international buss

Notes on

INTERNATIONAL BUSINESS

OR

INTERNATIONAL MARKETING

What is globalization?

• The shift towards a more integrated and interdependent world economy

• Two components:– The globalization of markets– The globalization of production

Globalization : An ExampleAmerican Car

OfficeDesigned in GermanyAssembled in Mexico (DaimlerChrysler)Components in USA & Japan

Fabricated from Korean Steel and Malaysain Rubber

BP Service StationBritish MNC in USOil wells of AfricaPumped out by French companyShipped in a Greek Shipping Line

Stockbroker

Con

sult

Gas

olin

e

Nokia Designed in FinlandAssembled in Texas

Chip sets manufactured in Taiwan

Chip sets designed by Indian Engineer working in San Diego for Qualcomm

Shares

Duetsche Telecom, GermanTransformed from state owned monopoly into global co by Israeli CEO

Coffee Stall

Korean immigrantCoffee beans from Brazil

Chocolate from Peru

Globalization of markets

• The merging of distinctly separate national markets into a global marketplace– Tastes and preferences converge onto a

global norm– Firms offer standardized products worldwide

creating a world market


• Significant differences still exist between national markets on many relevant dimensions

• These differences require that marketing and operating strategies and product features be customized to best match conditions in a country.


Range of problems are wider and more complex in different countries

• Government intervention in trade and investment creates problems

• International investment is impacted by different currencies

Globalization of production

• Refers to sourcing of goods and services from locations around the world to take advantage of – Differences in cost or quality of the factors of

production• Labor• Land• Capital

Emergence of global institutions

• Globalization has created the need for institutions to help manage, regulate and police the global marketplace– GATT– WTO– IMF– World bank– United Nations

Global drivers

• Macro factors that underlie trend towards greater globalization

– Decline in trade barriers– Technological change

Pattern of declining tariffs

Declining barriers to trade

• Globalization of markets and production has been facilitated by – Reduction in trade barriers (Tariff and Non Tariff)– Removal of restrictions to foreign direct

investment

The role of technological change

• Microprocessors and telecommunications

• The internet and world wide web

• Transportation technology

Other factors that underlie trend towards globalization

• Increased competition in the domestic market• Profit advantage• Growth opportunities / increase market share• Increasing consumer needs• Global Economic trends• Government Policies and Regulations• Monopoly on the business / industry• Strategic vision of the organisation

Global drivers

Globalization debate-Pro

• Lower prices for goods and services

• Economic growth stimulation

• Increase in consumer income

• Creates jobs

• Countries specialize in production of goods and services that are produced most efficiently

Globalization debate-Con

• Destroys manufacturing jobs in wealthy, advanced countries

• Wage rates of unskilled workers in advanced countries declines

• Companies move to countries with fewer labor and environment regulations

• Loss of sovereignty

Managing in a Global Marketplace

• Managing Difference in countries (PEST Analysis)

• Control and Coordinate production and marketing activities

• Knowledge of rules governing international trading and investment system

• Currency Market

MODULE 2

Trade theory-overview

• Free Trade occurs when a government does not attempt to influence, through quotas or duties, what its citizens can buy from another country or what they can produce and sell to another country

• The Benefits of Trade allow a country to specialize in the manufacture and export of products that can be produced most efficiently in that country

Trade theory-overview

• The Pattern of International Trade displays patterns that are easy to understand (Saudi Arabia/oil or China/crawfish). Others are not so easy to understand (Japan and cars)

• The history of Trade Theory and government involvement presents a mixed case for the role of government in promoting exports and limiting imports

• Later theories appear to make a case for limited involvement

Mercantilism: mid-16th century

• A nation’s wealth depends on accumulated treasure– Gold and silver are the currency of

trade

• Theory says you should have a trade surplus. – Maximize export through subsidies.– Minimize imports through tariffs

and quotas

• Flaw: “zero-sum game”

Mercantilism-zero-sum game

• David Hume in 1752 pointed out that:– Increased exports leads to inflation and higher

prices– Increased imports lead to lower prices

• Result: Country A sells less because of high prices and Country B sells more because of lower prices

• In the long run, no one can keep a trade surplus

Theory of absolute advantage

• Adam Smith: Wealth of Nations (1776) argued:– Capability of one country to produce more of

a product with the same amount of input than another country can vary

– A country should produce only goods where it is most efficient, and trade for those goods where it is not efficient

• Trade between countries is, therefore, beneficial • Assumes there is an absolute balance among

nations– Example: Ghana/cocoa

Theory of absolute advantage

Fig 4.1

Absolute advantage and the gains from trade

Theory of comparative advantage

• David Ricardo: Principles of Political Economy (1817).– Extends free trade argument– Efficiency of resource utilization leads to more

productivity.– Should import even if country is more efficient in

the product’s production than country from which it is buying.

– Look to see how much more efficient. If only comparatively efficient, than import.

• Makes better use of resources• Trade is a positive-sum game

Theory of comparative advantage

Fig 4.2

Comparative advantage and the gains from trade

Simple extensions of the Ricardian model

• Immobile resources:– Resources do not always move easily from one

economic activity to another

• Diminishing returns:– Diminishing returns to specialization suggests

that after some point, the more units of a good the country produces, the greater the additional resources required to produce an additional item

– Different goods use resources in different proportions

Simple extensions of the Ricardian model

• Free trade (open economies):– Free trade might increase a country’s stock of

resources (as labor and capital arrives from abroad)

– Increase the efficiency of resource utilization

PPF under diminishing returns

Fig 4.3

Influence of free trade on PPF

Fig 4.4

Heckscher (1919)-Olin (1933) Theory

• Export goods that intensively use factor endowments which are locally abundant– Corollary: import goods made from locally

scarce factors• Note: Factor endowments can be impacted by

government policy - minimum wage

• Patterns of trade are determined by differences in factor endowments - not productivity

• Remember, focus on relative advantage, not absolute advantage

Product life-cycle Theory- R. Vernon,(1966)

• As products mature, both location of sales and optimal production changes

• Affects the direction and flow of imports and exports

• Globalization and integration of the economy makes this theory less valid

Product life cycle theory

Fig 4.5

New trade theory

In industries with high fixed costs:

• Specialization increases output, and the ability to enhance economies of scale increases

• learning effects are high. These are cost savings that come from “learning by doing”

New trade theory-applications

• Typically, requires industries with high, fixed costs– World demand will support few competitors

• Competitors may emerge because of “ First-mover advantage”– Economies of scale may preclude new entrants– Role of the government becomes significant

• Some argue that it generates government intervention and strategic trade policy

Theory of national competitive advantage

• The theory attempts to analyze the reasons for a nations success in a particular industry

• Porter studied 100 industries in 10 nations– postulated determinants of competitive

advantage of a nation were based on four major attributes• Factor endowments• Demand conditions• Related and supporting industries• Firm strategy, structure and rivalry

Porter’s diamond

• Success occurs where these attributes exist.• More/greater the attribute, the higher chance of

success• The diamond is mutually reinforcing

Fig 4.6

Factor endowments

• Factor endowments:- A nation’s position in factors of production such as skilled labor or infrastructure necessary to compete in a given industry

• Basic factor endowments

• Advanced factor endowments

Basic factor endowments

• Basic factors: Factors present in a country– Natural resources– Climate– Geographic location– Demographics

• While basic factors can provide an initial advantage they must be supported by advanced factors to maintain success

Advanced factor endowments

• Advanced factors: Are the result of investment by people, companies, government and are more likely to lead to competitive advantage

• If a country has no basic factors,

it must invest in

advanced factors

Advanced factor endowments

• communications

• skilled labor

• research

• Technology

• education

Demand conditions

• Demand:– creates capabilities – creates sophisticated

and demanding consumers

• Demand impacts quality and innovation

Related and supporting industries

• Creates clusters of supporting industries that are internationally competitive

• Must also meet requirements of other parts of the Diamond

Firm Strategy, Structure and Rivalry

• Long term corporate vision is a determinant of success

• Management ‘ideology’ and structure of the firm can either help or hurt you

• Presence of domestic rivalry improves a company’s competitiveness

Determinants of Competitive Advantage in nations

GovernmentGovernment

Company Strategy,Structure,

and Rivalry

DemandConditions

Relatedand Supporting

Industries

FactorConditions

ChanceChance

Two external factors that influence the four determinants.

Fig 4.8

Porter’s Theory-predictions

• Porter’s theory should predict the pattern of international trade that we observe in the real world

• Countries should be exporting products

from those industries where all four components of the diamond are favorable, while importing in those areas where the components are not favorable

Implications for business

• Location implications:– Disperse production activities to countries

where they can be performed most efficiently• First-mover implications:

– Invest substantial financial resources in building a first-mover, or early-mover advantage

• Policy implications: – Promoting free trade is in the best interests of

the home-country, not always in the best interests of the firm, even though, many firms promote open markets

MODULE 3

Strategies for going global

• Entry Decision

• Different Entry Modes

• Selecting an entry mode

• Strategic Alliances

Entry Decisions

• Which market to enter ?

• When to enter ?

• Scale of entry ?

Entry Decisions : Which market to enter?

• Favourable Host country environment– Politically stable nations– Developed and developing economies– No dramatic upsurge in inflation or private sector

debt– Free market systems

• Unfavourable Host country environment– Political unstable– Excess borrowing

Entry Decisions : When to enter?

• Advantages of early market entry:– First-mover advantage.– Build sales volume.– Move down experience curve and achieve cost

advantage.– Create switching costs.

• Disadvantages:– First mover disadvantage - pioneering costs– Changes in government policy

Entry Decisions : Scale of entry?

• Large scale entry– Strategic Commitments - a decision that has a

long-term impact and is difficult to reverse.– May cause rivals to rethink market entry.– May lead to indigenous competitive response.

• Small scale entry:– Time to learn about market.– Reduces exposure risk.

Different Entry Modes

• Export / Import• Collaborative Arrangements

– Franchising– Licensing– Joint Ventures– Turnkey Operations

• Wholly Owned Subsidiary• Mergers & Acquisitions

Entry Mode : Export / Import

• Export– Selling products and services in other markets of the

world– Direct Export– Indirect Export

• Import– Buying products and services from other markets of

the world– Direct Import– Indirect Import

Entry Mode : Export

• Appropriate when– Volume of business not large– Cost of production in foreign market high– Political or other risk of investment in

foreign market– Production bottlenecks in foreign market– Company has no permanent interest in

foreign market– Foreign investment not favoured by the

government

Entry Mode : Export

• Advantages:– Avoids cost of establishing manufacturing

operations– May help achieve experience curve and location

economies• Disadvantages:

– May compete with low-cost location manufacturers

– Possible high transportation costs– Tariff barriers– Possible lack of control over marketing reps

Entry Mode : Franchising• Franchisor sells intangible property and ‘insists

on rules’ for operating business• Low risk mode of entry in international market• Franchise Agreement

– Responsibility of Franchisee • payment of fee upfront and percentage of revenue• Gets time proven concept and products and services that

can be brought to the market instantly

– Responsibility of Franchisor • provides managerial and technical assistance, support and

ongoing training to ensure same quality of goods and services worldwide

• Has new stream of income

Entry Mode : Franchising

• Advantages:– Reduces costs and risk of establishing

enterprise

• Disadvantages:– May prohibit movement of profits from one

country to support operations in another country

– Quality control

Entry Mode : Licensing

• Agreement where licensor grants rights to a firm (licensee) in host country to produce or sell a product for a specific period of time & receives ‘royalty’

• Low cost way to exploit foreign market• Licensing Arrangement

– Responsibility of Licensor• Gives the license to use a patent, trademark or proprietary

information– Responsibility of Licensee

• Pays royalty

Entry Mode : Licensing

• Advantages– Reduces development costs and risks of

establishing foreign enterprise.– Lack capital for venture.– Unfamiliar or politically volatile market.

– Overcomes restrictive investment barriers.– Others can develop business applications of

intangible property.

Entry Mode : Joint Ventures

• Joint Venture: two or more partners own or control a business– Cross marketing arrangements– Technology sharing agreements– Production contracting deals– Equity arrangements

• Types of Joint ventures– Non equity venture : one group providing service

for another– Equity Venture : financial investment by MNC in

business of local partner

Entry Mode : Joint Ventures

• Advantages :– Improvement of efficiency

• economies of scale• Spread the risk / cost

– Access to knowledge• e.g pool financial and technological resources

– Political Factors• Local partner can manage political risk better

– Collusion or restrictions in competition• Partner with competitors• Face competition effectively

• Disadvantages:– Risk giving control of technology to partner.– May not realize experience curve or location economies.– Shared ownership can lead to conflict

Entry Mode : Turnkey Operations

• Contractor agrees to handle every detail of project for foreign client and handover the ‘key

• Advantages:– Can earn a return on knowledge asset.– Less risky than conventional FDI.

• Disadvantages:– No long-term interest in the foreign country.– May create a competitor.– Selling process technology may be selling competitive

advantage as well.

Entry Mode : Wholly Owned Subsidiary

• Overseas operation that is owned and controlled by an MNC

• Could be Greenfield investments or acquisitions

Entry Mode : Wholly Owned Subsidiary

• Advantages:– No risk of losing technical competence to a

competitor– Tight control of operations.– Realize learning curve and location

economies.

• Disadvantage:– Bear full cost and risk

Entry Mode : Mergers & Acquisitions

• Outright purchase of a running company abroad or an amalgamation with a running foreign company

• Advantages– Quick to execute – instant presence in foreign

market– Preempt the competitors– Less risky than green field ventures

• Disadvantages– Clash of interest

Selecting an Entry Mode

Core competency•Technological Know-How

•Opt for wholly owned subsidiary

•licensing or JV if supported by agreements or technology is transitory

•Management Know-How

•Franchising, subsidiary and turnkey operations

Pressure for Cost Reduction•Exporting

•Wholly owned subsidiary

MODULE 4

Organization of Global Business

Organizational architecture

• Formal Organization structure

• Control Systems & incentives (Module 6)

• Processes (module 7,8, 10)

• Organizational Culture (Module 5)

• People (Module 9

Organizational architecture• Formal Organization structure

– Division of organization into subunits focusing on functions, products and geographic area

– Location of decision making responsibilities within the structure

– Coordination of subunits

• Control Systems & incentives (Module 6)– Measuring performance– Rewards

• Processes– Decisions are made and work is performed

Organizational architecture

• Organizational Culture– Norms and value system shared among the

employees

• People– Recruitment, compensation and strategy to

retain– skills, values and orientation

Organization structure

– Division of organization into subunits – Horizontal differentiation

– Location of decision making responsibilities within the structure – vertical differentiation

– Integrating mechanism for coordination of subunits

Horizontal Differentiation

• Concerned with firms division into subunits• Decisions made on basis of function, type of

business or geographical area• Structure of domestic firms

– Single entrepreneur or small team of individuals therefore a centralized structure

– With introduction of more product lines, product divisional structure introduced

– Each division responsible for single product line

– Self-contained, largely autonomous entities

– Responsible for operating decisions and performance

A typical functional structure

A typical product divisional structure

Horizontal Differentiation : Structure of the international division

• International division– Organized on geography– Initially export goods to foreign subsidiary but

later outsource production• Problems

– Heads of foreign subsidiaries relegated to second-tier position

– Lack of coordination between domestic and foreign operations

• Therefore firms begin adopting worldwide structures

International Division Structure

The International structural stages model

Horizontal Differentiation : Worldwide area structure

• Worldwide area structure– Favored by firms with low degree of

diversification & domestic structure based on function

– World is divided into autonomous geographic areas

– Operational authority decentralized– Facilitates local responsiveness – Fragmentation of organization can occur– Consistent with multidomestic strategy

A worldwide area structure

Horizontal Differentiation : World wide product divisional structure

• Adopted by firms that are reasonably diversified• Original domestic firm structure based on

product division• Value creation activities of each product division

coordinated by that division worldwide– Help realize location and experience curve

economies– Facilitate transfer of core competencies

• Problem: area managers have limited control, subservient to product division managers, leading to lack of local responsiveness

A worldwide product division structure

Horizontal differentiation: Global matrix structure

• Helps to cope with conflicting demands of earlier strategies

• Two dimensions: product division and geographic area

• Product division and geographic areas given equal responsibility for operating decisions

• Problems– Bureaucratic structure slows decision making– Conflict between areas and product divisions– Difficult to make one party accountable due to dual

responsibility

A Global matrix structure

Vertical differentiation

• Concerned with where decisions are made– Where is decision making power concentrated?

• Two Approaches– Centralization

– Decentralization

Integrating mechanisms

• Need for coordination follows the following order on an ascending basis

»Transnational

»Multi domestic corporations

» International companies

»Global companies

High

Low

Integrating mechanism

• Impediments to coordination– Differing goals and lack of respect– Different orientations due to different tasks– Differences in nationality, time zone &

distance– Particularly problematic in multinational

enterprises with its many subunits both home and abroad

Formal integrating mechanisms

Formal integrating systems

• Direct contact between subunit managers• Liaison roles: an individual assigned

responsibility to coordinate with another subunit on a regular basis

• Temporary or permanent teams from subunits to achieve coordination

• Matrix structure: all roles viewed as integrating roles– Often based on geographical areas and

worldwide product divisions

Informal integrating mechanisms

Informal integrating mechanisms

• Informal management networks supported by an organization culture that values teamwork and a common culture

• Non-bureaucratic flow of information• It must embrace as many managers as

possible• Two techniques used to establish networks

– Information systems– Management development policies

• Rotating managers through various subunits on a regular basis

MODULE 5

Mc Donald’s and Hindu Culture

• Mc Donald’s known for its global expansion

• 4.2 new McDonald’s restaurant every day

• By 2003, 30,000 restaurants in 121 countries serving 46 million customers

• Late 1990s entered Indian market

McDonald’ Global Expansion

Entering Indian Market : Challenges • Prosperous middle class - 150 to 200

million • Hindu culture has revered cow• Represents divine mother that sustains all

human being• Hindus do not eat meat of the scared cow• McDonald’s largest user of beef• Since its inception in 1955, countless

animals have died to produce Big Macs• Challenge : company whose fortune are

built on beef enter a country where consumption of beef is a sin

• Use pork?

• 140 million Muslims & Muslims do not eat pork

• Chicken & mutton?

• Maharaja Mac – made from mutton

• Mac Aloo Tikki Burger

• Chicken burger

• Foods strictly segregated into Vegetarian and non vegetarian lines

Entering Indian Market : Challenges

Global Challenges translating into local challenges

• In 2001 - Lawsuit by three Indian Businessmen in Seatle, USA

• All vegetarians, two of them Hindus

• Sued for “fraudulently concealing” existence of beef in McDonald’s French fries

• Initially company insisted that they used only 100 percent vegetable oil

• But soon admitted that it used a miniscule amount of beef extract in the oil


• Settled suit for $10 million dollars • Issued an apology

“ McDonald’s sincerely apologize to Hindus, vegetarians and other for failing to provide the kind of information they needed to make informed dietary decisions at our U.S. restaurant”

• The company pledged to label the ingredients of its food and find a substitute for the beef extract used in its oil


• News came to India• Vandalized one restaurant causing

damage of $45,000 • Shouted slogans outside another• Picketed company’s headquarters• Called on Indian Prime Minister to closed

McDonald’s 27 restaurants in the country• Denials by franchisee in India• Hindu extremists responded by stating that

they would submit oil to laboratory tests

Mc Donald’s : Cultural Sensitiveness

• no impact of negative publicity on McDonald’s long term palns in India

• By 2003 had 38 restaurants

• Announced plans to open 80 restaurants by end of 2005

• Satisfied Indian customers “Children enjoyed the American experience, food of consistent quality and toilets were clean!

What is culture?

• “A system of values and norms that are shared among a group of people and that when taken together constitute a design for living.”

• Hofstede, Namenwirth and Weber

Different components of culture

• Values and Norms

• Folkways and mores

Values and norms

• Values: Abstract ideas/assumptions about what a group believes to be good, right and desirable

• Norms: social rules and guidelines that prescribe appropriate behavior in particular situations

Folkways and mores

• Folkways: Routine conventions of everyday life.– Little moral significance– Generally, social conventions such as dress

codes, social manners, and neighborly behavior

• Mores: Norms central to the functioning of society and its social life– Greater significance than folkways– Violation can bring serious retribution

• Theft, adultery, incest and cannibalism

Determinants of culture

• Social structure• Religion• Language• Education• Economic philosophy• Political philosophy

Social structure

• Two dimensions– The extent to which society is group or

individually oriented– Degree of stratification into castes or classes

• Social mobility• Significance to business

Religion

• Shared beliefs and rituals

• Moral principles and values – guide or shape our behaviour

Language

• Spoken– Verbal cues– Language structures

perception of world

• Unspoken– Body language– Personal space

Education

• Education can be a source of competitive advantage

Other influences

– Political philosophy– Economic philosophy

Culture and the workplace

• Study on the relationship between culture and the workplace by Geert Hofstede 1967-73

– 40 countries– 100,000 individuals

Hofstede’s cultural dimensions

• Four dimensions of culture– Power distance– Individualism versus collectivism– Uncertainty avoidance– Masculinity versus femininity

Power distance

• Cultures are ranked high or low on this dimensions based on the particular society’s ability to deal with inequalities

Individualism versus collectivism

• This dimension focuses on the relationship between the individual and his/her fellows within a culture– Individualistic societies:

• loose ties• individual achievement and freedom highly

valued• Collectivist societies-

• tight ties• tend to be more relationship oriented

Uncertainty avoidance

• This dimension measures the extent to which a culture socializes its members into accepting ambiguous situations and tolerating uncertainty

Masculinity versus femininity

• This dimension looks at the relationship between gender and work roles

Work related values for twenty countries

Problems with Hofstede’s findings

• Assumes one-to-one relationship between culture and the nation-state

• His research may have been culturally bound.

• Survey respondents were from a single industry (computer) and a single company (IBM)

Cultural change

• Culture is not a constant; it evolves over time

• Since 1960s American values toward the role of women are changing.

• Japan moves toward greater individualism in the workplace

• Effects of globalization

Managerial implications

• Cross cultural literacy

• Culture and competitive advantage

• Culture and business ethics

MODULE 5 CONTD..

The Economic Environment Facing Global Business

KEY MACROECONOMIC INDICATORS

• Economic Growth

• Inflation

• Surpluses & Deficit

KEY MACROECONOMIC INDICATORS : ECONOMIC GROWTH

• GDP and GNI (or GNP)– High or Low– total amount of goods and services produced in a

year within the domestic territory) or GNI (GDP + net income)

– Per capita GNI (total GNI divided by total population)– PPP GNI (unmber of units of a country’s currency

required to buy the same goods and services in the domestic market that $1 will buy in USA

KEY MACROECONOMIC INDICATORS : INFLATION

• Increase in prices• Inflation rate percentage increase in the change

in prices from one period to another, usually a year

• Demand more than supply• Inflation effects

– interest rates– exchange rates– cost of living and– General confidence in a country’s political and

economic system


• Inflation and Interest rates

• High inflation – High interest rates


• Inflation and Exchange Rate• Higher inflation – devaluation• Case 1

• UK exporter – US distributor• Cost 100 pounds Exchange rate $1.59 / GBP• Cost to US distributor $159

• Case 2– High Inflation – exchange rate constant – exports will be costly

• Cost 110 pounds Exchange rate $1.59 / GBP• Cost to US distributor $174.90

– High Inflation – currency devaluation – exports will be competitive

• Cost 110 pounds Exchange rate $1.47 / GBP• Cost to US distributor $161.70


• Inflation and cost of living• Less disposable income with consumers

• Inflation and government • Under pressure to bring down inflation• Rise interest rates for slow economic

growth – social unrest• Protest if any control over wages

KEY MACROECONOMIC INDICATORS : SURPLUSES AND DEFICIT

• Balance of Payment• Record of country’s international transaction

between companies, individuals and government• Composed of current and capital account• Current Account

– Merchandise trade – Balance of trade - trade deficit or surplus

– Trade in Services– Income Receipts or payment on assets, receipt on

FDI– Unilateral transfers – govt and private relief grants

and income transferred from abroad


• Capital Account

• Transactions in real or financial assets

• Foreign Direct Investment

• Purchase of securities

• Official Asset Reserve e.g Gold, SDRs and Foreign Currency


• External Debt

• Total debt or debt as percentage of GDP

• Larger external debt – unstable economy


• Internal Debt

• Excess of Government expenditure than revenues

• Budget deficit – Poor tax system– Huge expenditure on defense and welfare– Sick state owned enterprises

Privatization

CLASSIFYING ECONOMIC SYSTEMS

Economic Systems

Centrally planned economy

Production and distribution system is owned by government

Decisions based on fulfilling economic, political and social objectivese.g former USSR and East European countries

Market based economy

Decisions to produce and distribute goods is taken by individual firms based on the forces of demand and supplye.g USA and European countries

Mixed economy

Private and public sectors co existNo country has mixed economy in purest form Form of Government intervention : - ownership of the means of production

- influence in decision making

In China CPE + Special Economic Zones with private initiatives, India

Economic System and Implications for Business

• CPE - State trading corporations participates in international trade

• Market Based Economy – Individual firms

• Mixed Economy – Both the systems are found

Understanding Economic Environment

• Demand for its products

• Expected cost of production & net earnings

• Consumption behavior• Availability of Human or physical resources• Network of infrastructure• Fiscal, Monetary and Industrial Policy• Strength of External sector

• Repatriation of earnings

Understanding Economic Environment : Demand conditions

• Level of income & its distribution

• tendency to consume

• Rate of inflation


• Level of income and its distribution– GDP – Per Capita income – Countries classified by World Bank on basis on Per

capita income as

Country classification Per capital Income

Low income country US$ 905 or less in 2006

Middle income country US$ 906 – $11,115

High income country US$ 11,116 or above


• Based on GDP, GNI, Income level and other economic and socio economic factors countries are divided into

• Developed Economies

• Developing Economies and

• Least Developed Economies

Demand conditions and Implications for business

• MNCs also enter low income countries for high price goods– Huge population, low wages , cheap labor force– Distribution of national income

• Unequal distribution e.g population of 500 million, 10% of the population has 60% of the income , company can sell high price goods

• Equal distribution , company can sell low price goods

– Not per capita income but income distribution that influences the international business decision

Understanding Economic Environment : Inflation

• Purchasing power of consumer depend upon real income

• Higher level of inflation– lower real income and purchasing power– Cost of production will be higher ( beneficial to

export from home country where inflation level is low)

Understanding Economic Environment : Consumption behavior

• Low income country – price conscious customers

• Rural areas of LDCs – savings or real estate investment

• LDCs – income spent on fulfilling basic needs e.g food and housing

• High literacy rate – quality conscious• Less educated – price conscious• Less social security – prefer savings with low

tendency to consume

Understanding Economic Environment : Availability of Human or physical resources

• Easy availability – lower manufacturing cost

• MNCs look for skilled manpower locally

• Availability of physical resource e.g factors of production

• Indian companies have shifted to Sri Lanka for manufacture of rubber products and to Nepal for herbal products

Understanding Economic Environment : Network of infrastructure

• Power supply, good road/ rail / air links, communication system

Understanding Economic Environment : Fiscal, Monetary and

Industrial Policy• Fiscal policy

– Income tax, excise duties, tariff – Fiscal deficit

• Monetary Policy– Money supply, rate of inflation, rate of interest

and cost of credit– Inflation within limits, low interest rates

• Industrial Policy– Sectors open to foreign participation

Understanding Economic Environment : Strength of External

sector• Strong Balance of payment position

• Huge Forex reserves

• Favourable when government adopts liberal policies

• Current account deficit when imports are more than exports

• Capital account deficit due to difference in inflow and outflow of currency

Understanding Economic Environment : Repatriation of Earnings

• Possible when govt have liberal policy

• strong balance of payment position

• foreign exchange reserves is large

Analysing Economic Environment

• Data collection – Secondary data - International organisations

like World Bank, IMF, United Nations etc.– Primary data – own sources or consultants

• Statistical Analysis of data – to predict demand for the product– Analyse economic trends etc.

MODULE 5 CONTD..

Instruments of trade policy

• Tariffs - oldest form of trade policy– Specific– Ad valorem

• Good for government• Protects domestic producers

– Reduces efficiency

• Bad for consumers– Increases cost of goods

Instruments of trade policy-subsidies

• Government payment to a domestic producer– Cash grants– Low-interest loans– Tax breaks– Government equity participation in the company

• Subsidy revenues are generated from taxes• Subsidies encourage over-production,

inefficiency and reduced trade

Instruments of trade policy - Quota

• Import quota– Restriction on the quantity of some good

imported into a country

• Voluntary export restraint (VER)– Quota on trade imposed by exporting country,

typically at the request of the importing country

Instruments of trade policy -Quota

• Benefits producers by limiting import competition

Instruments of trade policy- local content

• Requires some specific fraction of a good to be produced domestically

• Initially used by developing countries to help shift from assembly to production of goods.

• Developed countries (US) beginning to implement.

• For component parts manufacturer, LCR acts the same as an import quota

• Benefits producers, not consumers

Instruments of trade policy-administrative policies

• Bureaucratic rules designed to make it difficult for imports to enter a country.

• Japanese ‘masters’ in imposing rules.

Instruments of trade policy-anti dumping policies

• Defined as– Selling goods in a foreign market below

production costs– Selling goods in a foreign market below fair

market value

• Result of– Unloading excess production.– Predatory behavior

• Remedy: seek imposition of tariffs

Political arguments for intervention

• Protecting jobs and industries– CAP (Europe) and VER

• National security– Defense industries - semiconductors

• Retaliation– Punitive sanctions

Political arguments for intervention

• Protecting consumers– Genetically engineered seeds and crops– Hormone treated beef

• Furthering foreign policy objectives– Helms-Burton Act.– D’Amato Act

• Protecting human rights– MFN

Economic arguments for intervention

• Infant industry.– Oldest argument - Alexander Hamilton, 1792– Protected under the WTO– Only good if it makes the industry efficient.

• Brazil auto-makers - 10th largest - wilted when protection eliminated

– Requires government financial assistance.• Today if the industry is a good investment, global

capital markets would invest

Economic arguments for intervention

• Strategic trade policy– Government should use subsidies to protect

promising firms in newly emerging industries with substantial scale economies

– Governments benefit if they support domestic firms to overcome barriers to entry created by existing foreign firms

Development of the world trading system

• Intellectual arguments for free trade– Adam Smith and David Ricardo

• Free trade as government policy– Britain’s (1846) repeal of the Corn Laws

• Britain continued free trade policy– Fear of trade war


• Great Depression– US stock market collapse– Smoot-Hawley tariff(1930)

• Almost every industry had its “made to order tariff”

• Foreign response was to impose own barriers

• US exports tumbled


• GATT -multilateral agreement established under US leadership1948– Objective is to liberalize trade by eliminating

tariffs, subsidies, & import quotas– 19 original members grew to 120


• Used ‘Rounds of talks’ to gradually reduce trade barriers

• Uruguay Round GATT 1986-93– Mutual tariff reductions negotiated– Dispute resolution only if complaints were

received

Disturbing trends in the world trading system

• Pressure for greater protectionism due to– Increase in the power of Japan’s economic

machine and closed Japanese markets– US trade deficit– GATT circumvented by many countries

• Through use of VER

GATT criticisms

• Economic theories don’t fit the ‘real world’ model

• US global preeminence has declined

• Shift from cutting tariffs to eliminating non-tariff barriers angered countries

• ‘National Treatment’ or ‘Most Favored Nation’ status results in inequalities

The World Trade Organization

• The WTO was created during the Uruguay Round of GATT to police and enforce GATT rules

• Most comprehensive trade agreement in history• Formation of WTO had an impact on

– Agriculture subsidies (stumbling block: US/EU)

– Applied GATT rules to services and intellectual property (TRIPS)

– Strengthened GATT monitoring and enforcement

The WTO

• 145 members in 2003

• Represents 90% of world trade

• 9 of 10 disputes satisfactorily settled

• Tariff reduction from 40% to 5%

• Trade volume of manufactured goods has increased 20 times

The WTO

• Policing organization for:– GATT– Services– Intellectual property

• Responsibility for trade arbitration:– Reports adopted unless specifically rejected– After appeal, failure to comply can result in

compensation to injured country or trade sanctions

WTO at work

• 280 disputes brought to WTO between 1995 and 2003

• 196 handled by GATT during its 50 year history

• US is biggest WTO user – Big wins - beef - bananas– Big loss - Kodak

The WTO -achievements

• Telecommunications (1997)– 68 countries (90%) of world

telecommunications revenues– Pledged to open their market to fair competition

• Financial Services (1997)– 95% of financial services market– 102 countries will open, their markets to varying

degrees

WTO in Seattle

• Millennium round was aimed at further reduction of trade barriers in agriculture and services

• WTO meeting disrupted by– Human rights groups– Trade unions– Environmentalists – Anti globalization groups

• No agreement was reached

Doha agenda -WTO

• Cutting tariffs on industrial goods and services

• Phasing out subsidies• Reducing antidumping laws• WTO regulation on intellectual property

should not prevent members from protecting public health– TRIPS agreement

Antidumping cases by WTO members

Fig 5.1

Antidumping actions

• Four sectors account for 70 percent of all antidumping actions reported to WTO – Metal industries– Chemicals– Plastics– Machinery and electrical equipment– Actions often initiated by politicians in the

various countries to please strong lobbying groups in exchange for votes

Protectionism in agriculture

• Recent focus of WTO on agricultural subsides – These are 3 to 5 times higher than non-

agricultural subsidies– Advanced nations are the strongest defenders

of this system• Combination of high tariffs and subsides on

agricultural product– Raises price to the consumer– Reduces volume of agricultural trade– Encourages overproduction of subsidized

products

Protection of intellectual property

• Trade related Aspects of Intellectual property (TRIPS)– WTO members allowed to grant and enforce

patents and copyrights– This encourages innovation– Reduces piracy rates in drugs, software music

• Expected to boost global economic rates and social and economic welfare around the world

Managerial implications

• Trade barriers act as a constraint on firm strategy

• May be useful to establish more production activities in the protected country

• Business gains from government’s efforts to open protected markets are more than gains from governments efforts to protect domestic industries/firms

MODULE 5 CONTD..

The Political Environment

Nature of Political Risk

• Political risk due to

• host government intervention into foreign business : Trade restrictions viz tariffs, Quota, LCR, Subsidies, Policies etc.

• Political risk due to unstable host government– Multi party system

The Political Environment

• Reasons for government intervention in international trade– Protect domestic producers/ consumers– Protect jobs – Promoting indigenous goods in the Foreign market– National Security– Retaliation

• Restricting imports• Promoting Exports

Host government intervention into foreign business

• Trade policy instruments– Tariffs– Subsidies– Quota– Local content requirement– Administrative policies– Anti-dumping regulations

Instruments of trade policy

• Tariffs - oldest form of trade policy– Specific– Ad valorem

• Good for government• Protects domestic producers

– Reduces efficiency

• Bad for consumers– Increases cost of goods

Instruments of trade policy-subsidies

• Government payment to a domestic producer– Cash grants– Low-interest loans– Tax breaks– Government equity participation in the company

• Subsidy revenues are generated from taxes• Subsidies encourage over-production,

inefficiency and reduced trade

Instruments of trade policy - Quota

• Import quota– Restriction on the quantity of some good

imported into a country

• Voluntary export restraint (VER)– Quota on trade imposed by exporting country,

typically at the request of the importing country

Instruments of trade policy -Quota

• Benefits producers by limiting import competition

Instruments of trade policy- local content

requirement• Requires some specific fraction of a good to

be produced domestically• Initially used by developing countries to help

shift from assembly to production of goods.• Developed countries (US) beginning to

implement.• For component parts manufacturer, LCR

acts the same as an import quota• Benefits producers, not consumers

Instruments of trade policy-administrative policies

• Bureaucratic rules designed to make it difficult for imports to enter a country.

• Japanese ‘masters’ in imposing rules.

Instruments of trade policy-anti dumping policies

• Defined as– Selling goods in a foreign market below

production costs– Selling goods in a foreign market below fair

market value

• Result of– Unloading excess production.– Predatory behavior

• Remedy: seek imposition of tariffs

Host Government Instability

• Wars arising from within the country or outside the country

• Ethnic / Religion / Class conflict• Revolution• Terrorism• Military Coup• New International Alliances• Changes in Ideology or Business Plicy• International Debt

Nature of Political Risk

• Political Risk can be analysed through– Leadership succession– Historical tendency to nationalize– Labour agitation and worker participation in

management– Civil Disorder, violence and terrorism– Military unrest– External territorial dispute– Policies concerning foreign investment

The Environment of Political Risk

MNC

Business conflict

Local Law

International Law

Ideology

Ideology

The Environment of Political Risk

CommunismClassless societyGreatest risk when communist government takes over the non communist governmentConfiscates or expropriates private property

SocialismGovernment ownershipNo concern for profitNationalization of key industry

CapitalismPrivate ownershipNational security, defense, police under government control

The Legal Environment

• International Law– Laws conforming to WTO rules and regulations

• Anti-dumping law• Subsidies & Countervailing duty• IPR

• Local Laws– Laws designed to protect interest of business and

consumer interest alike• Taxation• Monetary Policy

• Business Conflicts– Methods to resolve business conflicts (litigation,

arbitration or conciliation)

Political Rick Assessment Techniques

• Type of government in power – Political patterns – Norms of stability

• Analyze the characteristic of its own products – Identify potential risk

• Identify sources of potential risk• Future projections of the probabilities and time

frame of potential risks• Surveys / Research of international organisation

Protection for MNCs

• Trade : Policy e.g ECGC in India

• Investment : MIGA (Multilateral Investment Guarantee Agency

MODULE 6

Control Strategies

References• Daniels John D., Radebaugh Lee H., Sullivan Daniel P., International

Business : Environment and Operations, Pearson Education, 10th Edition, Chapter 15

• Hodgetts Richard M, Luthans F. & Doh Johathan P., , International Management, Tata McGrawHill Publishing Company Ltd., (2005) Chapter 11

• Koontz Harold and Weihrich Heinz, (2001), Management : A Global Perspective, Tata McGraw Hills Publishing Co. Ltd., Chapter 20, 21 & 23

• Thakur Manab, Burton Gene E. & Srivastava B. N. (2002), International Management Concepts & Cases, Tata McGraw Hills Publishing Co. Ltd., Chapter 11

• Bhalla V. K. & Ramu Shiva S. ( 2005). International Business, Environment and Management, Anmol Publications Pvt. Ltd., Chapter 12

• Sharan Vyuptakesh, (2006), International Business, Concept, Environment and Strategy, Pearson Education, Chapter 14

Why Control ?

Control

Planning

Implementing Evaluation

correction of performance

Control is essential but difficult if……

• Distance• Diversity

– Market size– Type of competition– Nature of product– Labour policy– Currency

• Uncontrollable – Outside stakeholders– Government regulations

• Degree of certainty / uncertainity– Changing political environment– Insufficient country data

Control Process

Planning

Organizational Architecture

Location of Decision making

Control Strategies

PlanningSTEP 1Setting GoalsSTEP 2• Analyze internal corporate resources

– Financial Resources• Capital, cash flow needs, Transfer funds, Profit and

dividend targets– Human Resources

• Product / General Skill, Functional skills, Transferability of people, Additional Resources

– Product Resources • Capacity use and bottlenecks, Monopolistic

characteristic, Adaptation for foreign sales, Transportation, Cost savings

– Environmental Effects• Cyclical change in demand, Competition, Societal

Attitudes

Planning

STEP 3

• Set International Corporate Objectives – sales objectives,– Resource acquisition objectives,– Diversification, – Competitive risk minimizing objectives

Planning

STEP 4• Analyze Local Conditions ( in current or

perspective host countries)– Same as in step 2 plus– Financial Factors

• Tax system, Timing of receivables and payables, need for finance

– Marketing Factors• Cost and availability of market data, distribution methods and

cost, nature of competition, government regulation, advertising

– Other Factors• Attitude towards foreign business, political and economic

stability

Planning

STEP 5

• Select Alternatives and priorities– Alternatives

• Location of value added activities• Location of sales target

– Setting priorities among alternatives

Planning

STEP 6

• Implementation strategy

• Set targets / goals

• Reports

• Environmental Analysis

• Corrective steps

• Contingency plan

Organizational Structure

• International Division

• Worldwide area Structure

• Worldwide Product Structure

• Martix Structure

Location of Decision Making

• Centralized – decision making at top e.g global organisation

• Decentralized – decisions delegated to operating personnel e.g transnational organisation


• Pressure for Global Integration vs. Local Responsiveness– Transferring resources i.e capital, personnel

and technology– Standardization– Systematic dealing with stakeholders– Transnational strategies


• Capabilities of Headquarter Vs. Subsidiary Personnel– Decentralized

• Large teams in subsidiary• Worked for a long time with the company• Successful track record

• Decision Expediency and Quality– Cost and Expediency– Importance of decision

Factors effecting decision makingCentralization Decentralization

Large Size Small Size

Large Capital Investment Small Capital Investment

Relative high importance to MNC

Relative low importance to MNC

Highly competitive environment

Stable environment

Strong volume to cost relationship

Weak volume to cost relationship

High degree of technology Moderate to Low degree of technology

Strong importance attached to brand name, patent rights, etc.

Little importance attached to brand name, patent rights, etc.

Centralization Decentralization

Low level of product diversification

High level of product diversification

Homogenous product lines Heterogeneous product lines

Small geographic distance between home office and subsidiary

Large geographic distance between home office and subsidiary

High interdependent between the units

Low interdependent between the units

Fewer highly competent managers in host country

More highly competent managers in host country

Much experience in international business

Little experience in international business

Factors effecting decision making

Control Strategies

• Controlling means evaluating results in relation to plans and objectives and deciding what action to take

• Types of control– Direct Control – face to face or personal meetings,

visit by top executives to foreign subsidiaries, staffing policy, organization structure

– Indirect Control – Reports and other written forms e.g balance sheets, income statements etc.

Control Techniques

• Corporate Culture e.g dress, time, code of conduct etc.

• Coordinating mechanism

• Financial Performance

• Quality Performance

• Personnel Performance

Control Techniques

• Financial Performance– Profit and ROI

• Quality Performance– Initiatives to improve Quality – Importance to customer feedback– Working closely with suppliers

• Personnel Performance– Periodic appraisal of work performance– Performance to be evaluated separately from the

performance of the subsidiary

MODULE 7

The globalization of markets and brands

• Standardization vs Adaptation

• Different marketing mix in different country

• Globalization may be the exception rather than the rule in many consumer goods markets and industrial markets

Market segmentation

• Refers to identifying distinct groups of consumers whose purchasing behavior differs from others in important ways

• Segments can based on:– Geography– Demography– Socio-cultural factors– Psychological factors

Market segmentation

• Two main issues relating to segmentation:– Extent of differences between countries in the

structure of market segments– Existence of segments that transcend national

borders

Product Policy

• Cultural differences

• Economic development

• Product and technical standards

Product Policy : Cultural differences

– Differ along dimensions such as social structure, language, religion and education

– Impact of tradition

– Some tastes and preferences becoming cosmopolitan

Product Policy : Economic development

• Consumer behavior is influenced by economic development

– Consumers in highly developed countries tend to demand extra performance attributes in their products

• Price not a factor due to high income level– Consumers in less developed countries, value

basic features as more important • Price a factor due to lower income level

– Cars: no air-conditioning, power steering, power windows, radios and cassette players.

• Product reliability is more important

Product Policy : Technical standards

–Government standards can rule out mass production and marketing of a standardized product

–Differing technical standards constrain globalization of markets

• Different television signal frequencies, left hand and right hand driven cars, different voltage requirements

Pricing strategy

• Three aspects of international pricing strategy– Price discrimination– Strategic pricing– Regulatory influence on prices

Price discrimination

• Said to occur when consumers in different countries are charged different prices for the same product

• Two conditions necessary– National markets kept separate to prevent

arbitrage • Capitalization of price differentials by purchasing

product in countries where prices are lower and reselling where prices are higher

– Different price elasticities of demand in different countries

• Greater in countries with low income levels & highly competitive conditions

Elastic and inelastic demand curves

Price discrimination

Strategic pricing

• Predatory pricing– Using price as a competitive weapon to drive

weaker competition out of a national market– Firms then raise prices to enjoy high profits– Firms normally have profitable position in

another national market

Strategic pricing

• Multipoint pricing strategy– Two or more international firms compete

against each other in two or more national markets

– A firm’s pricing strategy in one market may impact a rival in another market.

• Kodak and Fuji

Strategic pricing

• Experience curve pricing– Firms price low worldwide to build market

share– Incurred losses are made up as company

moves down experience curve, making substantial profits

– Cost advantage over its less-aggressive competitors

Regulatory influences on prices

• Antidumping regulations– Selling a product for a price that is less than the cost of

producing it– Antidumping rules vague, but place a floor under export

prices and limit a firm’s ability to pursue strategic pricing• Article 6 of GATT, allows action against an importer if

the product is sold at ‘less than fair value’ and causes ‘material injury to a domestic industry’

• Competition policy– Regulations designed to promote competition and

restrict monopoly practices

Communication strategy

• Defines the process the firm will use in communicating the attributes of its product to prospective customers

Barriers to international communication

• Cultural Barriers– Develop cross-cultural literacy– Firm should use local input such as local

advertising agency and sales force


• Source and country of origin effects– Receiver of the message evaluates the message

based on status or image of the sender • Anti-Japan wave in US in 1990’s

– Place of manufacturing influences product evaluations

• Often used when consumer lacks more detailed knowledge of the product

– Examples: French wines, Italian clothes and German luxury cars


• Noise levels– Amount of other messages competing for a

potential customer’s attention• Developed countries - high.• Less developed countries - low.

• Standardized advertising strategy execution more difficult (culture, laws)

Push versus pull strategy

• Push strategy emphasizes personal selling

– Requires intense use of a sales force– Relatively costly

• Pull strategy depends on mass media advertising– Can be cheaper for a large market segment

• Determining factors of type of strategy– Product type and consumer sophistication– Channel length– Media availability

Product type and consumer sophistication

• Pull strategy

– Consumer goods– Large market segment– Long distribution

channels– Mass communication

has cost advantages

• Push strategy– Industrial products or

complex new products– Direct selling allows

firms to educate users– Short distribution

channels– Used in poorer nations

for consumer goods where direct selling only way to reach consumers

Channel length

• Pull strategy– Long or exclusive distribution channels

• e.g. Japan

– Mass advertising to generate demand to pull product through various layers

• Push Strategy– In countries with low literacy levels to educate

consumers

Media availability

• Pull strategy– Relies on access to advertising media– Common in developed nations

• Push strategy– Media availability limited by law– All electronic media state owned with no

commercial policy

Global advertising

• Standardized:

– Significant economic advantages– Scarce creative talent– Many global brand names

• Non-standardized:– Cultural differences– Advertising regulations can be a restriction

Distribution strategy

• Choice of the optimal channel for delivering a product to the consumer– Optimal strategy is determined by the relative

costs and benefits of each alternative– Depends on differences between countries

• retail concentration• channel length• channel exclusivity

A typical distribution system

Retail concentration

• Concentrated system– common in developed countries– contributing factors: increase in car ownership,

number of households with refrigerators and freezers and two-income households

• Fragmented system– common in developing countries– contributing factors: great population density with

large number of urban centers e.g. Japan– uneven or mountainous terrain e.g. Nepal

Channel length

• Refers to number of intermediaries between the producer and the consumer

• Determined by degree to which the retail system is fragmented– Long distribution channel– Short distribution channel

Channel length

• Long distribution channel– Fragmented retail system promotes growth of

wholesalers and retailers– Firms go through intermediaries such as

wholesalers to cut selling costs

• Short distribution channel– Concentrated retail system– Firms deal directly with retailers

Channel exclusivity

• Degree to which it is difficult for outsiders to access distribution channels

• Varies between countries– Japan - exclusive systems because personal

relations, often decades old play important role in stocking products

– Difficult for new firm to get shelf space as compared to an old firm

Configuring the marketing mix

Culture

Economy

Com

petition

Stan

dard

s

Distrib

ution

Gov’t Regs

Product

Attrib

utes

Dis

tribu

tion

Stra

tegy

Comm

unications

Strategy

Pricing Strategy

Differences Here

Requires Variation Here

New product development

• The location of R & D– Rate of new product development greater

in countries where• More money spent on R&D• Underlying demand is strong• Consumers are affluent• Competition is intense

Integrating R&D, marketing and production

• Integrating R&D, production and marketing ensures– Project development driven by customer

needs– New products are designed for ease of

manufacture– Development costs are kept in check– Time to market is minimized

Integrating R&D, marketing and production

• High failure rate ratio– Between 33 % and 60% of new products fail

to earn adequate profits

• Reasons for failure:– Limited product demand– Failure to adequately commercialize product– Inability to manufacture product cost-

effectively

Cross-functional product development teams

• Objective of team to take a product development project from the initial concept development to market introduction

• Effective teams must have – “Heavyweight “ project manager– One member from each key function– Physically co-located to facilitate

communication– Clear plan and goals– Own process for communication and conflict

resolution

MODULE 8

Global Manufacturing Strategies

Manufacturing Strategies

• Activity that controls the transmission of physical materials through the value chain– Includes procurement, production and into

distribution

• Logistics : Procurement and physical transmission of materials through the supply chain, from suppliers to customers

Manufacturing : Strategic objectives

• Lower costs– Disperse manufacturing activities to efficient

global locations

• Increase productivity – Using Total Quality Management – Six Sigma

Manufacturing : Strategic objectives

• Accommodate demands for local responsiveness– decentralize production

• Respond quickly to shifts on customer demand– time-based competition extremely important

CountryFactors

TechnologicalFactors

ProductFactors

LocatingManufacturing

Facilities

Global Sourcing

Country factors

• Optimum economic, political, and cultural conditions

• Externalities– Skilled labor pools– Supporting industries

• Formal and informal trade barriers

• Exchange rate

Technological factors• Fixed costs• Minimum efficient scale• Flexible manufacturing for mass customization,

reduced cost and product customization– reduce setup times for complex equipment– increase machine utilization – improve quality control

• flexible machine cells to perform a variety of operations

A typical unit cost curve

Manufacturing locationSingle or few locations

• Fixed costs are substantial• Minimum efficient scale is high• Flexible manufacturing technologies available

Major market locations • Better meets local demands• Fixed costs are low• Minimum efficient scale is low• Flexible manufacturing technologies unavailable• Trade barriers and transportation costs remain major

impediments

Product factors and location strategies

• Two product features affect location decisions:– Value to weight ratio.– Product serves universal needs

• Two basic strategies– Concentrating in a centralized location and serving

the world market – Decentralizing them in various regional or national

locations close to major markets when opposite conditions exist

Centralized location

• Factor costs have substantial impact• Low trade barriers• Externalities favor certain location• Stable exchange rates• High fixed costs, high minimum efficient

scale relative to global demand or flexible manufacturing technology

• Product’s value-to-weight ratio is high• Product serves universal needs

Decentralized location

• Factor costs do not have substantial impact• High trade barriers• Location externalities not important• Exchange rates volatile• Low fixed costs, low minimum efficient scale• Flexible manufacturing technology unavailable• Product’s value-to-weight ratio is low• Significant differences in consumer tastes and

preferences exist between nations.

Strategic role of foreign factories

• Initially, established where labor costs low• Later, important centers for design and

final assembly• Upward migration caused by pressures to:

– Improve cost structure– Customize product to meet customer demand.

and– An increasing abundance of advanced factors

of production

Make or buy decisions

• Should a firm make or buy the component parts that go into their final product?

• Advantages of making own components:– Lower costs if most efficient producer– Facilitating specialized investments– Proprietary product technology protection– Improved scheduling

Advantages of buy versus make

• Strategic flexibility in sourcing components

• Lower firm’s cost structure

• Offsets

• Strategic alliances with suppliers give benefits of vertical integration without the associated organizational problems

Managing a global supply chain

• Objective of materials management in managing a firm’s global supply chain– Maintain lowest possible cost – In a way that best serves the customer’s

needs

• Role of just-in time inventory– Economize on inventory holding costs– Speeds inventory turnover– Drawback: no buffer stock

Role of organization

• Organizational linkages more numerous and complex– More difficult to control costs

• Require separate materials management as a function– Equal weight with other departments– Decide between centralized and decentralized

organizational structure

Potential materials management linkages

Traditional organizational structure

Organization structure with materials management as separate function

Strategicmanager/CEO

Productionplanning

and controlPurchasing

Manufacturing Marketing Finance

Distribution

Materials management

Role of information technology and the internet

• Track component parts across the globe to an assembly plant– Optimize and adjust production scheduling

• Electronic data interchange (EDI) – Used to coordinate flow of materials between

suppliers ,firm, shippers and customers– Communicate without time delay

• Increases flexibility and responsiveness of the whole global system

– Paperwork decreased– Significant competitive advantage

MODULE 9

Global Human Resource Management

Human resource management (HRM)

• Refers to the activities an organization carries out to use its human resources effectively

• Four major tasks of HRM

– Staffing policy– Management training and development– Performance appraisal – Compensation policy

International human resource management

• Strategic role: HRM policies should be congruent with the firm’s strategy and it’s formal and informal structure and controls

• Task complicated by profound differences between countries in labor markets, culture, legal and economic systems

Staffing policy

• Staffing policy– Selecting individuals with requisite skills to do a

particular job– Tool for developing and promoting corporate culture

• Types of Staffing Policy– Ethnocentric– Polycentric– Geocentric

Ethnocentric policy

• Key management positions filled by parent-country nationals

• Best suited to international businesses• Advantages:

– Overcomes lack of qualified managers in host nation– Unified culture– Helps transfer core competencies

• Disadvantages:– Limit advancement opportunities for host country nationals– Produces resentment in host country– Can lead to cultural myopia

Polycentric policy• Host-country nationals manage subsidiaries• Parent company nationals hold key headquarter

positions• Best suited to multi-domestic businesses• Advantages:

– Alleviates cultural myopia.– Inexpensive to implement

• Disadvantages:– Limits opportunity to gain experience of host-country

nationals outside their own country.– Can create gap between home-and host-country

operations

Geocentric policy

• Seek best people, regardless of nationality• Best suited to Global and trans-national

businesses• Advantages:

– Enables the firm to make best use of its human resources

– Equips executives to work in a number of cultures– Helps build strong unifying culture and informal

management network

• Disadvantages:– National immigration policies may limit implementation– Expensive to implement due to training and relocation– Compensation structure can be a problem.

The expatriate problem

• Expatriate: citizens of one country working in another– Expatriate failure: premature return of the

expatriate manager to his/her home country• Cost of failure is high

– Inpatriates: expatriates who are citizens of a foreign country working in the home country of their multinational employer

Reasons for expatriate failure

• US multinationals– Inability of spouse to

adjust– Manager’s inability to

adjust– Other family problems– Manager’s personal or

emotional immaturity– Inability to cope with

larger overseas responsibilities

• European multinationals• Inability of spouse to adjust

• Japanese Firms– Inability to cope with

larger overseas responsibilities

– Difficulties with the new environment

– Personal or emotional problems

– Lack of technical competence

– Inability of spouse to adjust.

Expatriate selection

• Reduce expatriate failure rates by improving selection procedures

• An executive’s domestic performance does not (necessarily) equate his/her overseas performance potential

• Employees need to be selected not solely on technical expertise but also on cross-cultural fluency

Four attributes that predict success

• Self-Orientation– Possessing high self-esteem, self-confidence and mental well-

being

• Others-Orientation– Ability to develop relationships with host-country nationals– Willingness to communicate

• Perceptual Ability– The ability to understand why people of other countries behave

the way they do– Being nonjudgmental and being flexible in management style

• Cultural Toughness– Relationship between country of assignment and the expatriate’s

adjustment to it

Training and management development

• Training: Obtaining skills for a particular foreign posting– Cultural training : Seeks to foster an appreciation of

the host-country’s culture, regular foreign postings– Language training : Can improve expatriate’s

effectiveness, aids in relating more easily to foreign culture and fosters a better firm image

– Practical training: Ease into day-to-day life of the host country

Training & management development continued

• Development: Broader concept involving developing manager’s skills over his or her career with the firm

– Several foreign postings over a number of years– Attend management education programs at regular

intervals

Management development & strategy

• Development programs designed to increase the overall skill levels of managers through:– On going management education– Rotation of managers through a number of jobs within

the firm to give broad range of experiences

• Used as a strategic tool to build a strong unifying culture and informal management network

• Above techniques support transnational and global strategies

Performance appraisal

• Problems:– Unintentional bias

• Host-nation biased by cultural frame of reference• Home-country biased by distance and lack of

experience working abroad

• Expatriate managers believe that headquarters unfairly evaluates and under appreciates them

• In a survey of personnel managers in U.S. multinationals, 56% stated foreign assignment either detrimental or immaterial to one’s career.

Guidelines for performance appraisal

• More weight should be given to onsite manager’s evaluation as they are able to recognize the soft variables

• Expatriate who worked in same location should assist home-office manager with evaluation

• If foreign on-site managers prepare an evaluation, home-office manager should be consulted before completion of formal the terminal evaluation

Compensation

• Two issues:– Pay executives in different countries according to the

standards in each country?

or

Equalize pay on a global basis?

– Method of payment

Compensation issues

Type of Company Payment

EthnocentricHow much home-country

expatriates should be paid.

PolycentricPay can and should be

country-specific.

Geocentric/TransnationalMay have to pay its

international cadre of managers the same.

Expatriate pay

• Typically use balance sheet approach– Equalizes purchasing power to maintain same

standard of living across countries – Provides financial incentives to offset

qualitative differences between assignment locations.

Components of expatriate pay • Base Salary

– Same range as a similar position in the home country• Foreign service premium

– Extra pay for work outside country of origin• Allowances

– Hardship, housing, cost-of-living and education allowances

• Taxation– Firm pays expatriate’s income tax in the host country

• Benefits– Level of medical and pension benefits identical

overseas

International labor relations

• Key Issue– Degree to which organized labor can limit the choices

of an international business

• Aims to foster harmony and minimize conflicts between firms and organized labor

Concerns of organized labor

• Multinational can counter union bargaining power with threats to move production to another country

• Multinational will keep highly skilled tasks in its home country and farm out only low-skilled tasks to foreign plants– Easy to switch locations if economic conditions warrant– Bargaining power of organized labor is reduced

• Attempts to import employment practices and contractual agreements from multinationals home country

Strategy of organized labor

• Attempts to establish international labor organizations

• Lobby for national legislation to restrict multinationals

• Attempts to achieve international regulations on multinationals through such organizations as the United Nations

MODULE 10

Accounting in International Business

Accounting information and capital flows

Need for Accounting Information

• Enables providers of capital to – access the value of their investment – Access security of their loan– Make decisions about future resource allocation

• Tax assessment• Performance evaluation of the firm• Control internal expenditure• Planning for future expenditure and income

Determinants of national accounting standards

Relationship between business and providers of capital

• Three external sources of capital:– Individual investors

• Buying shares and bonds

– Banks.• Loan capital

– Government• Make loans or investment

Relationship between business and providers of capital : Individual

investors

• E.g in US and UK – individual investors and major source of capital– stock and bond market – purchase small proportion of stocks and bonds– No desire to be involved in day to day

management of firms– Lack the ability to get information on demand

from management– Financial accounting system provide information

required by small investors to make decisions

Relationship between business and providers of capital : Banks.

• E.g Switzerland, Germany and Japan– Banks satisfy most of capital needs– Bank officials on board of firms – Information need satisfied through personal

contacts, direct visit, board meetings– Reports for public disclosure of financial

information– Assets and valued conservatively, and liabilities

are overvalued to provide cushion for banks

Relationship between business and providers of capital : Government

• E.g France and Sweden– Government major providers of capital– Financial information oriented towards need

of government planners

Political and economic ties with other countries

• Accounting convergence due to close political and economic ties between countries– US system influenced accounting practices in

Canada and Mexico : NAFTA– Former colonies of British Empire follow

British system– European Union attempting to harmonize

accounting practices in its member countries

Inflation accounting

• Historic cost principle:– Assumes currency is not losing value to

inflation– Most significant impact in the area of asset

valuation• Current cost accounting:

– Factors out inflation – Used in Great Britain until inflation rate

declined

Level of development

• Developed countries have more sophisticated accounting procedures– Accounting problems are more complex– Sophisticated capital markets– Lenders require comprehensive reports– Educated workforce can perform complex

accounting functions

Culture

• Hofstede’s uncertainty avoidance has an impact on accounting systems– Low uncertainty avoidance - these countries

tend to have strong independent auditing professions that ensure a firm’s compliance with rules

Accounting clusters

• Few countries have identical accounting systems.

• Similarities exist in clusters

British-American-Dutch Group

Firms raise capital from investors. Accounting systems designed to inform investors

Have close ties to banks. Accounting practices meet bank’s needs.

South American Group

Countries have experienced persistent and rapid inflation.

Accounting principles reflect the inflation.

Accounting clusters

Europe-Japan Group

National and international standards

• Diverse accounting practices are enshrined in national accounting and auditing standards

• Accounting standards: Rules for preparing financial statements

• Auditing standards: Specify rules for performing an audit

Lack of comparability

• One result of national differences in auditing and accounting standards is lack of comparability of financial reports– Dutch – current values for replacement assets

– Japan – prescribes historic cost– Germany – depreciation is liability, Britain –

depreciation is deducted from assets

Lack of comparability

• With growth of global capital markets both transnational financing and transnational investment have grown

• Firm has to explain to investors why its financial position looks different in two accountings

International standards

• Efforts to harmonize accounting standards across countries

• Formation of International Accounting Standards Board in March 2001

• Members represent 79 countries• Responsible for formulating international

accounting standards (IAS)• Has issued over 30 IAS

– Difficult to get requisite votes– Voluntary compliance

• Recognition is growing

Accounting aspects of control systems

• Annual control process involves three steps:– Head office and subunit management jointly

determine subunit goals for the coming year.– Throughout year, head office monitors subunit

performance against agreed goals.– If subunit fails to achieve goals, head office

intervenes to determine why the shortfall occurred, taking corrective action when appropriate.

Exchange rate combinations in the control process

Fig19.3

Accounting aspects of control systems

• Lessard- Lorange Model:– Three exchange rates used to translate foreign

currency into corporate currency for budget and performance purposes.• The initial rate, the spot exchange rate when the

budget is adopted.• The projected rate, the spot exchange forecast

for the end of budget period (i.e., the forward rate)

• The ending rate, the spot exchange rate when the budget and performance are being compared.

Transfer pricing and control systems

• Transfer prices introduce significant distortions into the control process

• Transfer price must be taken into account when setting budgets and evaluating a subsidiary’s performance.

Separation of subsidiary and manager performance

• Valuation of a subsidiary should be separate from the evaluation of the subsidiary manager

• Manager’s evaluation should take into consideration how hostile or benign the countries environment is for business and make allowances over items the manager has no control e.g. inflation rates, interest rates exchange rates

MODULE 11

Strategic Management


• Mission : an organization’s current purpose

• Vision : Fundamental aspirations and values

• Plan of action for pursuing mission and vision of the organization

Dabur: Mission

We intend to significantly accelerate profitable growth. To do this, we will: • Focus on growing our core brands across categories, reaching out to

new geographies, within and outside India, and improve operational efficiencies by leveraging technology

• Be the preferred company to meet the health and personal grooming needs of our target consumers with safe, efficacious, natural solutions by synthesizing our deep knowledge of ayurveda and herbs with modern science

• Provide our consumers with innovative products within easy reach • Build a platform to enable Dabur to become a global ayurvedic leader • Be a professionally managed employer of choice, attracting,

developing and retaining quality personnel • Be responsible citizens with a commitment to environmental protection • Provide superior returns, relative to our peer group, to our shareholders

Dabur: Vision

Dedicated to health and well being of every household

Hyundai Motors : Mission

• To create exceptional automotive value for our customers by harmoniously blending safety, quality and efficiency. With our diverse team, we will provide responsible stewardship to our community and environment while achieving stability and security now and for future generations.

Hyundai Motors : Vision

Our team provides value for your future.

Need for Strategic Management

• diversification

• Need to integrate diverse operations with unified and agreed on focus

Benefit of Strategic Management• Better monitoring and coordination

operations worldwide

Strategy Formulation

Four approaches • Economic Imperative• Political Imperative• Quality Imperative• Administrative Coordination Strategy

Strategy Formulation : Economic Imperative

Focus on

• Cost Leadership

• Differentiation

• Segmentation

Product is generic in nature

Brand name not important, performance / results matters

Strategy Formulation : Political Imperative

Focus

• Protect local market niches

• e.g Thumps Up , Loreal

• Planning are country responsive

Strategy Formulation : Quality Imperative

• Change in attitude and raising expectations for service quality e.g Japanese companies A/V product

• Focus on quality improvement e.g TQM

Strategy Formulation : Administrative Coordination

• Decisions based on merits of individual situations

• Wal-Mart in Latin America

Steps in Strategy Formulation

1. Scanning the external environment

2. Internal resource analysis

3. Formulating goals on basis on 1 and 2 above

Environmental Scanning

• Forecasts of Trends– Macroeconomic indicators– Currency market– Industry trend, market share

Internal Resource analysis

SWOT analysis

• Strength

• Weakness

• Opportunities

• Threat

Goal Setting• Goals for

– Profitability• Level of profits, ROI, ROA

– Marketing goals• Market share – worldwide, region, country, growth

– Operations• Ratio of foreign to domestic production volume, Quality and

cost control

– Finance• Minimizing tax burden globally, optimal capital structure

– Human Resource• Managers with global orientation, Management development

of host country natioanls

Strategy Implementation

• Providing goods and services in accordance with plan of action– Location consideration– Functional Areas

Strategy Implementation : Location consideration

• Country Selection– Industralized countries– Gateway to other markets– Cost effective– Government control– Policies related to foreign investment– Low tax rates, interest rates, subsidized

electricity, land, well developed infrastructure etc.

Strategy Implementation : Location consideration

• Specific locale in chosen country– Access to markets– Proximity to competitors– Availability of transportation and electric

power– Desirability of employees – Nature of workforce, closer to availability of

skilled workforce– Cost of doing business

Strategy Implementation : Role of Functional Areas

• Marketing– Strategy to differ from country to country– Marketing approach to match with overall

strategic plan

• Production– Importance of worldwide production strategy– Shift from multi domestic approach to global

integration approach

Strategy Implementation : Role of Functional Areas

• Finance– Sourcing funds for overseas business

operations– Shift from local sourcing to sourcing from

international money market


• Company that pursue most appropriate strategy within the context of core competencies and the markets in which it does business, will outperform the competitors

Airbus and Boeing

Building Planes in Global Factories

Airbus Formerly known as Airbus Industrie. The name AIRBUS was taken from a nonproprietary termed used by airline

industry in 1960s. AIRBUS refers ton commercial aircraft of certain size and range. Owned by Europe's 2 largest contractors EADS and BAE. These 2 company had 80% and 20% of the stake respectively. BAE system put a option for their stakes to EADS for 2 billion pounds. No. of people employed 55000. It operated in 4 Europe countries-France, Germany, the United Kingdom

and Spain. Final assembly of articles occurred at Toulouse (France) and Hamburg

(Germany). It had 3 subsidiaries in the USA ,Japan, China.

Conti… A300 was its maiden flight and 1st production model in 1972. The launch of A320 in 1981 made it emerge as a major player in the aircraft

market. The aircraft had over 400 orders before its launch ,compared to 15 for A300

in 1972. The alliance was weak but that changed in 2000 when Daimler Chrysler

areospace,aeropatiale and CASA merged to form EADS. IN 2001 when BAE system and EADS formed the airbus integrated

company to coincide with the development of new airbus A380 A380 expected to seat 555 passengers and be the world’s largest

commercial passenger jet. In 2005 A380 successfully completed 1st flight from Toulouse ,France.

Boeing • Gobally the largest aircraft manufacture.• Headquater in chicago, illinois(US)• It’s the 2nd largest defence contractor in the world.• Founded by william e boeing and george conrad westervelt. On 15 july 1916• It was eatablised in seatle (us) and was named “b&W” after their initials.• In1971 the name was changed to “pacific aero products”• Soon the company was again renamed and became “boeing airplane

company”• In 1927 boeing eatblised a new service,boeing air transport(bat).• Later bat,pacific air transport and boeing airplane company merged into a

single corporation.• In 1929 company acquired pratt & whitney , hamilton standard propeller co.

and chance vought.

Conti….

• In 2005 the company was globally the largest civil aircraft manufactures.

• In 2005 it posted a revenue of us $54.845 billion and net profit was us $2.572 billion.

• It employed 153000 associated in2006.

• Its stock played a major role in the dow jones industrial average.

• United aircraft purchased national air transport in1930.

• Its 1st aircraft Boeing 314 clipper in June 1938.

• 1958 Boeing began to manufacture B707, the united states 1st commercial jet airliner.

• Piasecki helicopter was acquired in 1960 and reorganized as Boeing's vertol division.

Conti…..• In 1967 it introduced short and medium-range airliner, the twin 737.• In the mid 1990s it developed a new and revamped version of the 737

called the next generation 737 or 737NG• 1997 Boeing merged with McDonnell Douglas• The Boeing 787 dreamliner was under development in 2006 by Boeing

commercial airplanes and scheduled to enter in service in 2008.• The company also began to consider 2 new projects-the Boeing sonic

cruiser and 747X.

About the case

# Manufacturing race between airbus versus boeing.

# This contributed to battle of racism and corporate war between us and Europe.

# Fear and apprehension in Europe and America as both airbus and Boeing were transferring their technical know-how to Asian countries.

# The volume core manufacturing activities that the 2 companies outsourced to other countries were so big that their national identity was fading.

# About 60% of the production work of A 350 was done outside continental Europe.

# About 70% of Boeing 787 dreamliner was built outside united states.

# The 2 companies’ rival networks of exclusive subcontractors were evolving into 1 network.

# Europe and us feared to lose out expertise and job cuts.

Global Civil Aerospace Market: A Snapshot

► Civil aerospace was cyclical and was dependent upon the performance of commercial airlines industry and profitability in the global scale.

► Airbus and Boeing were two major players.

► Bitter rivalry between these 2 companies.

► Both these companies had projected growth of 4.5 % during 2005-2010.

► Boeing was leader in of fragmented network and point-to-point traffic concept thus supported smaller aircraft.

► In 2006 Boeing had 55% share followed by 21% of airbus and 24% rest.

► It was perceived that by 2010 share of airbus would increase to 31% whereas Boeing's could decline to 51%.

► Analyst opined that Boeing failed to enrich its product.

► Airbus invested huge amount in R&D as compared to Boeing

Conti…..

► While airbus favored hub-and-spoke model of operation ,network consolidation and supported larger aircraft.

► Leading aircraft manufactures sourced parts and components from tier 1 suppliers and developed aircrafts.

► Commercial airlines sourced new aircraft system , components and spare parts.

► Manufactures earned substantial revenue by selling aircraft system and components and suppliers got their revenue from selling spare parts.

► Major customers were national carriers who provided long haul ,short haul services and low cost airlines offering intra regional services.

► Analyst predicted that Boeing would be able to increase its Asian market share by 1.3% during 2005-2010

► Airbus would be able to increase by 4.9% in other regions.

STRATEGIC INITIATIVES

Outsourcing : A Trend or Political Influence

Outsourcing was done by these two companies as it helped them to reduce labor and production cost which in turn reduced the manufacturing cost.

A large portion of parts and equipments of these two companies came from Japan and Canada.

Expertise of handling the manufacturing process varied from country to country

As china had the better expertise of assembling metal aircraft and could build wing boxes in much more efficient way.

The us enjoyed good political relationship with Japan. Japanese govt. also provided subsidies to Boeing which was an indirect

help. Airbus also took advantage by setting up manufacturing units in china.

Airbus v/s Boeing

• Richard J Samuels says, “ There is nothing impenetrable about any duopoly in this industry”.

• Japan & China involved in the outsourcing rivalry.• Japan’s Ministry of Economy, Trade & Industry (METI) had

invested US $76 million to establish the infrastructure.• Japanese aerospace manufacturing companies

MHI,KHI,FHI,JAL,ANA got contracts from Boeing 787 to manufacture Wings.

• One main reason for Boeing to revive their market position is to increase the fuel efficiency of aircraft.

• On other hand, china was lagging behind Japan in the technological aspect of manufacturing.

Conti..

• China also failed when they made an attempt to make Y-10 based on Boeing 707.

• The European plane maker had announced the site of assembly plant in China, first ever outside Europe in 2005.

• The plant likely to built near Beijing or Hong Kong & start rolling out A320 by 2008.

• Airbus announced a plan to invest $10 billion in China for 150 narrow body A320s.

Outsourcing: across the continent

• Close social & political ties to the booming Asia-Pacific market were certainly going to their help cause.

• Acc. To industry magazine “ Flight International in 2005, 40% of new aircraft orders from Asia, 17% from Europe, 11% from North America.

• China was growing fast & expected to become the 2nd largest aviation market after US.

• Boeing components develops in various countries. Likely– Japan- trailing edge, fuselages sections, wings boxes.– Australia- Wing flaps.– Sweden- Cargo doors.– Canada- gear doors.– UK- build Engine– South Korea- wings tips.

What lies ahead• To pacify the thinking –”that it would be gloomy in the future

aerospace market of Europe and America• To reduce apprehension about the knowledge outsourcing • Airbus & Boeing had record sales in 2005• In Japan & china there were already huge domestic demand for ND.• The idea of national aerospace was fading away as the two giants

increased their outsourcing of manufacturing activities • Outsourcing helped them to reduced their cost and maintain

efficiency level.• If the trends continue by 2025 it would be impossible to distinguish

among American, European and Asian aircraft.

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Boeing Airbus Others

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Airbus-Boeing competition: Net Aircraft Orders 2002-2005

The end

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