International Business and Emerging Markets Challenges of Emerging

International Business and Emerging Markets

Challenges of Emerging Markets • Fast moving • Sometimes relationships have been “dislocated” through changes in systems • Not always easy to understand from outside what is happening • High opportunity but high risk

Importance of networks in emerging markets • Shift in marketing towards relationships, networks and CRM • Shift in international business towards strategic alliances • Shift in strategy towards win-win cooperation rather than zero-sum rivalry

Risk Assessment Techniques • Range of models from complex mathematics to “back of an envelope” • Designed to quantify risks • Largely focus on economic/political context • egs. . .

e. g: BERI - Business Environment Risk Index Published 4 times yearly by Haner Inc of Newark, Delaware. Now available on-line. Panel of local national experts assess 50 countries on 15 weighted economic, political and financial factors. 1. Factor score scale = 0 to 4 (0 = unacceptable risk, 4 = superior conditions) 2. Factor weights = 0. 5 to 3 with sum = 25. 3. Total factor score = 1(factor score) x 2 (factor weight) Total score = sum of all factor scores (3). Maximum 100. More than 80 = very attractive country. Less than 50 means unattractive country.

BERI 2 Factors Political Stability Attitude to foreign investor and profits Nationalisation Monetary Inflation Balance of payments Bureaucratic delays Economic growth Currency Convertibility Contract enforceability Unit labour costs Professional services Communications Local management Short-term credit Long-term loans Weights 3 1. 5 1. 0 2. 5 1. 5 2. 0 0. 5 1. 0 2. 0 Total 25. 0

Risk Assessment • Cannot easily capture “softer” issues • Open to bias - those who operate the model • • have to decide variables and relative weight May result in simplistic decisions based on numbers Uses historic data to predict future ttractiveness

Matrices • Can compare attractiveness based on two dimensions • Visual comparison of countries • May help rational assessment of risks and opportunities • egs. . .

Country Attractiveness Screen High 100 Selective Country Attractiveness Low 0 Selective Invest Selective Divest Selective Competitive Strength 100 High

Limitation of Matrices • Over-simplistic • Open to criticism of dimensions used to measure attractiveness – particular limitation of single-variate axes, multivariate axes better • Based on historic data, do not capture rapid shifts of current turbulent international environments

Scenario Planning Macrotrend Past Present Future

Relationships in Emerging Markets • A majority of market entry decisions involve international joint ventures, strategic alliances • Importance of building personal relationships and trust, for example in Eastern Europe, China (guanxi) • To explore some of the reasons why relationships and networks are important in emerging markets

Changing shape of the Value Chain TECHNOLOGY DEVELOPMENT SUPPORT FIRM INFRASTRUCTURE HUMAN RESOURCES MANAGEMENT PROCUREMENT MARKETING AND SALES INBOUND LOGISTICS SERVICE PRIMARY OPERATIONS Source: Michael Porter 1985 OUTBOUND LOGISTICS

Value Constellations Outsourced Activity C Core Competence 1 Outsourced Activity B Core Competence 3 Core Competence Outsourced Activity A Second-tier relationship B Knowledge Relationships The Firm Core Competence 2 Outsourced Activity D Core Competence Second-tier relationship A

Two schools of thought • Nohria: – “Anyone reading what purports to be network literature will readily perceive the analogy between it and a “terminological jungle in which any newcomer may plant a tree. ” – This indiscriminate use of the word network may reduce its status and be so loose that it ceases to mean anything

What is network used for? • To describe relationships within, between firms and the context in which they operate. • To describe a type of organisational structure • To describe leveraging of social connections for business purpose • For “network marketing” = pyramid selling!

From relationships to networks • Two different perspectives – Markets as networks – Networks as an organisational form

Two schools of thought… • Networks as an organisational form – What are they and what are their characteristics? • Markets as networks – Building positions in an interconnected world

Markets as networks • All firms are connected to each other, directly or indirectly • To analyse networks we either simplify or describe complexity • e. g: Simplify:

Understanding B-2 -B Relationships Environment Atmosphere Customer Supplier Interaction Source: Turnbull and Valla 1986

A Networks as Markets Perspective Actors Activities Håkansson and Johanson 1992 Resources

Actors • Actors: May be connected through direct or Indirect relationships • Cunningham and Culligan define network as relationships with a certain degree of closeness – a focal network • Blankenburg classifies relationships into: – Competitor (c ) – Vertical (v) – Internal (i) – Other

Which Relationships matter? • “It is easy to lose sight of the relationships to the customer’s customer or not even to make an effort to look one step beyond. • The relationship is there whether you choose to acknowledge it or not. • As our customers live by their customers, it is an intelligent marketing strategy to help satisfy their customers. ” • Evert Gummesson “Total Relationship Marketing”

The compromise… • Define boundaries of the focal network • All those relationships within a certain degree of closeness to the central relationship (Cunningham and Culligan 1991) • Identify the strategic challenges: – Understand network structures – Stability versus change trade-offs – How to build successful network positions?

Network levels • Lee identifies different levels of relationships: – Macro – Inter-organisational – Intra-organisational

Bofors Example • In groups consider the following questions: – What different effects did the Bofors scandal have on Swedish firms in India – Why do you think the effects were so different on these different firms?

A Networks as Markets Perspective Actors Activities Håkansson and Johanson 1992 Resources

Building Network Positions Macro-level Network Interorganisational. Networ k Intra. Organisational. Network Position

Activities • What type of exchange? – – – Economic Legal Information Technological Social • Some exchanges are “hard” contract or financial • exchanges, other are “softer” social exchanges. Social exchanges considered important to avoid conflict and build trust

Resources • Mattsson distinguishes between: – Internal or “marketing” investments to build capabilities/relationships – External or “market” investments to build network positions • Firm may have joint/split control over resources. • As networks are dynamic, it is not always easy to work out where best to commit resources

Networks and Change • Tightly-structured networks: – Known actors – Well-defined positions – New entrants succeed by filling gaps or “positions” left open by existing competitors – High “visibility” • Loosely-structured networks: – – Dynamic Many new entrants Changing positions of main actors Highly opaque • Emerging Markets are very loosely structured, opaque networks

Successful strategies from a markets as networks perspective • Involve understanding the actors, activities and resources in the network • About building successful network positions

References • • Markets as Networks – Johanson, J and Mattson, L-G (1988) “Internationalisation in industrial systems: A network approach” in Hood and Vahlne (ed) Strategies in Global Competition, Croom helm. – Arnott, D and Bridgewater, S (2002) “Internet, interaction and implications for marketing” Market intelligence and Planning, 20, 2 – Bridgewater, S (1999) “Networks and Internationalisation: The Case of Multinational Corporations entering Ukraine” International Business Review. Networks as an Organisational Form – Thorelli, H (1986) “Networks: between Markets and Hierarchies” Strategic Management Journal, 7: p 37 – 51 – Jarillo, J-C (1988) “On Strategic Networks” Strategic Management Journal, 11: 497 – 499 – Miles, R E and Snow, C C (1986) “Organizations: New Concepts for New Forms” California Management Review, 28: 62 – 73 – Lorenzoni, G and Ornati, O A (1988) “Constellations of Firms and New Ventures” Journal of Business Venturing, 3: p 41 – 57