CASE STUDY

Case: Wipro Ltd. - The New face of Global Competition

1. How did outsourcing work to Wipro improve GE’s ability to compete in the global
economy? Does such outsourcing harm or benefit the American economy?

Answer: The given case “Wipro Pvt. Ltd: The new face of global competition” is a genuine
example of globalization and its benefits. The case gives a brief picture of Wipro Ltd. which was
once a jumbled conglomerate selling everything from cooking oil and personal care products to
knockoffs of Dell microcomputers and light bulbs and its transformation to a giant multinational
technology provider with its ties with General Electrics in a decade. The case gives us ideas of
how globalization and outsourcing activities are important and how these activities can transform
the fate of any company within short time.

GE entered into the Indian market in the late 80s with a joint venture with Wipro Ltd. that sold
varieties of products to the Indian market and had just revenue worth $15 million to make and
sell GE ultrasound scanners. The benefits were enjoyed by both parties but for GE, it got the
market, a most important factor in the business that too the second largest consumer market in
the world. By this outsourcing GE also benefitted from a very cheap labor force than its
American base which only took $10,000 a year per labor compared to $64,000 a year in the U.S.
with similar expertise and experience. GE also got a valuable benefit from local culture,
knowledge, language, rules and regulations, political conditions, business environment etc. that
were very important steps for GE’s success in the global market. Moreover, by contracting out to
its costs and hence benefitted the Indian IT market with even more competitions.

However, such outsourcing has both good and bad sides both for the company and the American
economy. As the GE was a company with headquarter in the U.S.A., GE was able to provide
innovative products to the American market in a very low price. This also contributed to more
competitive market in the America.

The main drawback this agreement gave to the U.S. economy was the loss of the opportunity of
the employment for the American people. Though, GE was getting low cost resources and labor
talents but the American economy was losing money.
2. Did GE help to create Wipro? How?

Answer: Wipro Ltd. was once a jumbled conglomerate that produced almost every product. It
had no specialized market. The agreement with one of the biggest American multinational, GE
proved to be a fortune for the Wipro. There is no doubt that GE helped to create Wipro or more
specifically saying, Wipro became a technology giant because of GE. When GE was a confused
producer, GE was in search of a partner to introduce ultra scanner with low cost in India. At a
time when GE made as yearly revenue of just $15 billion, it agreed to partner with GE to
produce the scanners in India. Wipro got a chance to concentrate its business in the technology
sector benefitting from the low cost Indian resources and labor talents. As Wipro was producing
scanners for GE, GE contracted its works out to other IT companies that helped to increase the
competition in the market and hence Wipro got the chance to improve its efficiency. Wipro must
thank to GE that it not only copied the Six sigma model to enhance its operating efficiencies but
also gained international multinational expertise. Wipro learnt valuable lessons of doing business
internationally that resulted an annual sales growth of 25% for Wipro from 1997 and strong
relationships with the renowned multinational companies like Nokia, Sony etc. Therefore, it can
be said that GE was an important factor for the success of Wipro to become a technology giant.

3. If India’s IT companies continue to prosper, over time what will you think will happen
to the income differential between software programmers in the U.S. and India? What
are the implications for the American economy?

Answer: In 1989, GE entered into the Indian market with a joint venture with Wipro that was a
striving company at that time in the large Indian market. When GE came up with the partnership
with the Wipro, the most important benefit it got was cheap labor and materials in the Indian
market. When GE had to pay $64,000 a year for an experienced software programmer in the
American market, the same programmer with same experience only took $10,000 a year which
was a huge amount for Indian workforce at the time when per capita income was about $500 a
month in India. Moreover, Indian universities and colleges produced a huge mass of talents each
year hence, it was very easy for GE to hire talents at low cost. In this way, GE got a competitive
advantage on the labor cost than other multinational companies. This was the matter in the 90s.
Today, Indian market is one of the most rapidly growing global markets in the world. As time
has passed, the difference between the incomes has reduced significantly. The Indian market has
kept progressing and prospering and hence the Indian labor are also getting a higher payroll as
per their talents. However, the American still earn more due to their quality of life, power and
strong economy and markets.

As discussed earlier, American economy has both advantages and disadvantages with this deal
between GE and Wipro. From the perspective of income, the implication of this deal to the
American economy will be that the potential job opportunities will decrease in the American
market. As India provides more talents with less cost, the demand of the workforce in the
America will go down and consequently their income as well. In the long run, the income in the
two countries may come very close.

4. Since 2000, Wipro has moved abroad, establishing sales offices in 35 nations and design
centers in nine. Why is Wipro doing this? What would happen to the company if it did
not follow this strategy?

Answer: After the valuable lesson from GE that Wipro got and its improvement of the operating
efficiencies to the Six Sigma model, the case tells us that the annual revenue and profit Wipro is
increasing every year in double figure and is continuing to dominate other multinational
technology providers. The Wipro has increased its workforce to 39,000 worldwide and works for
some of the biggest multinational companies like Sony, Nokia, HP, etc. The company has direct
sales to 35 countries in the U.S. and the Europe. Wipro is advancing and expanding rapidly
because Wipro wants to go global and become a technology grant in the world. Wipro wants to
forget its past and wants to expand its market and customer base and hence earning more profit.
Wipro is still searching for huge potential partners so that it can give quality service at low cost.
By hiring local talents, Wipro is also contributing in improving the employment of many
countries. Wipro wants to be a true global multinational companies that despite of its global
appearance still appears local to its customers.

If Wipro doesn’t exploit the opportunities it has got and doesn’t expand then there’s no way
Wipro can attract or increase a large customer base. They will be compelled to do the routine
work everyday with same technology, workforce. The increased sales and profit that Wipro got
was only possible by this strategy and without this strategy, Wipro can’t bind ties with huge
companies and provide their services all over the world. Wipro would only be a normal India IT
company striving to earn small revenue without global strategy.

5. What does the rise of the Wipro teach you about the nature of the global economy in
the first decade of the 21st century?

Answer: The given case gives us an excellent example of how globalization paves a way for any
company to gain continuous success as Wipro Ltd. The case teaches us that global market is
dynamic and ever changing. The market today has become more and more competitive and each
and every company tries to introduce and succeed in the market by different strategies say it as
innovative, quality products or low cost or differentiation etc. Wipro’s case teaches us that luck
doesn’t knock twice and a company should utilize each and every chance it gets to prove its
worth in the market. In this case, Wipro utilizes similar opportunity with a tie with GE that
changed the business and market of the Wipro. Wipro changed itself from variety producing
companies to a technology provider. By learning from GE, Wipro enhanced its operating
efficiency with Six Sigma and provided low cost quality service that excelled Wipro in the
world. With important ties with large multinational company, Wipro also got successful to grow
as a huge IT multinational company. Its unique growth and expansion strategies are keys to
prosper. Therefore, this case teaches us that, in today’s dynamic, ever changing market, a
company can only excel and come up as a global company with its unique, explorative vision,
mission and strategies that can challenge its global competitors and guide the way towards
success as like Wipro.
 Case: Logitech

1. In a world without trade, what would American consumer have to pay for Logitech's
products?

Answer: International trade allows us to expand our markets for both goods and services. It is
the reason why you can pick between a Japanese, German or American car. As a result of
international trade, the market contains greater competition and therefore more competitive
prices, which brings a cheaper product to the consumer. According to question in a world
without trade, the cost that American consumers would have to pay would be very high. If the
United States were to build a product entirely domestically, the retail price would not be feasible
to most consumers. With trading in place it allows for economies of scale. Factor of production
is major determinant of cost. In the United labor cost is very high that leads to high cost for the
product. For example, Wanda retails for $40, of which only $3 is the production cost from china.
This $3 cost would rise immensely if production was in the United States because the American
economy demanding high wages. So that the trade helps to lower the cost to the American
consumer

2. Explain how trade lowers the costs of making computer peripherals such as mice and
keyboards.

Answer: The trade helps to lower the costs of a product. As we saw in the previous question, if
the United States were to build a product entirely domestically, the retail price would not be
feasible to most consumers. With trading in place it allows for economies of scale. In 1776
Adam Smith noted that if a country could produce a good cheaper than other countries, it had an
absolute advantage in the production of that good. based on his argument, in order to maximize
national income, countries should produce and export surpluses of what they have absolute
advantage and buy whatever else they have from the rest of the world. Similarly, the theory of
comparative advantage states that if countries specialize in producing goods where they have a
lower opportunity cost – then there will be an increase in economic welfare. Hence, comparative
advantage gives a company the ability to sell goods and services at a lower price than its
competitors and realize stronger sales margins. So the technology can be developed in one
country, the ergonomics in another country, the production in another country, and the assembly
in yet another country. The shipping costs are much less than it would be to perform these tasks
in one country. This is called absolute advantage, where someone is great at one thing. With this
in mind you will get a product that has the best resources available at the lowest cost, which is
comparative advantage. Finally, specialization is where everyone is doing what they do best and
pulling their resources together to make one incredible product.

3. Use the theory of comparative advantage to explain the way in which Logitech has
configured its global operations. Why does the company manufacture in China and
Taiwan, undertake basic R&D in California and Switzerland, design products in Ireland,
and coordinate marketing and operations from California?

Answer: Logitech is one of the world leader companies in global. The main of purpose of
Logitech is to provide user-friendly interfaces with agility and low cost. Logitech is
differentiated from competitors by its continuing innovation. In 2003 it introduced 91 new
products which are high brand and recognition and its strong retail presence. As well as Logitech
is very brilliant when it comes to comparative advantage. For sustaining in the industry, the
research and development program is very important. Similarly the company needs to consider
for the cooperative advantage also. Hence, it does basic R&D work in Switzerland with 200
employees, its headquarters are in Fremont, California with 450 employees as well as some
R&D, the ergonomic designs are developed in Ireland, and the products are manufactured in
Taiwan and China. The comparative advantage is that it is the most cost effective to break up the
business in many different countries that specialize in a certain job.

4. Who creates more value for Logitech, the 650 people it employs in Fremont and
Switzerland, or the 4,000 employees at its Chinese factory? What are the implications of
this observation for the argument that free trade is beneficial?

Answer: Most people associate the research and development (R&D) function of a company
with the invention of new products. Whilst this is very important, the development of existing
products is of equal significance because consumer preferences are continually changing. The
task of product research and development is to come up with the goods and services that meet
the needs of tomorrow's customers. Research and Development (R&D) is becoming a key
element of many company and, when well planned and used, enables a business to generate
increased wealth over a period of time. Based on case 650 employees in Fremont, California and
Switzerland are involved on research and development program. Ti is obviously, That 650
employees in Fremont, California and Switzerland create more value for Logitech. It is where all
of the R&D and designs are developed. The 4,000 employees of China add $3 to the Wanda
product, which is almost nothing in comparison to the remaining $37. Free trade is beneficial
because labor costs can be brought way down.

5. Why do you think the company decided to shift its corporate headquarters from
Switzerland to Fremont?

Answer: As we know that America are specialized in R&D. This is very important; the
development of existing products is of equal significance because consumer preferences are
continually changing. The task of product research and development is to come up with the
goods and services that meet the needs of tomorrow's customers. Research and Development
(R&D) is becoming a key element of many company. The headquarters were moved because of
the company’s global marketing, finance, and logistics operations. That is what Americans do
best.

1. To what extent can Porter’s diamond help explain the choice of Taiwan as a major
manufacturing site for Logitech?

Answer: There are four parts to Porter’s diamond: (1) factor of endowments, which is a nation’s
position in factors of production such as skilled labor or the infrastructure necessary to compete
in a given industry; (2) demand conditions, which is the nature of home demand for the
industry’s product or service; (3) relating and supporting industries, which is the presence or
absence of supplier industries and related industries that are internationally competitive; (4) firm
strategy, structure, and rivalry, which are the conditions governing how companies are created,
organized, and managed and the nature of domestic rivalry. Taiwan’s factor of endowments was
that it had a science-based Industrial Park in Hsinchu. The demand conditions were that the
Taiwanese were already trained to deal with technology. The relating and supporting industries
were that Taiwan was the best as building technology as the lowest cost. The firm strategy,
structure, and rivalry were that Taiwan had no domestic rivalry; they provided the lowest cost.
7. Why do you think China is now a favored location for so much high technology
manufacturing activity? How will China’s increasing involvement in global trade help that
country? How will it help the world’s developed economies? What potential problems are
associated with moving work to China?

Answer: Among the various factor of production labor is one. Due to labor cost, the cost of the
product becomes high. Chinese laborers are some of the cheapest in the world. Even though the
workers are not treated very well, they are starting to rise up and demand more wages. The
increase in foreign trade for China has helped to increase their economy. The world’s developed
economies will benefit because of the globalization of production. The potential problems are
that Americans are losing jobs to foreign markets. Therefore the China is more favorable for the
manufacturing activities. That really decreases the cost of the production.
 Case: Subsidy Dogfight - Boeing versus Airbus

1. How might the repayable launch aid for Airbus change its decision making on launching
a new aircraft? What are the potential consequences for (a) Boeing, (b) airlines, and (c) the
profitability of both Boeing and Airbus?

Answer: If Boeing’s arrangement with the Japanese companies can be outside the agreed-to
subsidy limits, Boeing may have such advantages:

• Boeings get the first mover advantages

In other hand that Airbus would not be able to catch up the cots and first mover advantage.
Unless they can be assured of substantial orders, they may not want to take the launch aid. If
that is the case and Airbus chooses to not go forward on this project, Boeing will have a decided
advantage. Airlines in general will have fewer choices, Boeing may gain share against Airbus
and its profitability levels may increase at the cost of Airbus. That is, if the venture is successful.
If it is not, if the market does not want this new aircraft, then Airbus will be at an advantage.

2. When Airbus originally received government aid back in the 1960s, it was a new
enterprise. Today it is the global market share leader in the commercial aerospace
business. How do gains in market share effect the legitimacy of claims for subsidies?

Answer: When airbus originally received government aid in the 1960s it was a new enterprise,
should Airbus require assistance now Airbus could not use the same argument.  Today Airbus is
the global market share leader in the commercial aerospace, Airbus legitimacy of claims for
subsidies now would need to argue on the basis of sustainability of local jobs and the creation of
new jobs in the airspace industry.  Airbus would probably want to demonstrate that if they
couldn’t complete with companies like Boeing local jobs could move abroad. Airbus would
probably point out that Boeing receive major assistance from the US government, assistance
which provides Boeing with an unfair advantage that needs to be compensated by subsidies from
the EU. The EU may argue that any assistance will cancel out any net benefit investors will
receive. Regulations or legislation like this used to restrict imports and boost exports ultimately
hurts consumers as this strategy upwardly influences the cost of imported products. As
experienced by Boeing in the 50’s Administrative policy helped provide subsidies to help Boeing
gain first mover advantage in global industries where economies of scale are important. 
Subsidies help the Boeing to lower costs which in turn assist those producers to compete against
potential foreign imports like Hawker de Havilland which would mean less British imports
entering America and if so those imports would become more expensive consumer pay more
consumption often less. These policies were also Strategic, as America had the desire to become
the world’s leader in aircraft manufacture and aerospace technology development.

Thus when there is increase in market shares than the legitimacy of claims for subsidies
weakens. Over the long term, sustained subsidies function to support inefficiencies.

3. Do you think that R&D contracts from NASA and the Pentagon benefit Boeing’s
commercial aerospace business? How?

Answer: Although there has a long history of development subsidies in the commercial
aerospace industry, a 1992 agreement between Boeing and Airbus limits the state aid either
company can get from their respective governments. Airbus, now a private company, is limited
to repayable launch aid that must not exceed one third of the development costs of a new aircraft.
The launch aid has to be repaid only if aircraft sales are high enough for Airbus to turn profit on
the investment in a new plane. As for Boeing, indirect aid from U.S government agencies such
R&D contracts from the Pentagon and NASS are capped at 4% of its total revenues. Thus
Government R&D contracts to Boeing keep R&D people employed, so that it is a positive.
There may also be transference of knowledge and specific findings from one application to
another, either direct or indirect.

4. If the EU does file a complaint with the WTO protesting Japanese launch aid on the
Boeing 787 aircraft, how might the Japanese retaliate? Given this, what should Airbus urge
the EU to do?
Answer: If the EU were to file a complaint against Japanese involvement in the new Boeing
project, the Japanese government could retaliate by making the importation of EU products more
difficult. Given the possibility of retaliation, Airbus might want to think about other ways to
understand the Japanese-American collaboration. One way is to understand that the EU project
by its very nature is a multi-nation collaboration. Perhaps the EU could use the implicit leverage
it has to extract a trade concession from the Japanese.

5. At this point, what do you think is the most equitable solution to the long running battle
between the US and EU on subsidies for commercial aircraft development?

Answer: This is a matter for conjecture and creative thinking. One approach is to realize that the
aerospace industry is in a difficult situation right now and any advancement may well depend on
government support. Given its importance to defense, governments will want to ensure its
continuance.

There have been disputes between the EU and the US regarding US subsidizing its aerospace
industry for some time, EU subsidies to its aerospace have been high profile while subsidies by
the US government have been relatively secretive as to the extent of their subsidies towards
aerospace development.  The EU argues that the US does not comply with WTO rules of
transparency by failing to publicly notify of all federal schemes and by refusing to notify of sub
federal schemes which benefit the US aerospace industry.
 Case: CAR price Differentials in the European Union

1. What are the sources of significant price differentials in the EU automobile market?

Answer: Despite of strong economic integration through EU, the concept of one market is still
not feasible in the Europe. The issue is more highlighted with the price differentials within the
region. As mentioned in the case the major source of price differentials is the restricted free
competition among the car dealers in Europe. The ‘block exemption’ clause in the EU
competition policy enabled the car manufacturers to control the location and terms of trade for
the car dealers. Due to this, the car dealers were restricted to carry a free and competitive
business among them. Although the manufacture of cars was market driven its distribution was
controlled by the manufacturers. As rightly sighted in the case, that if a dealer wanted to initiate
a business in Belgium, then the company might restrict the dealer to sell cars of other brands or
to sell the its own car to other countries. Block exemptions allowed EU car manufacturers to
control the sales area and product range of dealers. Essentially, the auto market was a series of
markets, not one integrated one.

2. In a pure single market would these price differentials exist? By what process might
price differentials be eradicated?

Answer: Common market is usually referred to as the first stage towards the creation of a single
market. It usually is built upon a free trade area with relatively free movement of capital and of
services, but not so advanced in reduction of the rest of the trade barriers.

A single market is a type of trade bloc in which most trade barriers have been removed
(for goods) with some common policies on product regulation, and freedom of movement of
the factors of production (capital and labor) and of enterprise and services. The goal is that the
movement of capital, labor, goods, and services between the members is as easy as within them.
The physical (borders), technical (standards) and fiscal (taxes) barriers among the member states
are removed to the maximum extent possible. These barriers obstruct the freedom of movement
of the four factors of production so that in a pure single market with open competition, these
price differentials would not exist. Opening the market, freeing dealers to expand both their
sales region and their product range should eliminate these differentials.
3. Why do you think the United Kingdom is one of the most expensive car markets in
Europe?

Answer: There are several possible reasons the UK is one of the most expensive car markets.
First, it is both economically and geographically isolated from the other EU markets. It is not a
member of the euro zone and it is an island. Also, the discretionary income there may be higher
(market pricing). Students will probably focus on the fact the UK has opted to retain its own
currency as a factor in the higher automobile prices found in the U.K. Certainly it can be argued
that it can be harder to compare prices across currencies, however, it can also be argued that
since the UK has established a link between the British pound and the euro, this should not factor
into the price differentials. Students may also note that because the UK is more isolated
geographically from the other EU countries, prices may be higher in the UK as a result of
transportation costs.

4. What do you think will happen to price differentials in the EU automobile market under
the new regulations set to take effect in September 2005?

Answer: Price differentials should begin to fade and the three-year implementation begins. The
new regulations set to take effect in 2005 are designed to encourage competition within the EU
car market be allowing dealers to sell anywhere they choose, open new locations where they
choose, and sell more than one brand. If the new rules are implemented as proposed, price
differentials should be eradicated as competition increases among dealers. Indeed, consumers
might find that car prices drop significantly as dealers try to gain market share. In the longer
term, one might envision a monopoly situation occurring however, which would have a negative
effect on prices.

5. What will the impact of these new regulations be on (a) competitive intensity in the EU
automobile market, and (b) the profitability of automobile operations in the EU?

Answer: Competition is likely to increase in the EU market and profitability may well decline as
a result of the integrated market. The new regulations will probably have the effect of increased
competitive intensity in the EU automobile market as dealers vie for market share, and
potentially lower profits for companies as prices fall due to the increased competition.
6. Which automobile companies will do best in the post-2005 environment?

Answer: The car companies that are likely to succeed in the post 2005 EU auto market are those
that have faced the most competition to date, who are flexible and can produce high quality
vehicles efficiently and at quality and safety levels consumers want. : Although the regulations
designed to encourage competition within the EU automobile industry have been phased in over
a three-year time period, there could still be a significant impact for automobile companies when
the regulations take full effect in 2005. Certainly, one could argue that the companies that are
the most likely to feel the smallest negative effect of the regulations are those that that have
already eliminated substantial price differences in their car prices across markets. In addition,
companies that are most efficient and have deep pockets are also likely to weather the storm
better than others.
 Case: The Poorest Continent

1. What were the triggers of cultural changes in Japan in the 1990s? How’s cultural
change starting to affect traditional values in Japan?

Answer: The triggers of cultural change in Japan during the 1990s were the rising of new
generation which lacked some commitment to traditional Japanese values as their parents. This
shift in cultural change affects traditional values in Japan in different ways. First this new
generation was more interested in western ideas of individualism than traditional Japanese
values. Second when the troubled companies started to lay off older workers, this new generation
people believe that this company would not hold their life time employment guarantees. And
finally they also did not want to tie a company for life to be a “Salary man”.

2. How might Japan’s changing culture influence the way Japanese operate in the future?
What are the potential implications of such changes for the Japanese company?

Answer: As you can see in the case, more western ideas are dominating the traditional Japanese
culture, they are forced to change. Because of this change in operation of the business, many
firms including Matsushita are dismantling their lifetime employment guarantee to performance-
based system. At initial phase, Matsushita give bonus almost entirely on seniority but after shift
in culture they said it would be based on performance.

The potential implication of such changes force the Japanese economy is that now the company
should focus on short-term planning to handle this new generation mentality of individualism by
replacing its old long-term planning of traditional Japanese values.

3. How did the traditional Japanese culture benefit Matsushita during the 1950s-1980s?
Did traditional values become more of a liability during the 1990s and early 2000s?
How so?

Answer: During the period 1950s-1980s, Matsushita was at the forefront of the rise of Japan to
the status of major economic power. This company was regarded a bastion of traditional
Japanese values based on strong group identification, reciprocal obligations and loyalty to the
company. During this period, the company got loyalty and hard work from its employees.
Employees worked hard for the betterment of the company.
But during 1990s and early 2000s, this traditional value backfired. During 1990s and 2000s when
the performance of the company was not good and Japanese economy entered a prolonged
economic slump. Because of this it was unable to keep up promise to its employees. Finally it
announced it would close for 30 factories in Japan and cut 13,000 jobs including 1000
management jobs and sell a huge amount of assets over the next three years.

4. What is Matsushita trying to achieve with human resource change it has announced?
What are the impediments to successfully implementing these changes? What are the
implications for Matsushita if (a) the change are made quickly or (b) it takes year or
even decades to fully implement the change?

Answer: With the announcement of human resource change, Matsushita trying to achieve
democratization of employee, encourage the employees’ initiative taking and risk seeking among
its younger employee, hire skilled and experienced employee to operate company effectively.

The impediments may be the conflict among employees of different culture, working
dissatisfaction between old and new employee and so on.

If changes are made quickly, it may face many challenges such as obstacles from employees of
old system, cultural conflict, etc.

If changes are made gradually by providing training and developing, socialization among
employees from different culture, and the motivating schemes, the company will run successfully
over long period.

5. What does the Matsushita case teach you about the relationship between societal
culture and business success?

Answer: The case about Matsushita teaches us various lessons about the relationship between
societal culture and business success. Firstly, it taught us that there is strong relationship between
social culture and business success. Cultural norms and values should be taken into consideration
while operating any business. Secondly, culture may be changed time to time due to education
level, beliefs and attitude. So, if we want to succeed our business, we have to adopt these cultural
changes and restructure our company accordingly.
 Case: Starbucks’ FDI

1. Initially Starbucks expanded internationally by licensing its format to foreign operators. It

Answer: Because this strategy did not give Starbucks the control needed to ensure that the
licensees closely followed Starbucks’ successful formula. Note: “Starbucks successful formula”
refers to its basic strategy, which .To sell the company’s own premium roasted coffee, along with
freshly brewed espresso-style beverages, a variety of pastries, coffee accessories, teas, and other
products, in a tastefully designed coffeehouse setting also providing superior customer service.

2. Why do you think Starbucks has now elected to expand internationally primarily through
local joint ventures to whom it licenses its format, as opposed to a pure licensing strategy?

Answer: I am sure it is one of the most important Starbucks’ strategies: to license its format to
foreign operators and also establishing local joint ventures with them. This fact (as I said before)
gives Starbucks the control to be sure that licensees are following its success formula; “licensed
to the venture” means that both joint owners have the responsibility for growing the business.
For example: at the beginning Starbucks decided to enter to Japan by licensing its format to
foreign operators, but later it become a bad decision because Starbucks did not have the authority
to control this new business was still following Starbucks successful formula. It is when
Starbucks improved this situation adding to the license a joint venture, so both companies which
participated as joint owners had the commitment and responsibility to work together in order to
get the best result=sales.

So, it is clear Starbucks’ strategies had been innovated, in the way that it doesn’t want to affront
directly a new business in other countries, Starbucks has been operating in foreign markets by its
own decision.
3 (a). What are the advantages of a joint-venture entry mode for Starbucks over entering
through wholly owned subsidiaries?

Answer: Starbucks can benefit from local partner’s knowledge of the host country’s competitive
conditions, culture, language, political and business systems.

 Starbucks can share potentially high development costs and risks with local partner.
 Joint-ventures face low risk of being subject to nationalization or other forms of adverse
government interference.

3 (b). On occasion, Starbucks has chosen a wholly owned subsidiary to control its foreign
expansion (e.g., in Britain & Thailand). Why?

 Gain tighter control over expansion strategies

1. Could SMS Elotherm has taken steps to avoid the position it now found itself in? What
were those steps? Why do you think the company did not take these steps?

Answer: SMS Elotherm could have taken several steps to hedge their exchange risk. First,
depending on the competition in the marketplace, they could have stipulated a price pegged to
the exchange rate value on the day the contract was signed, thus transferring the exchange rate
risk to the buyer. Perhaps competitive conditions would not allow for this. They could have
hedged by buying euro forward in the futures currency market with their dollars.

Such a hedge would have had a transaction cost. Depending on the size and type of their foreign
operations, there are other hedging techniques SMS might have explored. These could include
currency swaps, leading and lagging payables and receivables, managing transfer prices, local
debt financing, accelerating dividend payments, and adjusting capital budgeting to reflect foreign
exchange exposure.

In addition, SMS could have diversified their production location and market location to reduce
their exposure to economic shocks. This is more of a long term strategy.

SMS likely did not take the precautionary steps because

(1) They are overconfident about the stability of the currency market, or

(2) They did not expect the profit to drop so precipitously

2. Why was Keiper weather the rise of the euro better than SMS?

Answer: Keiper had partially insulated themselves against exchange risk by moving to Canada.
Now many of their costs were in Canadian dollars, although some were still in euro, and there is
risk between the euro and the Canadian dollar. Keiper also still has some exchange risk between
the U.S. and Canadian currencies, but less than between the dollar and the euro.
3. In retrospect, what might Keiper have done differently to improve the value of its “real
hedge” against a rise in the value of the euro?

Answer: Keiper could have further reduced exchange risk by reducing its euro-based imports so
that all of its costs were in U.S. and Canadian dollars. Long term-wise, Keiper could have
further reduced exchange risk by diversifying their production and market into markets that use
different currencies.

They also could have hedged their transactions in the forward markets and followed some of the
other hedging techniques mentioned in Q1 above, if appropriate to the scope of their business.

4. If the U.S. dollar had appreciated against the euro and Canadian dollar, instead of
depreciating, which company would have done better?

Answer: If the U.S. dollar has appreciated against the euro, SMS would have benefited from the
change. SMS has all of its costs in euro and it is selling into dollars. So each dollar would have
bought more euro as the dollar strengthened. Keiper would have benefited to the extent that its
costs were in euro, assuming that it was selling into a U.S. dollar market. Since some of its costs
were in Canadian dollars, and they might have grown weaker against a strengthening dollar,
Keiper would also have benefited because a stronger U.S. dollar might well have purchased
increased amounts of Canadian dollars.

If the U.S. dollar had appreciated more against the euro than the Canadian dollar, SMS would
have benefited more. If the U.S. dollar had appreciated more against the Canadian dollar than
the euro, Keiper would have benefited more. This question shows that overall, Keiper is in the
safer position with regard to currency risk exposure.
 Case: The evolution of strategy at Procter and Gamble

1. What strategy was Procter & Gamble pursuing when it first entered foreign markets in
the period up until the 1980s?

 Answer: Founded in 1837, Cincinnati-based Procter & Gamble has long been one of the
world’s most international of companies. Today P&G is a global colossus in the consumer
products business with annual sales in excess of $50 billion, some 54 percent of which are
generated outside of the United States. P&G sells more than 300 brands—including Ivory soap,
Tide, Pampers, Iams pet food, Crisco, and Folgers—to consumers in 160 countries. Historically
the strategy at P&G was well established. The company developed new products in Cincinnati
and then relied on semi-autonomous foreign subsidiaries to manufacture, market, and distribute
those products in different nations. In many cases, foreign subsidiaries had their own production
facilities and tailored the packaging, brand name, and marketing message to local tastes and
preferences. For years this strategy delivered a steady stream of new products and reliable
growth in sales and profits. By the 1990s, however, profit growth at P&G was slowing.
The essence of the problem was simple: P&G’s costs were too high because of extensive
duplication of manufacturing, marketing, and administrative facilities in different national
subsidiaries. The duplication of assets made sense in the world of the 1960s, when national
markets were segmented from each other by barriers to cross-border trade. Products produced in
Great Britain, for example, could not be sold economically in Germany due to high tariff duties
levied on imports into Germany.

By the 1980s, however, barriers to cross-border trade were falling rapidly worldwide and
fragmented national markets were merging into larger regional or global markets. Also, the
retailers through which P&G distributed its products were growing larger and more global, such
as Walmart, Tesco from the United Kingdom, and Carrefour from France. These emerging
global retailers were demanding price discounts from P&G.

2. Why do you think this strategy became less viable in the 1990s? 
 Answer: In the 1990s P&G embarked on a major reorganization in an attempt to control its cost
structure and recognize the new reality of emerging global markets. The company shut down
some 30 manufacturing plants around the globe, laid off 13,000 employees, and concentrated
production in fewer plants that could better realize economies of scale and serve regional
markets. It wasn’t enough! Profit growth remained sluggish so in 1999 P&G launched its second
reorganization of the decade. Named “Organization 2005,” the goal was to transform P&G into a
truly global company. The company tore up its old organization, which was based on countries
and regions, and replaced it with one based on seven self-contained global business units,
ranging from baby care to food products. Each business unit was given complete responsibility
for generating profits from its products, and for manufacturing, marketing, and product
development. Each business unit was told to rationalize production, concentrating it in fewer
larger facilities; to try to build global brands wherever possible, thereby eliminating marketing
differences between countries; and to accelerate the development and launch of new products.
P&G announced that as a result of this initiative, it would close another 10 factories and lay off
15,000 employees, mostly in Europe where there was still extensive duplication of assets. The
annual cost savings were estimated to be about $800 million. P&G planned to use the savings to
cut prices and increase marketing spending in an effort to gain market share, and thus further
lower costs through the attainment of scale economies. This time the strategy seemed to be
working. For most of the 2000s P&G reported strong growth in both sales and profits.

3. What strategy does P&G appear to be moving toward? What are the benefits of this
strategy? What are the potential risks associated with it? 

Answer: Each business unit was told to rationalize production, concentrating it in fewer larger
facilities; to try to build global brands wherever possible, thereby eliminating marketing
differences between countries; and to accelerate the development and launch of new products.
P&G announced that as a result of this initiative, it would close another 10 factories and lay off
15,000 employees, mostly in Europe where there was still extensive duplication of assets. The
annual cost savings were estimated to be about $800 million. P&G planned to use the savings to
cut prices and increase marketing spending in an effort to gain market share, and thus further
lower costs through the attainment of scale economies. This time the strategy seemed to be
working. For most of the 2000s P&G reported strong growth in both sales and profits.
Significantly, P&G’s global competitors, such as Unilever, Kimberly-Clark, and Colgate-
Palmolive, were struggling during the same time period.

Advantages:

1. Emerging market with rapidly rising incomes.

2. Great demand potential

3. The rise of social media provided a new platform for marketing

Threats:

1. Competitors Unilever and Colgate are eyeing the same market.

2. Increasing availability of general store brands of consumer products making it harder for
P&G’ brand to compete

3. Rising commodity prices and cost of production