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 Example Designed in Germany Office

Car

Gasoline

American

Assembled in Mexico (DaimlerChrysler) Components in USA & Japan Fabricated from Korean Steel and M alaysain Rubber

Consult

BP Service Station kia o N

Stockbroker

Ko rea Coffee beans from Brazil n im Chocolate from Peru mi gra Shares Coffee Stall nt

British MNC in US Oil wells of Africa Pumped out by French company Shipped in a Greek Shipping Line Designed in Finland Assembled in Texas Chip sets designed by Indian Engineer working in San Diego for Qualcomm Chip sets manufactured in Taiwan Duetsche Telecom, German Transformed from state owned monopoly into global co by Israeli CEO

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

Globalization of markets • 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.

Globalization of markets 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

Global drivers 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

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 “ Firstmover 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 Fig 4.8

Chance

Two external factors that influence the four determinants.

Company Strategy, Structure, and Rivalry Factor Conditions

Government

Demand Conditions Related and Supporting Industries

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

Strategic Alliances • Cooperative agreements between potential or actual competitors • Advantages: – Facilitate entry into market. – Share fixed costs. – Bring together skills and assets that neither company has or can develop. – Establish industry technology standards.

• Disadvantage: – Competitors get low cost route to technology and markets.

Partner Selection

Making Alliances Work

Alliance Structure

Partner Selection • Get as much information as possible on the potential partner • Collect data from informed third parties – former partners – investment bankers – former employees

• Get to know the potential partner before committing

Structuring the Alliance to Reduce Opportunism Walling off critical technology

Establishing contractual safeguards Opportunism by partner

reduced by:

Agreeing to swap valuable skills and technologies

Seeking credible commitments

Managing the Alliance

Building Trust Focus on developing interpersonal relationship

Learning from Partners Alliance between GM and Toyota in California Toyota learned US supply, transportation and also how to manage workforce which they used while opening their plant in Kentucky

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 secondtier 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 High

Low

» Transnational » Multi domestic corporations » International companies » Global companies

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

McDonald’ Global Expansion • 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

• • • • • • •

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

Entering Indian Market : Challenges 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

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

Global Challenges translating into local challenges • 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

Global Challenges translating into local challenges • 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

KEY MACROECONOMIC INDICATORS : INFLATION • Inflation and Interest rates • High inflation – High interest rates

KEY MACROECONOMIC INDICATORS : INFLATION • 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

KEY MACROECONOMIC INDICATORS : INFLATION • 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

KEY MACROECONOMIC INDICATORS : SURPLUSES AND DEFICIT • • • • •

Capital Account Transactions in real or financial assets Foreign Direct Investment Purchase of securities Official Asset Reserve e.g Gold, SDRs and Foreign Currency

KEY MACROECONOMIC INDICATORS : SURPLUSES AND DEFICIT • External Debt • Total debt or debt as percentage of GDP • Larger external debt – unstable economy

KEY MACROECONOMIC INDICATORS : SURPLUSES AND DEFICIT • 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 objectives e.g former USSR and East European countries

Market based economy

Mixed economy

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

Private and public sectors co exist No 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

Understanding Economic Environment : Demand conditions • 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

Understanding Economic Environment : Demand conditions • 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 policysubsidies • 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 policyadministrative 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

Development of the world trading system • 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

Development of the world trading system • GATT -multilateral agreement established under US leadership1948 – Objective is to liberalize trade by eliminating tariffs, subsidies, & import quotas – 19 original members grew to 120

Development of the world trading system • 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

Fig 5.1

Antidumping cases by WTO members

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 nonagricultural 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 policysubsidies • 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 policyadministrative 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 Ideology International Law Local Law Business conflict MNC

The Environment of Political Risk Ideology

Communism Classless society Greatest risk when communist government takes over the non communist government Confiscates or expropriates private property

Socialism Government ownership No concern for profit Nationalization of key industry

Capitalism Private ownership National 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 ? Planning

correction of performance Control

Implementing

Evaluation

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

Planning STEP 1 Setting Goals STEP 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

Location of Decision Making • Pressure for Global Integration vs. Local Responsiveness – Transferring resources i.e capital, personnel and technology – Standardization – Systematic dealing with stakeholders – Transnational strategies

Location of Decision Making • 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 making Centralization

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

Factors effecting decision making 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 Low interdependent between the units 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

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

Barriers to international communication • 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

Barriers to international communication • 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

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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

Global Sourcing Country Factors Technological Factors Product Factors Locating Manufacturing Facilities

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 location Single 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 Strategic manager/CEO

Materials management

Purchasing

Manufacturing

Production planning and control

Marketing

Distribution

Finance

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 • Japanese Firms • US multinationals – Inability of spouse to adjust – Inability to cope with – 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

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

Ethnocentric

How much home-country expatriates should be paid.

Polycentric

Pay can and should be country-specific.

Geocentric/Transnational

May 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

Accounting clusters

British-American-Dutch Group Firms raise capital from investors. Accounting systems designed to inform investors South American Group Countries have experienced persistent and rapid inflation. Accounting principles reflect the inflation.

Europe-Japan Group Have close ties to banks. Accounting practices meet bank’s needs.

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

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

Strategic Management • 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.

Market Share in Aero Space in 2006 70.00% 60.00% 50.00% US

40.00%

Europe 30.00%

Asia

20.00% 10.00% 0.00% Boeing

Airbus

Others

Airbus-Boeing competition: Net Aircraft Orders 2002-2005 1200 1000 800 Airbus

600

Boeing

400 200 0 2002

2003

2004

2005

The end