move in both directions

Not always clear the direction of the supply chain.

Assumption #2 Independence of Demand

- Under normal circumstances, one assumes that individual demand is independent of others demand for a product.
- Example: The joy I get from a pedicure is independent of the joy others get from a pedicure.
- However, you can violate this. Counter-Example: My ability to talk to someone on the phone assumes they have a
compatible phone. In order for me to have demand to exist there needs to be a tipping point at which enough people
have joined to demand to make it worth my own while for network effects for everyone to be on the one network.

These assumptions are not true

- In two-sided networks, cost and revenue are both to the left and to the right, because the platform has a distinct
group of users on each side. The platform product or service incurs costs in serving both groups and can collect
revenue from each, although one side is often subsidized.

Two-sided markets and platforms

- Market making role between customers and shops. What credit cards shops will use depends on their access to
customers. Credit card networks provide a platform for banks, customers, and vendors. Also, game platforms. Malls
are platforms.
- HBS is market making between students and professors.
- We have options to go to in Paris e.g. clubs. We are going to go to the clubs that your friends are at. If you friends are
at X, then you are going to go to X. This is same-side network events.
o At the same time, they are creating a community on the producing time.
- A classic example of a two-sided market: a matrimonial agency
o Needs men and women

Market makers use platforms

- MSP enable direct contact between shoppers and suppliers
- Multi-sided platforms exist because there is a need of intermediary in order to match both parts of the platform in a
more efficient way. Indeed, this intermediary will minimize the overall cost, for instance, by avoiding duplication, or
by minimizing transaction costs.
- This intermediary will make possible exchanges that would not occur without them and create value for both sides.
- Two-sided platforms, by playing an intermediary role, produce certain value for both users (parties) that are
interconnected through it, and therefore those sides (parties) may both be evaluated as customers (unlike in the
traditional seller-buyer dichotomy).
- Because of network effects, successful platforms enjoy increasing returns to scale. Users will pay more for access to a
bigger network, so margins improve as user bases grow. This sets network platforms apart from most traditional
manufacturing and service businesses. In traditional businesses, growth beyond some point usually leads to
diminishing returns: Acquiring new customers becomes harder as fewer people, not more, find the firm's value
proposition appealing.

Network Externalities
If you put these assumptions together you get network externalities.
- Because of what economists call network effects, these platform products enjoy increasing returns to scale, which
explains their extraordinary impact.
- Network externalities exist when individuals demand is interdependent. That is to say, when an individuals
participation in the market depends on others participation.
- Same-side Network Effects
My willingness to join one side of the market depends on the number and type of participants on the same side of the
market. My willingness to use iPhone messenger as opposed to their apps is because my friends will also be on it. If
they are not, I will switch.
o More players, more online interaction
o More sellers, more competition. You can exclude users to avoid negative network effects.
o Competition for dates on match.com or competition between suppliers in an online auction market
- Cross-side Network Effects
The willingness to join one side of the market depends on the number and type of participants in the other side of the
market.
o CNG not as successful because too few fueling stations this reduced cross-side network effects.
o Can be negative, consumers reactions to advertisements

- For example, in marketplaces such as eBay buyers and sellers are the two groups. Buyers prefer a large number of
sellers, and, meanwhile, sellers prefer a large number of buyers, such that the members in one group can easily find
their trading partners from the other group. Therefore, the cross-side network effect is positive. On the other hand, a
large number of sellers mean severe competition among sellers. Therefore, the same-side network effect is negative
Pricing in two-sided markets
- One side can subsidize the other. Traditionally price is restricted. Min = marginal price per unit. Max = Customers
willingness to pay.
- You should subsidise side that is price sensitive.

- What does this imply for pricing? Low pricing initially to attract both sides.
o Asymmetric pricing structure to reflect different elasticities: The price charged to one side of the market is
lower the more responsive is its demand and the more valuable it is to the other side of the market. E.g.
making application more expensive for women by a dollar will have a greater affect than making application
more expensive for men.
- Instead of products moving from left to right, with platforms they move both ways.

2-sided markets meet on Platforms

Often as a result, one side subsides the other

De Beers
- The supply chain for diamonds is straight forward
o Mines sorters (De Beers) Cutters Tiffanys
DBs has been able to insert itself within this supply chain at most parts. Mainly upstream.
- Early on DBs learned that it had to do more than production.
- Monopoly but they are restrained because it is a luxury item.
- Controls supply
- If they are simply extracting value form the supply chain how is that possible?
o They have relationships with governments
De Beers is not just an intermediary in the market. For many yrs, despite ethical failings, and overstepping the bounds of
legality, there are elements of DBs strategy that were both legitimate and worth paying attention to.
- De Beers has to be adding more value to the rest of the supply chain than what it is extracting.
- They produce their own diamonds, and sort them etc.
In order to hold position for so long, that have to provide value across supply chain.
- So how do they do that?
o Reduces transaction costs through standardization, pricing, and allocation
o Systematizes the otherwise subjective categorization of stones
Standardized a lot of the process removed subjectivity from supply chain.
o Advertising and PR increases customer demand for diamonds
Not so much an adaptor, their goal is to create and rise demand across different boundaries in order to
aggregate and get economies of scale.

Upstream
- Creating favourable loan terms (they are able to leverage and arbitrage their own power) they pay cash immediately,
creates a financial service immediately.
- Arbitrage differences in cost of capital they can borrow at lower rates. Cost of capital much less in comparison to a
mine in a country with weak institutions. The cost of capital to them is so much lower, they can arbitrage this.
- Stabilization of demand downstream demand goes up and down (tastes on diamonds) on the producer side it
doesnt matter. De Beers will stockpile diamonds.
- Stockpiling shifts risk to CSO removing a lot of the upstream market risk.
- Leverages knowledge and networks teaches mines the best practices etc.
These are generally positive upstream factors. This is because they own and sort a high % of the mines.

Downstream
- One stop shopping you dont have to deal with dangerous conditions etc you can deal with De Beers in riskless nice
office in London.
- Facilitates infrastructure create rules for buyers clubs etc create certain rule and enforce those rules. They dont
own the clubs, but creating rules.
o This point it seems like that are creating and then pushing that value back in to the SC. But it is not all
positive.
- Restricted volume increases both price and costs
- Restricting buyers this lowers power
Intermediary goods flowing left to right. You are creating /extracting value by restricting flow of goods and playing
some role in arbitraging.
Platform provider De Beers playing that role creating value on both sides of the mkt
Monopolist does not have to deal with that, just intermediary control

De Beers is taking from downstream to subsidise upstream. This is an aspect of nearly all two sided markets. E.G if you
are looking at apps on your iPhone, apple subsidies your ability to do that. The IOs is free. If you use your Credit Card
the retailer is spending more money to use it then you are. Apple shifts subsidiaries to more difficult aspects of the market.
Anti-trust questions arise are they subsidising one part of the market with other or are they playing the monopolist
where they are extracting value in a market that is essentially one-sided.
- Are you paying the full cost or is the other side of the market subsidising it.
If they were just creating value on both sides they would be platform provider.
De Beers eventually lost their market power. Online sales.
- Australian argyle
- Internet
- Blood diamond movements = bad PR
Strat creating and capturing value sustainably over a period of time. They are creating it. How do they capture it? By
being the intermediary and they can use their market power to extract even more from the downstream side of the
market they are shifting value from the upstream and into their pockets.

De Beers move into the diamond selling business.

- They now have store fronts. Instead of controlling everything, they are creating one monopoly from start to finish.
They have their own mines, but they create favorite supplier system they are accepting competition we awill
only work with our own mines and some others.
- Relatedly, firms may forward integrate to a point in the supply chain at which they have persuasive advantages. For
example, producers of products for mass retail markets can forward integrate into retail distribution.
- Vertical control to Horizontal control

Take-away
- In the absence of rules, regulations, and standards that can reduce transaction costs between buyers and sellers, and
that can incentivize market participants to invest optimally in technology and marketing, certain companies can step
into the role of the global market maker.
- But even the strongest companys strategies can have an expiration date.
Innovators dilemma companies stick with a strat that is working they dont switch. They have sunk cost in their
existing strategy. Companies often stay in their existing strat. However, their shift was still impressive. They still exist
today. Entire industry has changed and they were able to stay alive.
- De Beers got out of market-making to stay alive. Google, Apple, Uber, Bitcoin etc these are all companies that have
made $ through market-making and platforming. There is an absence of rules when these companies move into other
industries.
- In the absence of rules, regulations and standards that can reduce transaction costs between buyers and sellers, and
that can incentivize market participants to invest optimally in technology and marketing, certain companies can step
into the role of the global market maker.
- But even the strongest companies strategies can have an expiration date.

READING LECTURE 6

Sophia Kusyk, Learning to Navigate the Rough Seas of Ethics

- Not only illegal activity but also unethical legal activity. Although legal it corrupts our institution and leadership.
- Common vales transcend borders so do ethical values transcend legal values? If bribery is legal in a context, should
companies do it.
- Siemens bribery standard operating for their management. Siemens argued that there was simply no other way of
securing the contracts, and that everyone bribed gov officials.
- Is using local law enough for your business?
o Law takes into account the various cultures. If something is permission in one culture, it may be cultural.
Why disrespect that. It would be unethical to assert that your cultural values are the correct ones.
- Relativism
- Individual subjectivism

Lecture 6 - Ethics in Global Business: Corruption and

Exploitation

https://drive.google.com/drive/folders/0BzPh4D61ytdJNWV5bDEwWFN3Y2s
- Goldman Sachs is a market maker, but also investing their clients and their own money. The question here is is that
an ethical or legal violation.
- Daewoos actions in Uzbekistan although case was dismissed
- De Beers accused of supporting civil wars in Africa Blood Diamond De Beers now argues that it does its work
ethically now. It could no longer sustain its existing business model. It now owns the mines and now can be more
ethical. While before if was acting through middle men.
- It is also consistent with the change in strategy that is going on.
- LOreal named most ethical company in 2017
o If you look into the institute that determines this it is a for-profit-consultancy one of their clients is
LOreal.
- True: The international context offers many opportunities for engaging in unethical behavior. Better put: the
international context creates many contexts where the ethics of a decision are unclear.
o Arbitrage profiting of lax standards. Is that ethical? Two-sides to the coin. While there are instances where
this is obvious, the ethics of a decision is not clear.
- Ethics is about your judgement and your judgment will be based on the degree that you have thought about your
own standard.

Joe Fresh
- Low cost strat
- How does it create value
o Arbitraging labor costs
Originally Joe Fresh was able to get labor costs down. Since then, labor costs have increased.
Companies now more to Bangladesh where they can make it cheaper than China.

Distributive Justice/Utilitarianism
- Society is a system of cooperation for mutual advantage. The central question is how benefits and burdens are to be
distributed.
- Resources should be given first to those who need it most. Then, each person should be given their due with the goal
of maximizing happiness for the most.
- LAG =least-advantaged group
- MAG = most-advantaged group.
- J = equal justice line, where primary goods are evenly distributed between both groups.
- D = a distribution where the most-advantaged group has just enough primary goods to maximize the benefits of the
least-advantaged.

Egalitarian Justice
- Equality of happiness is the ultimate moral ideal. All people deserve equal rights and opportunities for happiness.
- Society (especially government) is responsible for furthering and promoting equality.
- It is permissible and perhaps necessary to restrict individuals liberty to promote social equality.

Tragedy of Commons
- A dilemma arising from the situation in which multiple individuals acting independently and rationally consulting
their own self-interest will ultimately deplete a shared limited resource even when it is clear that it is not in anyones
long-term interest for this to happen.
o E.g. sheep in field problem
- Goal is to do just enough of corporative behavior to ensure your total happiness and the survival of the group.

Organizational Considerations
- Organizational Leadership and Culture can legitimize or stigmatize unethical behavior.
- Performance Expectations may encourage managers to act in an unethical manner despite official policy or even
cultural stigma.

When strategy and culture dont match, e.g. strategy is cost and in conflict with quality etc, pushes people to unethical
behavior.

Many professionals are licensed and bound by professional standards defined and enforced by the field.
Doctors
Lawyers
Accountants
Why not for business?

Aggregating paired with adaptation

Arbitrage
Market-making