Incoterms 2010 and International Business - 101
International Business: Environments and Operations, 15e (Daniels et al.)
CHAPTER FIFTEEN: DIRECT INVESTMENT AND COLLABORATIVE STRATEGIES
CHAPTER FIFTEEN: DIRECT INVESTMENT AND COLLABORATIVE STRATEGIES
OPENING CASE: Melia Hotels International
Melia Hotels International is a Spanish hotel chain founded by Gabriel Escarre in 1956, leasing his first hotel in Majorca. The company is one of Spain’s largest domestic operators of holiday resorts, and the 17th biggest hotel chain worldwide. It currently operates 350 hotels in 35 countries. Eighty percent of its current income comes from its international operations. International expansion has been the result of a variety of investment and collaborative strategies.
Questions
15-1 After reading the chapter, explain the advantages for Malia to own its hotels versus manage them for other organizations.
Within the hotel industry, direct investment, particularly if the ownership is 100%, the owner then has the right to control over four non mutually exclusive dimensions: (1) Daily operations of the hotel, e.g., the hiring and scheduling of personnel and the securement of suppliers, (2) Physical assets (primarily property ownership and the maintenance thereof, (3) Organizational routines and tacit elements of the company, such as the culture and systems to gain both efficiency and effectiveness, and (4) Codified assets, such as the brand and reservation system. (LO: 2, Learning Outcome: To comprehend why and how companies make foreign direct investments, AACSB: Analytical Skills)
15-2 After reading the chapter, discuss the advantages and risks for Malia in its non-equity joint venture with Jin Jiang.
The Shanghai Jin Jiang International Hotel Group is the largest hotel chain in China. Over the years, no Spanish hotel chains have had any success in carrying out Chinese operations. Malia finally changed that in 2009 with a contractual agreement with Xintian, and later with a co-management agreement with Jin Jiang. This agreement enabled Malia to learn more about the Chinese customers, boosting the ability to expand within China. However, in partnering, one risks the chance of developing competitors because partners may gain access to critical and core services, especially knowledge controlled by Malia. (LO: 2, Learning Outcome: To comprehend why and how companies make foreign direct investments, AACSB: Analytical Skills)
TEACHING TIPS: Review the PowerPoint slides for Chapter Fifteen and select those you find most useful for enhancing your lecture and class discussion. For additional visual summaries of key chapter points, review the figures in the text.
CLOSING CASE: The Oneworld Airline Alliance
[See Map 15.2]
In 2011, American Airlines and Japan Airlines began sharing routes that connected mainland North American to East Asia. It was similar to other joint ventures. In 2008, American Airlines, British Airways, and Iberia sought approval for a nonequity joint venture. These types of relationships are not new but have increased in recent years due to profit pressures. The major reasons airlines enter into these agreements are to better control capacity, avoid price competition, and improve gate utilization. No single airline has the capacity to serve the whole world, yet passengers want to travel the whole world with a seamless experience. Although deregulation of the airline industry occurred in the U.S., the government continues to play a large role in oversight and intervention in the airline industry. These three airlines already belong to the Oneworld Alliance but want to enter into this joint venture so they can overcome antitrust provisions that prevent them from discussing and coordinating schedules, fares, and routes.
Questions
15-3 Companies within Oneworld, Star and Sky Team alliances have also engaged in major mergers and acquisitions (M&A): Frontier and USAIR (Star), Delta and Northwest (SkyTeam), and Continental and United (Star). What are the advantages of M&A versus non-equity alliances in the industry?
Mergers and acquisitions may be difficult in light of significant government regulation. Additionally, there may be practical issues as well when dealing with entities, including labor unions and organizations. There may also be problems associated with pay systems and corporate culture. The advantage of non-equity alliances is that it allows organizations to maintain a level of autonomy and independence. (LO: 5, Learning Outcome: To describe what companies should consider when entering into arrangements with other companies, AACSB: Analytical Skills)
15-4 Some airlines, such as Southwest, have survived as niche players without extensive international connections. Can they continue this strategy?
Southwest is one of the very few airlines that are consistently profitable. There are several reasons for this profitability and their model has been widely copied by other low-fare carriers, particularly in Europe. Recently Southwest has announced some codeshare agreements with WestJet of Canada and Volaris of Mexico. The implementation of these agreements has yet to be completed. This does show that even a niche player like Southwest recognizes the benefits of alliances. (LO: 2, Learning Outcome: To comprehend why and how companies make foreign direct investments, AACSB: Analytical Skills)
15-5 Why should an airline not be able to establish service anywhere in the world simply by demonstrating that it can and will comply with the local labor and business laws of the host country?
If it were only that easy to expand, but governments continue to limit expansion and it isn’t necessarily about labor or business laws. Airlines are a protected industry because they play a role in national security. The U.S. uses commercial carriers to transport troops. With the increased terrorist attacks, like the 2009 Christmas Day attempt, countries are worried about protecting their airspace. Protectionism also plays a role. Domestic airlines fly the lucrative internal routes and the continued health of domestic airlines is a priority for governments. (LO: 3, Learning Outcome: To understand the major motives that guide managers when choosing a collaborative arrangement for international business, AACSB: Dynamics of the Global Economy)
15-6 The U.S. law limiting foreign ownership of U.S. airlines to no more than 25 percent of voting shares was enacted in 1938. Is this law an anachronism, or are their valid reasons for having it today?
Government intervention and protection continues for some of the reasons mentioned above. The recent economic declines have also led to calls for even greater protectionism for key industries and raised concerns about job loss. Security concerns are in the headlines almost daily and 2010 brought even greater restrictions for those international passengers originating from a list of specific locations. These two trends will likely continue to reinforce foreign ownership restrictions. (LO: 5, Learning Outcome: To describe what companies should consider when entering into arrangements with other companies, AACSB: Reflective Thinking)
15-7 What will be the consequences if a few large airlines or networks dominate global air service?
There are always tradeoffs when the level of competition is reduced. Some see consolidation as a very negative thing. The case outlines the criticism voiced by Sir Richard Branson, founder of Virgin Atlantic, and U.S. congressman James Oberstar. Both see a reduction of competition as a bad thing for consumers. Fewer options might actually make the global travel experience more straightforward. The question is always what it will do to the availability of flights and pricing. Airlines want to fly only profitable legs and consumers want flexibility and good value. The flip side of the coin was also discussed in the case. Increased traffic as a result of this consolidation might actually justify new routes and increased competition. (LO: 4, Learning Outcome: To define the major types of collaborative arrangements, AACSB: Analytical Skills)
15-8 Many airlines have recently been no more than marginally profitable. Is this such a vital industry that governments should intervene to guarantee their survival? If so, how?
Industry bailouts have been prevalent in 2008 and 2009, from financial institutions to the auto industry. Post 9/11, President Bush signed into law the Air Transportation Safety and Stabilization Act that compensated airlines for mandatory grounding of flights. This was a one-time bailout based on extraordinary circumstances. The question is should the government bail out the industry due to underlying profitability concerns? Individual airlines have been allowed to fail and consolidation has occurred in the airline industry without government intervention. An underlying economic pressure is the price of fuel and Southwest’s hedging programs have allowed it to be profitable when others have been in the red. Now that the economy is showing some signs of recovery, the political pressure has increased for less government intervention in the economy. Does the government value this industry? Absolutely, for the many reasons outlined in the case. Will it be necessary for them to intervene at the industry level? Time will tell. (LO: 6, Learning Outcome: To grasp why collaborative arrangements succeed or fail, AACSB: Analytical Skills)
15-9 What methods could the three joint-venture partners use to divide revenue and expenses on the North Atlantic routes?
In addition to codesharing, these partners can coordinate the addition of new flights and new destinations without antitrust restrictions. Flights can be scheduled at less competitive times that will improve their capacity utilization and decrease the overall cost per passenger carried. In addition to increasing revenues, the joint venture partners can spread costs for ground services such as check-in and baggage handling. Consolidation of maintenance and reservations systems has also resulted in cost savings. Improved utilization of costly shared gates can also reduce the cost model, improving profitability. (LO: 7, Learning Outcome: To see how companies manage diverse collaborative arrangements, AACSB: Analytical Skills)
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