International Financila Management Module5

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MODULE – V INTERNATIONAL FINANCIAL MANAGEMENT Recent changes in the global financial markets: • Globalisation of financial markets. Increase in the amount of money involved in financial transactions . Increasing domination of instituti onal investors. Increase of new financial instr uments and products. Increase use and importa nce of technology. Impact of the internet (online banking online dealing). Increase competition between b anks (corporate banking decl ine). Trend towards deregulation of the f inancial sector. Emergence of EU and Euro. Increasing importance of emerging markets. Financial system Introduction Financial System is the group of individuals, intermediaries and institutions that can potentially interact or participat e in transactions that involve real or financial assets. The financial assets are instruments that facilitate transactions in real assets or constitute the subject of a transaction between market participants. The financial markets facilitate the trading of financi al assets between marke t participants and The financial intermedi aries facilitate the financial transactions of market participa nts. The role of a financial system Principl es The Financial System p rovides the environment in which the individual investors and companies operate. Financial system participants: Individuals. – Companies. Financial institutions, private and public organizations. – Governments. Functions of the financial system: Facilitation of transfer of money. Primary and secondary securit y mark ets.

Transcript of International Financila Management Module5

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MODULE – V

INTERNATIONAL FINANCIAL MANAGEMENT

Recent changes in the global financial markets:

• Globalisation of financial markets.

• Increase in the amount of money involved in financial transactions.

• Increasing domination of institutional investors.

• Increase of new financial instruments and products.

• Increase use and importance of technology.

• Impact of the internet (online banking online dealing).

• Increase competition between banks (corporate banking decline).

• Trend towards deregulation of the financial sector.

• Emergence of EU and Euro.

• Increasing importance of emerging markets.

Financial system – Introduction

Financial System is the group of individuals, intermediaries and institutions that

can potentially interact or participate in transactions that involve real or financial

assets.

The financial assets are instruments that facilitate transactions in real assets or

constitute the subject of a transaction between market participants.

The financial markets facilitate the trading of financial assets between market

participants and The financial intermediaries facilitate the financial transactions of 

market participants.

The role of a financial system – Principles

The Financial System provides the environment in which the individual investors and

companies operate.

Financial system participants:

– Individuals.– Companies.

– Financial institutions, private and public organizations.

– Governments.

Functions of the financial system:

– Facilitation of transfer of money.

– Primary and secondary security markets.

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– Financial services.

In a financial system different parties participate in or perform different functions but

the common feature of all those functions is The transfer of money from surplus to deficit

economic agents.

Examples:

– Bank deposits.– Use of means of payments (cheques or electronically).

– Managing risk through investing in pensions or using insurance.

– Direct investment through buying and selling equities and bonds.

Transfer of funds from ultimate Lenders to ultimate borrowers can Be made through

direct lending; through trading in organised securities markets or indirectly through

financial intermediaries.

Lenders and borrowers in a financial system

• End users:

– Ultimate Lenders.

– Ultimate Borrowers.

• Intermediate Lenders and borrowers

– Financial institutions.

– Dealers.

– Market makers.

• Financial intermediaries

– Brokers.

– Banks, Clearing houses.

Issues:

1. Motivation and interests of the end users.

2. Motivation and interests of financial intermediaries.

3. Function of financial intermediaries.

Saving and Lending

Savings is the surplus of the income over expenditure. In most developed economies, the

majority of the individuals and households are net savers, i.e. surplus economic agents.

Investment is the acquisition of  real assets that are used in the production of goods or

services by companies (the original term used by the economists). Financial Investment is

a term used by financial press for acquisition of financial assets by individuals.Individuals has less investment opportunities than companies.

Borrowing

The deficit economic agents have current consumption higher than their current income.

Borrowers are deficit economic agents such as:

– Companies.

– Government or local government authorities.

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– Individuals and households.

Deficit economic agents have to liquidate existing financial assets to

finance their investments or incur financial liabilities, i.e. debts.

Borrowers are interested at:

1. Minimising the cost of borrowing.

2. Maximising the length of time of the loan.

Lenders, borrowers and Financial assets

In a transaction, the financial asset of one party is liability for theother party.

In aggregate, the financial surpluses and deficits must be equal.

Sectors in a closed economy:

– Households or private sector.

– Companies or corporate sector.

– Government.

Assuming that households have a financial surplus and companies have financial deficit.

If government runs a deficit, the private sector surplus has to be equal to the sum of the

government and corporate sector deficit.

Financial Institutions

Financial institutions (FI) are companies that act as mediators between surplus and

deficit economic agents.

Financial Institutions:

– Deposit takers (banks).

– Non deposit takers.

Functions of financial institutions:

– provision of payment mechanism.

– facilitation of lending and borrowing.

– provision of insurance, foreign exchange and other services.

• Liabilities of the banks are used as money.

• Banks are increase and facilitate money supply.

• Banks are closely regulated.

FIs as companies

Financial institutions are companies and use labour and capital toprovide efficient services.

• Financial crises, economic recession periods or industry consolidation forces FI to

become more efficient.

– High street premises vs. internet banking.

– Labour efficiency.

FI use capital (input) and provide loans (output) that generates

economic rents.

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• Deposit taking FI:

– Input: customer deposits.

– Output: loans.

• Non deposit taking FI:

– Input: funds from savers (for insurance, pensions, unit trusts, mutual funds).

– Output: investments in FA and deposits/loans to other FI.

FIs as Intermediaries – Functions

Financial institutions mainly receive deposit from surplus economic agents and provide

loans to deficit economic agents but also provide a range of other services.

Inter mediation by FI also involves offering services not only to ultimate lenders and

borrowers but also to other transacting parties .

The role/functions of FI as intermediaries are:

– Provision of payment mechanism

– Creation of desirable assets and liabilities

– Maturity transformation

– Risk transformation/management

– Liquidity provision

– Cost efficiency (transaction, information and search costs)

– Provision of efficient monitoring mechanism.

FIs as Intermed. – Provision of Payment Mechanism.

Most payments do not involve exchange of cashMany FI such as commercial banks offer options to pay by:

– Cheques

– Credit cards

– Electronic transfers

– Debit cards etc.

Opportunities to use non cash payments are also offered by other non bank financial

intermediaries. Competition in prices and quality of services provide wide choice to

market participants. Electronic transactions in fund transfers are increasingly common

between domestic and  foreign residents. The efficiency of system of payments facilitates

economic growth.

FIs as Intermediaries – Asset & Liability creation

Creation of financial assets and liabilities:

Examples:

– A bank attracts deposits of customers with surplus funds by creating a number of 

different deposit and savings accounts (current accounts, savings accounts etc).

– A bank offers a number of different loans to individuals and companies (mortgages,

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short term loans, consumer loans etc).

– A financial company raises equity capital and loans to provide lease services to

corporate clients.

– An insurance company provides insurance services to households and companies.

– A mutual funds company offers investment opportunities.

Financial Markets

Financial markets (FMs) are organised and highly regulated mechanisms that facilitate

the transactions between investors and companies or other market participants that act

as investors or intermediaries.

No need to be in a specific physical location.

Financial claims or financial instruments that represent

investors’ assets and liabilities are traded in the FMs.

1. Financial instruments that can be traded directly:

Shares, corporate and government bonds, treasury bills.

2. Financial instruments that cannot be traded directly:

Life assurance benefits, pension benefits, bank or savings deposits.

Financial Markets & Financial Instruments

• Classification of FM by the type of interest rate that the traded

financial instruments offer:

1. Instruments that pay fixed rate of interest (bonds, some mortgages).

2. Instruments that pay variable rate of interest (bank deposits, equities).

• Classification of FM by the time to the residual maturity of thetraded financial instruments:

1. Money markets: where the maturity is less than a year.

2. Capital markets: where the maturity is higher than one year.

• Classification of FM by the type of issue:

1. Primary markets.

2. Secondary markets.

The global financial system (GFS)

The global financial system (GFS) is a financial system consisting of institutions and

regulations that act on the international level, as opposed to those that act on a nationalor regional level. The main players are the global institutions, such as International

Monetary  Fund  and  Bank  for  International  Settlements,  national  agencies  and

government  departments,  e.g.,  central  banks  and  finance  ministries,  and  private

institutions acting on the global scale, e.g., banks and hedge funds

The history of financial institutions must be differentiated from economic history and

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history of money. In Europe, it may have started with the first commodity exchange, the

Bruges Bourse in 1309 and the first financiers and banks in the 1400–1600s in central

and western Europe. The first global financiers the Fuggers (1487) in Germany; the first

stock company in England (Russia Company 1553); the first foreign exchange market (The

Royal Exchange 1566, England); the first stock exchange {the Amsterdam Stock Exchange

1602).Milestones in the history of financial institutions are the Gold Standard (1871–1932

), the founding of International Monetary Fund (IMF), World Bank at Bretton Woods, andthe abolishment of fixed exchange rates in 1973.

International institutions

The most prominent international institutions are the IMF, the World Bank and the

WTO:

1.)The International Monetary Fund (http://www.imf.org/) keeps account of international

balance of payments accounts of member states. The IMF acts as a lender of last resort

for members in financial distress, e.g., currency crisis, problems meeting balance of 

payment when in deficit and debt default. Membership is based on quotas, or the amount

of money a country provides to the fund relative to the size of its role in the international

trading system.

2)The World Bank (http://www.worldbank.org/) aims to provide funding, take up credit

risk or offer favorable terms to development projects mostly in developing countries that

couldn't be obtained by the private sector. The other multilateral development banks and

other international financial institutions also play specific regional or functional roles.

3)The  World  Trade  Organization  (http://www.wto.org/)  settles  trade  disputes  and

negotiates international trade agreements in its rounds of talks (currently the DohaRound)

Government institutions

Governments act in various ways as actors in the GFS: they pass the laws and

regulations for financial markets and set the tax burden for private players, e.g., banks,

funds and exchanges. They also participate actively through discretionary spending. They

are closely tied (though in most countries independent of) to central banks that issue

government debt, set interest rates and deposit requirements, and intervene in the

foreign exchange market.

Private participants

Players acting in the stock , bond , foreign exchange , derivatives and

commodities markets and investment banking are

Commercial banks

Pension funds

Hedge funds and Private Equity

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Legal frameworks and treatises

Eurozone

North American Free Trade Agreement (NAFTA)

Mercosur

Commonwealth of Independent States (CIS)

Perspectives

There are three primary approaches to viewing and understanding the global financial

system. The liberal view holds that the exchange of currencies should be determined not

by state institutions but instead individual players at a market level. This view has been

labelled as the Washington Consensus. This view is challenged by a social democratic

front which advocates the tempering of market mechanisms, and instituting economic

safeguards in an attempt to ensure financial stability and redistribution. Examples

include slowing down the rate of financial transactions, or enforcing regulations on the

behaviour of private firms. Outside of this contention of authority and the individual,

neoMarxists are highly critical of the modern financial system in that it promotes

inequality between state players, particularly holding the view that the political North

abuse the financial system to exercise control of developing countries' economies.

Exchange rate system

An exchange rate is the current market price for which one currency can be exchanged for

another. If the U.S. exchange rate for the Canadian Dollar is $1.60, this means that 1American Dollar can be exchanged for 1.6 Canadian dollars.

Exchange Rate Systems is of three types:

(1) Free Floating Systems

A free floating exchange rate system is one in which governments and central banks do

not participate in the foreign exchange market.

The free floating exchange rate system is a theoretical system only.

The advantage of a free floating exchange rate system is self regulation.The disadvantage of a free floating exchange rate system is the unpredictability of the

exchange rate.

(2)Managed Float Systems

A managed float is a system of floating exchange rates in which some governments or

central banks seek to influence their exchange rates.

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A government or central bank cannot control the exchange rate but they often try to

influence their rate at least for a short time.

(3)Fixed Exchange Rates

A system of fixed exchange rates is one in which exchange rates are fixed by government

policy.

A Commodity Standard

A commodity standard system is a fixed exchange rate system in which the prices of 

various currencies are fixed relative to a given quantity of some commodity.

The most important commodity standard system in history is the gold standard.

In order to print money, gold had to be owned by a particular country and international

payments had to be redeemable in gold at the stated rate. The gold standard was self

regulating.

The self regulation system required that adjustments to international imbalances come

through massive changes in the economy.

Fixed Exchange Rates through Currency Board Arrangements

A currency board arrangement is a kind of commodity standard fixed exchange rate

system in which there is explicit legislative commitment to exchange domestic currencyfor a specified foreign currency at a fixed rate and a currency board to ensure fulfillment

of the legal obligations this arrangement entails. The simplest version is to only issue

domestic currency when the currency board has an equivalent amount of the foreign

currency to which the domestic currency is pegged. This system severely limits an

independent monetary policy by the country with the currency board.

Fixed Exchange Rates through Intervention

The post World War II system was set at Bretton Woods by international agreement.Currencies were fixed in value in terms of other currencies.

Currency values were maintained by active intervention of governments and central

banks by adjusting monetary and fiscal policies. The unwillingness of countries to

subjugate  their monetary/fiscal  policies  to  international  considerations  caused  the

breakdown of the system.

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The United States withdrew from the Bretton Woods system when President Nixon

announced the United States would no longer redeem foreign held dollars for gold.

Fixed exchange rate systems make exchange rates more predictable. Once exchange rates

diverge significantly from their set values, bringing them back in line is very disruptive.

Coordinating monetary and fiscal policies to maintain exchange rates is not impossible,as the eleven member European Union with its common currency, the euro, attests.

BALANCE OF PAYMENT

Meaning of the balance of payments

The current account

trade in goods

trade in services

balance on trade in goods and services

income flow

current transfer of money

balance on current account

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The capital account

The financial account

investment

▪ direct

▪ portfolio

other financial flows (mainly short term)

flows to and from reserves

overall balance of payment

assessing bop figure

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Exchange Rates

The rate of exchange

individual rates of exchange

exchange rate index Determination of exchange rates

the equilibrium exchange rate

appreciation and depreciation

shifts in currency demand and supply

differences in interest rates

differences in inflation rates

relative investment prospects

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change in aggregate demand

speculation

Exchange rates and the balance of payments: government intervention

reducing short term fluctuations

using reserves

borrowing from abroad

changes in interest rates

maintaining a fixed rate of exchange over the longer term

deflation / reflation

supply side policies

import controls

Fixed versus Floating Exchange Rates

Advantages of fixed exchange rates

certainty

no speculation (if rate is absolutely fixed) prevents 'irresponsible' government policies

Disadvantages of fixed exchange rates

conflicts with other macro objectives

danger of competitive deflations

problems of international liquidity

difficulties in adjusting to shocks

speculation

Fixed versus Floating Exchange Rates

Advantages of free floating rates

automatic correction

no problem of international liquidity

insulation from external events

less constraint on domestic macro policy

Disadvantages of free floating rates

possibly unstable exchange rates

speculation

uncertainty for business

but use of forward markets

lack of discipline on economy

Globalisation and the Problem of Instability

Interdependence through trade

international effects of changes in aggregate demand

vulnerability of open economies

Financial interdependence

size of international financial flows

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international effects of changes in interest rates

The need for policy co ordination

the search for policy co ordination

G7/G8 meetings: attempts at harmonisation but lack of convergence

Difficulties in achieving harmonisation

differences in budget deficits and debt

interest rate divergence

different internal structures of economies

politicians more concerned with domestic issues

Debt and Developing Countries

The debt problem

Debt ratios: average of all developing countries

Debt ratios: average of all developing countries

Debt ratios: average of all developing countries

Debt and Developing Countries

Origins of the debt problem

borrowing to finance development

the 1973/4 oil shock

the 1979/80 oil shock

world recession  fall in export earnings

fall in commodity prices (exports)

high interest rates  cost  of servicing debt

Rescheduling debt

rescheduling official loans rescheduling commercial bank loans

Dealing with debt

structural reforms

IMF structural adjustment programmes

tight fiscal policies to reduce budget deficits

privatisation and market liberalisation

open trade policy

hardship from IMF programmes

debt forgiveness

HIPC initiative

▪ successes / failures to date

pressure to cancel debt

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INTERNATIONAL OPERATIONS MANAGEMENT

Operations management is becoming more and more international in its scope. Even a

firm, which markets the products only within the domestic market, may be conducting its

business  operations  internationally  like  sourcing  the  inputs  or  finished  products

internationally or manufacturing the product abroad. A dynamic company will take

advantage of the favorable conditions that exist anywhere in the world.

The business system involves the integration and management of diverse activities. On

the one extreme, a firm may undertake all of these different activities, carrying on the

whole production process and doing all the other operations encompassing the business

system. On the other extreme, a firm can outsource most of these. Many firms now

concentrate on its core competence/business and outsource the rest. The multinational

Nike, for example, concentrates itself on the two strategic ends of the business R&D and

marketing and gets its products manufactured by independent subcontractors located in

different countries as per the design and other’s specifications given b1 the company, with

the result that while Nike directly employs about 9,000 people it indirectl1 employs about

7,5000 people. In fact, many products put to the market by a number of companies

embody substantial outsourced parts/components.

Global Supply Chain Management

Operations management, in fact, is, to a very large extent, supply chain management. As

Scary and Larsen observe, “managing the supply chain is vital for international business.

The alternate objective is to deliver products to market with variety, responsiveness,

timeliness and efficiency. Corporate strategy must include organizing; coordinating andexecuting the processor product flow as a competitive necessity and as a source of 

potential competitive advantage.

The  strategic  requirements  of  international  business   determine  the  extent,

characteristics and strategic direction of the supply chain. Some

businesses are only involved with international operations to secure a supply of materials

and components; marketing is domestic. Other businesses manufacture and export from a

home base an~ procure materials overseas. Some corporations serving global markets

rationalize production using international factory networks for supply.

A company’s supply chain encompasses the coordination of materials, information, and

funds from the initial raw material supplier to the ultimate.2 It is the management of the

valueadded process from the suppliers’ supplier to the customers’

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The scope of supply chain, thus, encompasses almost the entire system of business

process. According to Houlihan, the underlying concept of the supply chain embraces the

following points:

∙ The supply chain identifies the complete process of providing goods and services

to the final user.

∙ It includes all parties and logistics operations from supplier to customer within asingle system.

∙ The scope of the supply chain includes procurement, production and distribution

operations.

∙ The supply chain extends across organizational boundaries.

∙ It is coordinated through an information system accessible to all members.

∙ The primary objective of the supply chain is service to customers. This must be

balanced against costs and assets.

∙ Objectives of individual supply chain members are achieved through the

performance of the chain as a whole.

The  above  exposition  of  the  scope  of  the  supply  chain  connotes  that  operations

management is, by and large, supply chain management (note, particularly, the third

point). As the supply chain becomes more complex, there is an increasing need

to integrate each stage as part of a larger system.

Make or Buy

One of the critical considerations in the supply chain management is make or buy.

Globalization, having increased the scope of sourcing, has made the make or buy questionmore relevant. The make or buy decision is influenced by a number of factors.

The organizational technological environment may affect the buying decision. Some of the

firms that outsource components design or redesign the component parts in house and

select suppliers who can offer the best combination of quality, price, service and delivery.

In other words, in such cases, called make to print, the buying company provides the

product technology to the supplier who has the required process technology. Some firms

want the product technology also to be developed by the supplier. In some cases both the

supplier and buyer work in collaboration to develop proper solution to the problem.

Global Sourcing

Buy strategy is greatly benefited by the opportunities for global sourcing. The major

factors determining the input output ratio, output volume, cost and quality are the

appropriateness and cost of technology and the quality and cost of other inputs. A

great advantage of globalization is the opportunity to source them from the best source

anywhere in the world.

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Outsourcing  has  certain  other  advantages.  It  reduces  the  capital  and  manpower

requirements. It may also impart more flexibility to adjust to certain conditions like a

recession. International sourcing accounts for an estimated one third of the world trade.

Many developing countries have taken a lot of advantage of this trend. Although India did

not benefit significantly in the past, India is emerging as a major sourcing destination for

a variety of products.

Partnering / Relationship Marketing Buyer supplier relationship is emerging as a veryimportant strategic element in industrial marketing. The conventional win lose approach

is giving way to a dynamic and enduring win win mind set. It is pointed out that “never

before in the history of man’s industrial endeavor has the value of building effectiv eand

responsive relationships between suppliers and customers been more crucial to the

survival of free market enterprise than today.”

The collaborating relationship between the supplier andcustomer is known by different

names such as company

marketing, partnering partnership sourcing relationships marketing and co petition. As

Nalebuff and Branden burger point out, “one strategy that co petition emphasizes is

working with what we term ‘complementary.’ A complement or is the opposite of a

competitor. It’s someone who makes your products and services more, rather than less,

valuable. Not surprisingly, the complement or concept is especially relevant to the

builders of the Information Economy. Hardware needs software, and the Internet needs

high speed phone lines. No one, alone, can ‘;” build the infrastructure for the new

economy. It’s a whole new system made up of many complimentary parts.”7 As they

further exemplify, “in fact, most businesses succeed only if others also succeed. The

demand for Intel chips increases when Microsoft creates more powerful software. ‘

Microsoft  becomes more valuable when Intel produces faster chips. It’s mutual success

rather (;’Z than mutual destruction. It’s winwin. The cold war is over and along with it

the old assumptions about competition.”

The benefits reaped by the Japanese industry by the collaborative relationship have

encouraged industry in other parts of the world, particularly North America and Western

Europe, to rethink and restrategise the supplier customer relationship.

For example, Philips has laid down supplier partnership as one of the five principles of its

quality philosophy and the multination cultivates supplier relationships based on trust

and cooperation, sharing experience and expertise to benefit not only the buyer and the

supplier but also the end customer. Philips and its suppliers jointly develop technology,solve problems, learn from experience and try to avoid errors and misunderstandings.

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A look at the three categories of suppliers of Philips has would indicate the emerging

pattern Of buyer supplier relationships.

1. Supplier Partners: These are the most important suppliers, albeit might be the

smallest group among the three. Philips builds intense, involved relationships with them

and the important focus of the cooperation is innovation, the development of new

expertise and new opportunities. These suppliers might well have essential knowledgeand/or expertise that Philips could not otherwise access or develop for itself. This makes

these suppliers extremely significant strategically as their loss could seriously undermine

Philip’s current business and future direction.

2. Preferred suppliers: This category is less important than the first and there is not the

same degree of mutual dependence as in the first category. The company works closely

with them on issues such as quality, logistics and price to gain mutual benefit. The

suppliers may also adopt themselves, to some extent, to suit Philip’s requirements.

3. Commercial Suppliers: These are the least important suppliers and although the

company will encourage better performance in terms of quality ete. it is unlikely to get

involved in helping the supplier to achieve it.

International Logistics

An important dimension of the supply chain is logistics, also sometimes called materials

management. to According to the Council of Logistics Management, USA, logistics

management is the “process of planning, implementing and controlling the efficient, cost

effective flow and storage of raw materials, in process inventory, finished goods, and

related information from point of origin to point of consumption for the purpose

of conforming to customer requirements.” 

The difference between supply chain management and materials management

is on degree.

Materials management, or logistics, focuses much more on the transport and storage of 

materials and final goods, whereas supply chain management extends beyond that to

include the management of supplier and customer relations. Logistics, also known by

such  other  names  as  marketing  logistics,  industrial  logistics/  business  logistics/ 

distribution/  channels  of  distribution  logistics/  distribution  engineering  materials

logistics management supply chain management is a very important component of 

operations management.

Components of Logistics

Logistics  encompasses  the  total  movement  concept,  covering  the  entire  range  of 

operations concerned with the movement of materials and products to, through, and out

of the firm to the consumer. It includes a variety of activities such as inventory

management,  warehousing  and  storage,  transportation,  materials  handling,  order

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processing,  distribution,  communications,  packaging,  salvage  and  scrap  disposal,

returned goods handling, customer service etc.

Some of the major components of logistics are the following:

Fixed Facilities Location:

The major consideration is the location of fixed facilities like production and warehousing

in such a way as to maximize the total efficiency of the logistics system. Factors like

future potential of the markets, future plans of the company,competitive factors, political

stability, etc. are also important considerations.

Inventory Management:

The main objective of inventory management is to minimize the cost of the inventory

while  ensuring  smooth  supplies.  Developments  in  inventory  management  by  thecustomers order processing and in the total logistics system have made

inventory management both challenging and efficient.

Order Processing:

The efficiency of order processing by the client as well as the company have important

implications for inventory levels and other aspects of the logistics. Rapid order processing

shortens the order cycle and allows for lower safety stocks on the part of 

the client. Exporters from developing countries like India face the challenge of coping up

with such situations. Material Handling and Transportation: Material handling and

transportation are also an important part of the logistics management. The technologiesin use in material handling and transportation affect the efficiency of logistics.

Global Manufacturing Strategies. Location of the manufacturing facilities is one of 

the most important of the global operations management decisions.

4 Cs of Global Manufacturing

The success of a global manufacturing strategy depends on four key factors:

compatibility, configuration, coordination, and control.

Compatibility in this context is the degree of consistency between the foreign investment

decision and the company’s competitive strategy. Company strategies that managers must

consider are:

Efficiency/cost reduction of manufacturing costs.

Dependability degree of trust in a company’s products and its delivery and price

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promises.

∙ Quality performa nce reliability, service quality, speed of delivery, and maintenance

quality of the product(s).

∙ Flexibility ability of the production process t o make different kinds of products and to

adjust the volume of output.

∙ Innovation ability to develop new products and ideas .

Cost minimization strategies often prompt companies to opt  for offshore manufacturing

locations like developing countries and for outsourcing. Factors like characteristics of 

supplier.

 

Firms in respect of, dependability flexibility, quality and innovation influence the make

or buy decision, choice of vendors etc. in case of the make situations, the choice of 

production location will be based on evaluation of the location with its environment vis a

vis the above critical factors.

Manufacturing Configuration refers to the strategy of centralization or dispersion of 

manufacturing facilities. There are broadly  three broad categories of manufacturing

configuration,  viz., centralized facility, regional facilities, and mulch domestic facilities.

The choice of the configuration strategy is influenced by several factors such as scale

economies,  nature  of  technology  and  skill  requirements,  firm  strategies  such  as

internalization or externalization, international orientation and the organizational

mode of the company, foreign market prospects and other characteristics etc.

Coordination and Control which are two sides of the same coin, refer to the integration,

monitoring and taking of required actions to ensure that the implementation of he plans

progress as envisaged.

Location Strategy

The location of production facilities of a global corporation may be influenced by a

number of factors.

Nature of Organization

The organizational model is a major determinant of the  location. For example, in a

Multinational Company, the subsidiaries do most of the production for their respective

markets. In an International Company and Global Company, there is tendency tocentralize core production activities in the home country. The transnational corporation is

characterized by globally integrated networks of production facilities and other factors.

(See the chapter on Multinational Enterprises for a description of the important

characteristics of the different organizational models.

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Cost

Given other factors (like political factors, organizational model and strategic orientation

etc.), the overall cost of operations is often the most important consideration in the

location  decision making. Important factors, which determine the cost, include the

following:

1. Scale Economies: Where there are large scale economies in production, production

tends to concentrate in one or very limited number of locations. Such concentration may

be in the home country or foreign countries.

2. Nature of Assembly Operations: If there is  large economies of scale in production of 

components and if the assembly operations are labour intensive, the locations of 

components manufacture and assembly operations could be different. The assembly

operations may be carried out in countries where the labour is very cheap.

3. Taxes and Transport Costs: The import duty structure also influences the location of 

production phases. If the import duty is very high on finished product and comparatively

low on components it would encourage assembling of the product in the foreign market,

coterie~ paribus. If the cost of transporting the finished product is significantly higher

than for the components, exort in the CKD form would be preferred and the assembling of 

the product would be done in the foreign market. This will be particularly attractive if the

labour is cheap in the foreign market. Sometimes the import duty and transport cost will

favour the complete or most of the manufacturing activity in the foreign market.

Exchange Rate Variation Exchange rate fluctuations may also influence the import vs.

manufacturing decision. A depreciation of the foreign currency vis àvis the home

currency will make imports into the foreign country costly and this may encourage

production within the foreign market.

Availability and Cost of Inputs

Availability and cost of inputs (including land and infrastructure), obviously, are critical

factors influencing the location decision. The infrastructure and other facilities and

incentives are the attraction of export processing/special economic zones.

Logistical Factors

Certain locations are preferred because of logistical reasons – the cost and ease of moving

products to various markets. Some locations (Singapore, for example) are indeed regardedas the hub of international operations.

Product Life Cycle and Pattern of 

Demand

The stage in the product life cycle may influence the location of production base. As

explained in the International Product .Life Cycle Theory, when the product is in the

declining stage of the life cycle or when the technology/product becomes standardized,

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the production base tends to shift to the developing countries.

Nature of Product

Nature of the product, like Perish ability, weight losing or weight adding characteristic

during production process ete. Also influence the location decision.

Government Policies and Regulations Government regulations like foreign investment

policy, environmental regulations, local content stipulations, labour laws, taxation,assistances and incentives, dividend policies etc.,

Influence the location.

Social and Political Factors

Social and political factors such as attitude towards foreign business, domestic harmony

and peace ete also influence the location decision.

Country Evaluation and Select

The global market, made up of well over 200 independent nations with their own

distinctive characteristics is too vast indeed. It would be very difficult for a company to

operate in all these markets. There are barriers, which make entry to a number of 

markets impossible or very difficult. There may be markets, which are not profitable or

are not worth the trouble. Further, there may be markets, which are very risky due to

political or other reasons. Moreover, the company resources may not permit the operation

in a large number of countries. There are, of course, companies, which operate in majority

of the countries of the world. These companies have not achieved such a massive

expansion overnight. It has been a gradual expansion achieved over a long period.Further, all types of business do not lend themselves for such substantial international

expansion. It is, therefore, necessary to make an evaluation of the prospective markets

and make rank list of them for the company to operate in.

Market Selection Process

International Business Objectives:

The first step in any management decision making process is to determine/ascertain the

objectives. The market selected to serve  a particular international business objective

need not necessarily be the best suited to achieve some other international marketingobjective. Various markets may have different degrees of attractiveness from the point of 

view of different objectives.

Parameters for Selection

For proper evaluation and selection of the markets, it is  essential to clearly lay down the

parameters and criteria for evaluation.

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Preliminary Screening

After determining the criteria for market selection, the next important step in market

selection process is to conduct a preliminary screening of the markets. The objective of 

the preliminary screening process is to eliminate the markets which are obviously not

potential enough as revealed by a cursory look.

The parameters used for the preliminary screening may vary from product to product.

However, parameters like the size of population, per capita income, structure of the

economy, infrastructural factors, political conditions ete. are commonly used. Information

about some of the factors would enable a company to eliminate certain markets from its

consideration.

For example, in a country where there is no telecasting, there is  obviously no market for

T.V. sets. Similarly if the rural areas are not electrified, there may be no demand for

electrical agricultural pump sets. If the household income of the majority of a country

with a small population is very low, the demand for costly consumer durables will be

limited. Further, there may be countries which should be omitted due to political reasons,

including government polices. A lot of information required for the preliminary screening

is available from such publications as the Statistical Year Book of the United Nations and

the World Bank’s World Development Report.

Short listing of Markets

Preliminary screening enables to eliminate markets, which obviously do not merit

consideration at the very outset. There would be a large number of markets left even after

the preliminary screening. They are further screened with the help of more information

than was used at the preliminary screening stage. The objective is to distill out a smallnumber of markets, which are likely to satisfy the company’s criteria for market selection

for a detailed analysis for ranking them and final selection.

Evaluation and Selection

A thorough evaluation of the short listed markets is done with reference to the specific

parameters and criteria and the markets are ranked on the basis of their overall

attractiveness. One or more market(s) is/are selected from the rank list. For further

details, see the section evaluation matrix.

Determinants of Market SelectionThe market selection is normally based on two sets of factors,  viz., the firm related

factors and the market related factors.

Firm Related Factors

A firm whose export objective is only to sell out a margina lsurplus will select a foreign

market suited to serve this purpose. Another firm with the same product, which wants to

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export a very large quantity, forming a very significant share of its total

output, may have different considerations than he fir firm in market selection. In the case

of the second firm, as the total quantity involved is large and 0" It forms a significant

share of its total output, market diversification would be important to minimize the risk.

If we think of a third firms which also wants to export the same product as the first two

firms but which wants to export several other products also, the market(s) which it

selects may perhaps be different from what the first two firms have chosen; it would givemore importance to the total exports of all its products than that of any single product.

Further, the market selection may be influenced by other objectives like growth. When

business growth is an important objective, growth potential of the market will be an

important

Criterion for selection.

The planned business strategy may also inf luence the market   selection. For example, a

market considered the most important from the point of view of exporting need not

necessarily be the one that would be selected for locating production base or a sales office.

A company that has plans for large expansion of foreign business may choose a market, to

start with, which can serve as a hub of international business.  The market selection is

also influenced by the international orientation (refer chapter 1 for details) of the

company.

∙ Another very important determinant is the company resources comprising financial,

human, technological and managerial factors.

∙ The dynamism and philosophy of the top management and the internal power relations

may also influence the market selection decision.

Market Related Factors

There are a number of market related factors which need to be carefully evaluated for

market selection. The market related factors may be broadly grouped into general factors

and specific factors.

General Factors

1. Economic Factors: Include factors like economic stability,CDP growth trends, incomedistribution, per capita income, sectoral distribution of CDP and trends, nature of and

trends in foreign trade and Bop, indebtedness, etc.

2. Economic Policy: Includes industrial policy, foreign investment policy, commercial

policy, monetary policy, fiscal policy and other economic policies.

3. Business Regulations: Regulations of business like industrial licensing; restrictions on

growth, takeovers, mergers etc.,restrictions on foreign remittances, repatriations etc; tax

laws; import restrictions and local content stipulations; export

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obligations and so on.

4. Currency Stability: Stability of the national currency is another very important

Consideration in the market selection.

5. Political Factors: Character of the political system including the nature and behavior of 

the ruling party/parties and opposition party/parties, the government system etc. and

political stability are among the most important determinants of market selection.

6. Ethnic Factors: Ethnic factors like ethnic characteristics, including ethnic differences,and their implications for the business, ethnic harmony etc. should also be analyzed.

7. Infrastructure: Infrastructure facilities seriously affect business. For example, power

shortage could cause considerable production losses. Shipping and other

communication bottlenecks could cause lot of delays and loss of business, in addition to

high costs.

8. Bureaucracy and Procedures: The nature and behavior of the bureaucracy and the

procedural system or styles are also important factors to be considered.

9. Market Hub: The ability of a market to act as a hub, a base from where the company

can operate in a contiguous region or countries, is a very important factor in the market

selection of a company with plans for expansion of international business.

South Africa, for example, could be such a hub for the entire sub Saharan Africa. A large

number of Indian companies have opened offices in Singapore to use it as a hub to trade

with the booming markets of South East Asia and the Pacific. Singapore is attractive for

Indian companies because of its infrastructure, tax incentives and the large Indian

population. A company, which sets up, an operational headquarters (OHQ) in Singapore

has to pay only 10 per cent corporate tax against the normal 30 per cent.

Indian industrialists feel that Sweden could be used as a base for exporting to third

countries, especially the Baltic states. They also feel that the Swedish industrialists coulduse India as a sourcing ground to manufacture goods for export to the Asia Pacific.

Specific Factors

Besides the general factors, there are a number of factors specific to the industry which

need to be analysed for evaluating the market. Important specific factors are:

1. Trends in domestic production and consumption and estimates for the future of the

product(s) concerned

2. Trends in imports and exports and estimates for the future

3. Nature of competition4. Government policy and regulations pertaining to the industry

5. Infrastructure relevant to the industry

6. Supply conditions of raw materials and other inputs

7. Trade practices and customs

8. Cultural factors and consumer characteristics

9. Market characteristics including the number and nature of 

market segments, price trends etc.

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Evaluation Matrix

An evaluation matrix is often used for ranking the markets with reference to their

attractive less for the company. The evaluation matrix will include the relevant general

and specific factors. These factors will be expressed in such specific terms so that they

lend themselves for clear measurement and evolution.

The countries to be evaluated may be listed on the horizontal  axis and the factors on the

vertical ax; Each factor is assigned a raw score and a weightage. The weighted score is

obtained by multiplying the raw score with the respective weightage. Comparing the total

weighted scores ranks markets.

INTERNATIONAL HRM

Human resource planning having been done, the international human resource manager

must proceed with the job of hiring the right number of people of the right type. The

international human resource manager must not only select people with skills, but also

employees who can jell with the organization's culture. ;so it wants to hire employees

whose styles, beliefs, and value systems are consistent with those of the firm.

 

Approaches of Staffing

International businesses are said to adopt three approaches to staffing:

(1) Ethnocentric,

(2) Polycentric, and(3) Geocentric.

Ethnocentric Approach In this approach, all key management positions are held by

parent country nationals. This strategy may be appropriate during the early phases of 

international business, because fums at that stage are concerned with transplanting a

part of the business that has worked in their home country. This practice was widespread

at one time. Firms such as P & G, Philips NY, and Matsushita originally followed the

ethnocentric approach.

Reasons :

• Perceived lack of qualified host country nationals;

• Understanding that a united corporate culture can be maintained; and

•  Need  to  maintain  good  communication,  coordination,  and  control  links  with

headquarters.

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Disadvantages:

• Denial of promotional opportunities to host country nationals, leading to reduced

productivity and increased turnover.

• The adaptation of expatriate managers to host countries takes a long time during which

home country nationals make poor decisions and commit mistakes.

• For many expatriates a key international posting means new status, authority, and

increased standard of living. The changes may affect expatriates' sensitivity to the needs

and expectations of their host country subordinates.

Polycentric Approach 

The polycentric staffing policy requires host country nationals to be hired to

manage subsidiaries, while parent country nationals occupy key positions at corporate

headquarters. Although top management positions are filled by home country personnel,

this is not always the case.

For example, many US MNCs use home country managers to get the operations started,then hand it over to the host country managers. Hindustan Lever Ltd, (HLL), the Indian

subsidiary of Unilever, has locals as its chiefs.

The Geocentric Approach This staffing philosophy seeks the best people for key jobs

throughout the organisation, regardless of nationality. Seeking the best person for the

job, irrespective of nationally is most consistent with the underlying philosophy of a

global corporation.

Colgate Palmolive is an example of a company that follows the geocentric approach. It has

been operating internationally for more than 50 years, and its products are householdnames in more than 170 countries. 60 per cent of the company's expatriates are from

countries other than the US. All the top executives speak atleast two languages, and

important meetings routinely take place all over the globe.

COMPENSATION & PERFORMANCE APPRAISAL OF EXPATRIATE STAFF

INTRODUCTION OF PERFORMANCE APPRAISAL

One of the most challenging tasks of llHRM is managing the performance of a ftrm's

various international facilities. Performance management may be understood as aprocess  that  enables  an international  firm to  evaluate  and  continuously improve

individuals, subsidiary unit, and corporate performance, against clearly defined, preset

goals and targets.An expatriate's performacne needs to be assessed to effect his or her

promotions, assess training and development needs, and introduce pay rises.

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INTRODUCTION OF COMPENSATION

Any expatriate remuneration package needs to be designed to

achieve the following major objectives:

1. Attract employees who are qualified and interested in international assignments;

2 Facilitate the movement of expatriates from one subsidiary to another, from home to

subsidiaries, and from subsidiaries back home;

3. Provide a consistent and reasonable relationship between the pay levels of employees at

headquarters, domestic affiliates, and foreign subsidiaries; and

4. Be cost effective by reducing unnecessary expenses

Problems:

Generally the following problems crop up while designing an international remuneration

package:

• Discrepancies in pay between parent, host, and third country nationals.

•  The  need  to  vary  expatriate  compensation,  depending  on  the  'lifecycle'  of  theexpatriate's family (e.g., young children, children in college, etc.).

• Remuneration issues related to re entry into the parent country organsiation.

• Using remuneration programmes that had not changed sufficiently over time to deal

adequately with the new international business environment.

Factors influencing international compensation:

COMPONENTS

1. Base Salary

2. Incentives

3. Taxes

COMPENSATION DESIGNING APPROACHES

(1) Balance Sheet Approach

In designing an expat's remuneration, fIrms generally follow a number of approaches.The most common is the balance sheet approach, which involves ensuring that the expat

is "made whole" and does not lose money by taking the assignment. The basic objective is

to maintain home country living standards, plus offer some fmancial inducement.

(3) Localisation

A second approach is called localisation and involves paying the expat a salary that is

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comparable to those of local citizens. Also called the going rate approach, in this method,

the base salary for international transfer is linked to the salary structure in the host

country. The international fIrm usually obtains information from local compensation

surveys and decides whether local nationals (HCNs), expatriates of the same nationality,

or expatriates of all nationalities will be the reference point in terms of benchmarking.

Cross cultural challenges in International Business

Cross National Difference

In recent years, with the increase in globalization and diversity in the workplace, cross

cultural management has become an important element of organizational. Culture can be

analyzed from a country, language, religion, value, ethical and/or many other areas of 

study as a frame of reference.The main cross national differences are

Social & cultural Environment

Social structure of the society

Values and belief of people

∙ Political environment

∙ Legal system

∙ Education system and standard

∙ Quality of quantity knowledge work force

∙ Level of available technology

Global HR issues

Global human resource strategy is the framework built around managing a global

workforce; including recruiting, hiring, setting compensation levels and benefits, and

retaining workers in a global organization. Global companies must make decisions about

hiring locally, recruiting expatriates, or utilizing emerging new worker groups to fill the

needs of a particular region.

Additionally, global HR strategy must consider the complexities of regional government

interaction with the business, as well as social programs that may compensate for

benefits offered by the employer in other regions. Other global HR issues that impact thedevelopment of a cohesive strategy include cost of living, local pay scales, retention issues,

pension issues, organized labor, and regional leave policies.

A) Standardization and adaptation of HR practices

1 .Host country culture and work place environment

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2. Firm’s size, maturity and level of international experience

3. Mode of operation

B).Retaining, developing and retaining local Staff 

C). HR implication of Language Standardization

D). Monitoring HR practices of host Country

Managing Multiculturalism Cultural diversity

Cultural diversity is the variety of human societies or cultures in a specific region, or in

the world as a whole. Human have spread throughout the world, successfully adapting to

widely differing conditions and to periodic cataclysmic changes in local and global

climate. The many separate societies that emerged around the globe differed markedly

from each other.

Cultural differences that exist between people, such as language, dress and traditions,

there are also significant variations in the way societies organize themselves, in their

shared conception of morality, and in the ways they interact with their environment.

Most people would agree that cultural diversity in the workplace utilizes country’s skills

to its fullest, and contributes to overall growth and prosperity.

Diversity at its core is about people and the behavioral characteristics that guide how weinteract, i.e. “culture.” To better understand this notion, let’s examine the impact of 

culture within our workplace organizations. Several aspects of culture shape today’s

workplace. For example, employees’ communication style, time consciousness, and work

practices all stem from their cultural programming. The dominant cultural norm here in

the United States dictates that business communication be specific and explicit. Meaning

is found in the actual content of words with very little left to interpretation. However, in

many ethnic and international cultures, communication is more implicit and indirect:

meaning is found in and around the words themselves.

By better understanding the cultural norms and values within their organization, leadersand their units benefit. When this enhanced comprehension becomes a way to guide

efforts, hiring practices, and employee relations strategies, diversity initiatives move

away from lip service and become actualized. An honest cultural audit of an organization

not only helps drive diverse policies and procedures, but goes far in the creation of 

welcoming workplace communities in which genuine cross cultural interaction and

respect for diversity are naturally occurring. And as an organization’s culture is identified

and shared, diverse employees are more likely to express their cultural uniqueness within

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the context of stated organizational norms and values. When organizational culture and

individual human values work together, there can be synergy: the interaction or

cooperation of two or more entities to produce a combined effect greater than the sum of 

their separate effects. That is a definition of diversity in which we can all find meaning.

Reasons for Expatriate Failure

• Inability of spouse to adjust

• Manager's inability to adjust

• Other family reasons

• Inability to cope with larger international responsibility

• Difficulties with new environment

• Personal or emotional problems

• Lack of technical competence

Factors of Expatriate Selection

(a)Technical ability

(b)Cross cultural Suitability

(c)Family Requirements

(d)language

(e)Cross cultural Requirements

Training for Expatriates:

An expatriate needs following trainings to cope with cross cultural challenges:

(1) cultural training,

(2) language training, and

(3) practical training.

Cultural Adjustment of expatriate

An expatriate's cultural adjustment typically comprises three stages .

1st Stage : Tourist Stage

the expatriate enjoys a great deal of excitement as he or she discovers the new culture.

This stage is called the tourist stage.

2nd Stage Disillusionment:

In this stage, the curve hits the bottom and is characterised by what is called culture

shock.

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3rd Stage : adapting or adjustment phase.

If culture shock is handled successfully, the expatriate enters the third stage, which may

be called the adapting or adjustment phase.

Issues and problems of International Human Resource Mgt (IHRM)

A challenge before Indian MNCs

Specifically  compared  with  domestic  HRM,  IHRM   is  more  important  as  it  (I)

encompasses more functions, (2) has more heterogeneous functions, 3) involves constantly

changing perspectives, (4) requires more involvement in employees’ personal lives, (5) is

influenced by more external sources (6) involves a greater level of risk than typical

domestic HRM.

When compared with domestic human resource management, IHRM requires a much

broader perspective on even the most common HR activities because manpower moves

across the political borders and work globally. Generally global employees are known asexpatiate employees. There are various complexities of operating in different countries

and employing different national categories of employees. And such complexities can

differentiate domestic HRM from IHRM. Dowling argues that the complexity of IHRM

can be attributed to many of factors such as more HR attitude, the need for broader

perspective, more involvement of employee’s personal lives, mixing of work force of 

various countries, risk exposure and broader external factor influences.

To operate in Global environment , HR Department must engage in number of activities

that would not be necessary in domestic environ i.e. international taxation issues,

international relocation and orientation, administrative services of expatriates , hostgovernment relations and language translation services etc. Host government relations

represent a phenomenal activity for IHRM particularly in third world nations where work

permits and other important certificates are easy to acquire with comparison to

developed nations.

Training and development issues of IHRM are more complex than domestic HRM. It is

difficult to plan a training programme and schedule for the workforce of multinationals.

People carry various attitudes and values for training and development issues. In the

present era, it is one of the major challenges before IHRM.

A greater degree of involvement in employee’s personal lives is also an important concernfor IHRM. It needs to ensure that expatriate understand housing arrangements,

schooling facilities , health care, cost of living , compensation package, local tax system

etc. of the nation where they are going to take up an global assignment.  Here the

involvement and onus of IHRM becomes much broader than domestic HRM.

As the foreign operations mature, the emphasis put on various human resource activities

also gets change. As the need for PCNs and TCNs declines, the more locally trained

manpower appear on the scene. And resources previously allocated for global staffing are

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transferred to the activities of local staffing. Such change also poses challenge before

IHRM to maintain balance between mixed workforces in a MNC.

The human and financial consequences of failure in international arena are more severe

than domestic activities. The amount of risk involved in global ventures is much higher

and complex than domestic employment. The direct and indirect cost of maintaining

global workforce is very high. And the long presence of global terrorism also leaves impactover global staffing issues.  After 11 Sep 2001, many MNCs started allocating 1 2 % of 

their budget for the safety and security of their global workforce. People are indisposed to

work in disturbed areas even though many avenues are available.

Some major external factors such as the type of government, the state of economy,

political stability, cultural and ethical issues, industrial relation and labour laws,

unionism, working culture, food, taxation, health and safety issues,  amusement etc. of a

nation is also an important concern for IHRM. The workforce in developed nations is

facilitated with more laurels and comforts than in developing and third world nations. It

also poses challenge before IRHM.   Global HR Manager must develop HR systems that

are not only acceptable to the host country but also compatible with company widesystems being developed by his or her HQ based counterpart.

The competition is in cut throat phase all over the globe as the domestic business organs

started operating at international fronts. On the other hand mergers and acquisitions are

hot buns for the developing business houses. The acquisition of CORUS by TATA was a

burning topic for Indian business houses operating globally. Due to MoUs, M & As and

strategic alliances etc. business organs keep on changing their organizational structure.

On the other hand advances in technology and telecommunications also helping to create

a global business milieu. In such scenario, managing men at global front is definitely a

significant issue.

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INTERNATIONAL MARKEITNG

1. Meaning and Definition of International Marketing

Multinational process of planning and executing the conception, pricing, promotion, and

distribution of ideas, goods, and services and to create exchanges that satisfy individualand organizational objectives

According to the American Marketing Association (AMA) "international marketing is

the multinational process of planning and executing the conception, pricing, promotion

and distribution of ideas, goods, and services to create exchanges that satisfy individual

and organizational objectives."

Cateora and Ghauri (1999) International Marketing is the performance of business

activities that direct the flow of a company's goods and services to consumers or users in

more than one nation for a profit.

2. Nature of International Marketing ( Challenges and Opportunities )

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3. Process of International Marketing

4. International Dimensions of Marketing

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5. Domestic and International Marketing

Domestic marketing is the marketing practices within a marketer's home country. Foreignmarketing is the domestic operations within a foreign country (i.e., marketing methodsused outside the home market). Comparative marketing analytically compares two ormore countries' marketing systems to identify similarities and differences.

International marketing studies the "how" and "why" a product succeeds or fails abroad

and how marketing efforts affect the outcome. It provides a micro view of the market at

the company level.

Multinational, global, and world marketing are all the same thing. Multinational

marketing treats all countries as the world market without designating a particular

country as domestic or foreign. As such, a company engaging in multinational marketing

is a corporate citizen of the world, whereas international marketing implies the presence

of a home base. However, the subtle difference between international marketing andmultinational marketing is probably insignificant in terms of strategic implications.

6. Difference between domestic and international Marketing

Scope: Scope of international business is quite wide. It includes not only merchandise

exports,  but  also  trade  in  services,  licensing  and  franchising  as  well  as  foreign

investments. Domestic business pertains to a limited territory. Though the firm has

many business establishments in different locations all the trading activities are inside a

single boundary.

Benefits: International business benefits both the nations and firms. Domestic business

have lesser benefits when compared to the former.

To the nations: Through international business nations gain by way of earning foreign

exchange, more efficient use of domestic resources, greater prospects of growth and

creation of employment opportunities. Domestic business as it is conducted locally there

would  be  no  much  involvement  of  foreign  currency.  It  can  create  employment

opportunities too and the most important part is business since carried locally and

always dealt with local resources the perfection in utilisation of the same resources would

obviously reap the benefits.

• To the firms: The advantages to the firms carrying business globally include

prospects for higher profits, greater utilization of production capacities, way out to

intense competition in domestic market and improved business vision. Profits in

domestic trade are always lesser when compared to the profits of the firms dealing

transactions globally.

Market Fluctuations: Firms conducting trade internationally can withstand these

situations and huge losses as their operations are wide spread. Though they face losses in

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one area they may get profits in other areas, this provides for stabilizing during seasonal

market fluctuations. Firms carrying business locally have to face this situation which

results in low profits and in some cases losses too.

7. Modes of entry in international markeitng : A firm desirous of entering into

international  business  has  several  options  available  to  it.  These  range  from

exporting/importing to contract manufacturing abroad, licensing and franchising, joint

ventures and setting up wholly owned subsidiaries abroad. Each entry mode has its own

advantages and disadvantages which the firm needs to take into account while deciding

as to which mode of entry it should prefer. Firms going for domestic trade does have the

options but not too many as the former one.

To establish business internationally firms initially have to complete many formalities

which obviously is a tedious task. But to start a business locally the process is always an

easy task. It doesn't require to process any difficult formalities.

Purvey: Providing goods and services as a business within a territory is much easier than

doing the same globally. Restrictions such as custom procedures do not bother domestic

entities but whereas globally operating firms need to follow complicated customs

procedures and trade barriers like tariff etc.

Sharing  of  Technology:  International  business  provides  for  sharing  of  the  latest

technology that is innovated in various firms across the globe which in consequence will

improve the mode and quality of their production.

Political relations: International business obviously improve the political relations among

the nations which gives rise to Cross national cooperation and agreements. Nations co

operate more on transactional issues.

8 .Benefits of International Marketing• Survival and Growth

• Sales and Profits

• Diversification

• Inflation and Price Moderation

• Employment

• Standards of Living

• Understanding of Marketing Process

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9. Pricing Issues

10. Product Issues in International Marketing

Products and Services. Some marketing scholars and professionals tend to draw a

strong distinction between conventional products and services, emphasizing service

characteristics such as heterogeneity (variation in standards among providers, frequently

even among different locations of the same firm), inseperability from consumption,

intangibility, and, in some cases, perishability—the idea that a service cannot generally

be created during times of slack and be “stored” for use later. However, almost all

products have at least some service component—e.g., a warranty, documentation, and

distribution—and this service component is an integral part of the product and itspositioning.  Thus, it may be more useful to look at the product service continuum as one

between very low and  very high levels of  tangibility of the  service. Income  tax

preparation, for example, is almost entirely intangible—the client may receive a few

printouts, but most of the value is in the service.  On the other hand, a customer who

picks up rocks for construction from a landowner gets a tangible product with very little

value added for service.  Firms that offer highly tangible products often seek to add an

intangible component to improve perception.  Conversely, adding a tangible element to a

service—e.g., a binder with information—may address many consumers’ psychological

need to get something to show for their money.

Product Need Satisfaction. We often take for granted the “obvious” need that products

seem to fill in our own culture; however, functions served may be very different in others

—for example, while cars have a large transportation role in the U.S., they are

impractical to drive in Japan, and thus cars there serve more of a role of being a status

symbol or providing for individual indulgence.  In the U.S., fast food and instant drinks

such as Tang are intended for convenience; elsewhere, they may represent more of a

treat.  Thus, it is important to examine through marketing research consumers’ true

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motives, desires, and expectations in buying a product.

Approaches to Product Introduction. Firms  face  a  choice  of  alternatives  in

marketing their products across markets.  An extreme strategy involves customization,

whereby the firm introduces a unique product in each country, usually with the belief 

tastes differ so much between countries that it is necessary more or less to start from

“scratch” in creating a product for each market.  On the other extreme, standardization

involves making one global product in the belief the same product can be sold across

markets without significant modification—e.g., Intel microprocessors are the same

regardless of the country in which they are sold.  Finally, in most cases firms will resort

to some kind of adaptation, whereby a common product is modified to some extent when

moved between some markets—e.g., in the United States, where fuel is relatively less

expensive, many cars have larger engines than their comparable models in Europe and

Asia; however, much of the design is similar or identical, so some economies are achieved.

Similarly, while Kentucky Fried Chicken serves much the same chicken with the eleven

herbs and spices in Japan, a lesser amount of sugar is used in the potato salad, and fries

are substituted for mashed potatoes.

There are certain benefits to standardization. Firms that produce a global product

can obtain economies of scale in manufacturing, and higher quantities produced also lead

to a faster advancement along the experience curve.  Further, it is more feasible to

establish a global brand as less confusion will occur when consumers travel across

countries and see the same product.  On the down side, there may be significant

differences in desires between cultures and physical environments—e.g., software sold in

the U.S. and Europe will often utter a “beep” to alert the user when a mistake has been

made; however, in Asia, where office workers are often seated closely together, this could

cause embarrassment.

Adaptations come in several forms. Mandatory adaptations involve changes thathave to be made before the product can be used—e.g., appliances made for the U.S. and

Europe must run on different voltages, and a major problem was experienced in the

European Union when hoses for restaurant frying machines could not simultaneously

meet the legal requirements of different countries.  “Discretionary” changes are changes

that do not have to be made before a product can be introduced (e.g., there is nothing to

prevent an American firm from introducing an overly sweet soft drink into the Japanese

market), although  products  may face  poor sales  if  such changes  are  not  made.

Discretionary changes may also involve cultural adaptations—e.g., in Sesame Street, the

Big Bird became the Big Camel in Saudi Arabia.

   

Another distinction involves physical product vs. communication adaptations.In order for gasoline to be effective in high altitude regions, its octane must be higher, but

it can be promoted much the same way.  On the other hand, while the same bicycle might

be sold in China and the U.S., it might be positioned as a serious means of transportation

in the former and as a recreational tool in the latter.  In some cases, products may not

need to be adapted in either way (e.g., industrial equipment), while in other cases, it

might have to be adapted in both (e.g., greeting cards, where the both occasions,

language, and motivations for sending differ).   Finally, a market may exist abroad for a

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product which has no analogue at home—e.g., hand powered washing machines.

Branding. While Americans seem to be comfortable with category specific brands, this

is not the case for Asian consumers.  American firms observed that their products would

be closely examined by Japanese consumers who could not find a major brand name on

the packages, which was required as a sign of quality.  Note that Japanese keiretsus span

and use their brand name across multiple industries—e.g., Mitsubishi, among other

things, sells food, automobiles, electronics, and heavy construction equipment.

    The International Product Life Cycle (PLC). Consumers in different countries differ

in the speed with which they adopt new products, in part for economic reasons (fewer

Malaysian than American consumers can afford to buy VCRs) and in part because of 

attitudes toward new products (pharmaceuticals upset the power afforded to traditional

faith healers, for example).  Thus, it may be possible, when one market has been

saturated, to continue growth in another market—e.g., while somewhere between one

third and one half of American homes now contain a computer, the corresponding figures

for even Europe and Japan are much lower and thus, many computer manufacturers seegreater growth potential there.  Note that expensive capital equipment may also cycle

between countries—e.g., airlines in economically developed countries will often buy the

newest and most desired aircraft and sell off older ones to their counterparts in

developing countries.  While in developed countries, “three part” canning machines that

solder on the bottom with lead are unacceptable for health reasons, they have found a

market in developing countries.

Diffusion of innovation. Good new innovations often do not spread as quickly as one

might expect—e.g., although the technology for microwave ovens has existed since the

1950s, they really did not take off in the United States until the late seventies or earlyeighties, and their penetration is much lower in most other countries.  The typewriter,

telephone answering machines, and cellular phones also existed for a long time before

they were widely adopted.

Certain characteristics of products make them more or less likely to spread.  One factor is

relative advantage.  While a computer offers a huge advantage over a typewriter, for

example, the added gain from having an electric typewriter over a manual one was much

smaller.

Compatibility both in the social and physical sense. A major problem with the

personal computer was that it could not read the manual files that firms had maintained,and birth control programs are resisted in many countries due to conflicts with religious

values.  Complexity refers to how difficult a new product is to use—e.g., some people have

resisted getting computers because learning to use them takes time.  Trialability refers to

the extent to which one can examine the merits of a new product without having to

commit a huge financial or personal investment—e.g., it is relatively easy to try a

restaurant with a new ethnic cuisine, but investing in a global positioning navigation

system is riskier since this has to be bought and installed in one’s car before the

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consumer can determine whether it is worthwhile in practice.  Finally, observability

refers to the extent to which consumers can readily see others using the product—e.g.,

people who do not have ATM cards or cellular phones can easily see the convenience that

other people experience using them; on the other hand, VCRs are mostly used in people’s

homes, and thus only an owner’s close friends would be likely to see it.

At the societal level, several factors influence  the spread  of an innovation.  Notsurprisingly, cosmopolitanism, the extent to which a country is connected to other

cultures, is useful.  Innovations are more likely to spread where there is a higher

percentage of women in the work force; these women both have more economic power and

are able to see other people use the products and/or discuss them.  Modernity refers to the

extent to which a culture values “progress.”  In the U.S., “new and improved” is

considered highly attractive; in more traditional countries, their potential for disruption

cause new products to be seen with more skepticism.  Although U.S. consumers appear to

adopt new products more quickly than those of other countries, we actually score lower on

homiphily, the extent to which consumers are relatively similar to each other, and

physical distance, where consumers who are more spread out are less likely to interact

with other users of the product.  Japan, which ranks second only to the U.S., on the other

hand, scores very well on these latter two factors.

THE 4 P's IN INTERNATIONAL MARKETING

International Promotion

Promotional tools. Numerous tools can be used to influence consumer purchases:

• Advertising—in or on newspapers, radio, television, billboards, busses, taxis, or the

Internet.

•Price promotions—products are being made available temporarily as at a lowerprice, or some premium (e.g., toothbrush with a package of toothpaste) is being

offered for free.

• Sponsorships

• Point of purchase—the manufacturer pays for extra display space in the store or

puts a coupon right by the product

• Other method of getting the consumer’s attention—all the Gap stores in France

may benefit from the prominence of the new store located on the Champs Elysees   Promotional objectives.    Promotional objectives involve the question of what the firm

hopes to achieve with a campaign—“increasing profits” is too vague an objective, since

this has to be achieved through some intermediate outcome (such as increasing marketshare, which in turn is achieved by some change in consumers which cause them to buy

more).  Some common objectives that firms may hold:

• Awareness.  Many French consumers do not know that the Gap even exists, so they

cannot decide to go shopping there.  This objective is often achieved through

advertising,  but  could  also  be  achieved  through  favorable  point of purchase

displays.  Note that since advertising and promotional stimuli are often afforded

very little attention by consumers, potential buyers may have to be exposed to the

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promotional stimulus numerous times before it “registers.”

• Trial.  Even when consumers know that a product exists and could possibly satisfy

some of their desires, it may take a while before they get around to trying the

product—especially when there are so many other products that compete for their

attention and wallets.  Thus, the next step is often to try get consumer to try the

product at least once, with the hope that they will make repeat purchases.

Coupons are often an effective way of achieving trial, but these are illegal in somecountries and in some others, the infrastructure to readily accept coupons  (e.g.,

clearing houses) does not exist.  Continued advertising and point of purchase

displays may be effective.  Although Coca Cola is widely known in China, a large

part of the population has not yet tried the product.

• Attitude toward the product.  A high percentage of people in the U.S. and Europe

has tried Coca Cola, so a more reasonable objective is to get people to believe

positive things about the product—e.g., that it has a superior taste and is better

than generics or store brands.  This is often achieved through advertising.

• Temporary sales increases.  For mature products and categories, attitudes may be

fairly well established and not subject to cost effective change.  Thus, it may be

more useful to work on getting temporary increases in sales (which are likely to go

away the incentives are removed).  In the U.S. and Japan, for example, fast food

restaurants may run temporary price promotions to get people to eat out more or

switch from competitors, but when these promotions end, sales are likely to move

back down again (in developing countries, in contrast, trial may be a more

appropriate objective in this category).

Note that in new or emerging markets, the first objectives are more likely to be useful

while, for established products, the latter objectives may be more useful in mature

markets such as Japan, the U.S., and Western Europe.   Constraints on Global Communications Strategies. Although firms that seek

standardized  positions  may  seek  globally  unified  campaigns,  there  are  several

constraints:

• Language barriers:  The advertising will have to be translated, not just into the

generic language category (e.g., Portuguese) but also into the specific version

spoken in the region (e.g., Brazilian Portuguese).  (Occasionally, foreign language

ads are deliberately run to add mystique to a product, but this is the exception

rather than the rule).

• Cultural barriers.  Subtle cultural differences may make an ad that tested well in

one country unsuitable in another—e.g., an ad that featured a man walking in tojoin his wife in the bathroom was considered an inappropriate invasion in Japan.

Symbolism often differs between cultures, and humor, which is based on the

contrast to people’s experiences, tends not to travel well.  Values also tend to differ

between cultures—in the U.S. and Australia, excelling above the group is often

desirable, while in Japan, “The nail that sticks out gets hammered down.”  In the

U.S., “The early bird gets the worm” while in China “The first bird in the flock gets

shot down.”

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• Local attitudes toward advertising.  People in some countries are more receptive to

advertising than others.  While advertising is accepted as a fact of life in the U.S.,

some Europeans find it too crass and commercial.

• Media infrastructure.  Cable TV is not well developed in some countries and

regions, and not all media in all countries accept advertising.  Consumer media

habits also differ dramatically; newspapers appear to have a higher reach than

television and radio in parts of Latin America.

• Advertising regulations.  Countries often have arbitrary rules on what can be

advertised and what can be claimed.  Comparative advertising is banned almost

everywhere outside the U.S.  Holland requires that a toothbrush be displayed in

advertisements for sweets, and some countries require that advertising to be shown

there be produced in the country.

Some cultural dimensions:

• Directness vs. indirectness:  U.S. advertising tends to emphasize directly why

someone would benefit from buying the product.   This, however,  is considered too

pushy for Japanese consumers, where it is felt to be arrogant of the seller topresume to know what the consumer would like.

• Comparison:  Comparative advertising is banned in most countries and would

probably be very counterproductive, as an insulting instance of confrontation and

bragging, in Asia even if it were allowed.  In the U.S., comparison advertising has

proven somewhat effective (although its implementation is tricky) as a way to

persuade consumers what to buy.

• Humor.  Although humor is a relatively universal phenomenon, what is considered

funny between countries differs greatly, so pre testing is essential.

• Gender roles.  A study found that women in U.S. advertising tended to be shown in

more traditional roles in the U.S. than in Europe or Australia.  On the other hand,some countries are even more traditional—e.g., a Japanese ad that claimed a

camera to be “so simple that even a woman can use it” was not found to be

unusually insulting.

• Explicitness.  Europeans  tend  to  allow  for  considerably  more  explicit

advertisements, often with sexual overtones, than Americans.

• Sophistication.  Europeans, particularly the French, demand considerably more

sophistication than Americans who may react more favorably to emotional appeals

—e.g., an ad showing a mentally retarded young man succeeding in a job at

McDonald’s was very favorably received in the U.S. but was booed at the Cannes

film festival in France.• Popular vs. traditional culture.  U.S. ads tend to employ contemporary, popular

culture, often including current music while those in more traditional cultures tend

to refer more to classical culture.

• Information content vs. fluff.  American ads contain a great deal of “puffery,” which

was found to be very ineffective in Eastern European countries because it

resembled communist propaganda too much.  The Eastern European consumers

instead wanted hard, cold facts.

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Advertising standardization.    Issues surrounding advertising standardization tend to

parallel issues surrounding product and positioning standardization.  On the plus side,

economies of scale are achieved, a consistent image can be established across markets,

creative talent can be utilized across markets, and good ideas can be transplanted from

one  market  to  others.  On  the  down  side,  cultural  differences,  peculiar  country

regulations, and differences in product life cycle stages make this approach difficult.

Further, local advertising professionals may resist campaigns imposed from the outside—

sometimes with good reasons and sometimes merely to preserve their own creative

autonomy.   Legal issues.    Countries differ in their regulations of advertising, and some products are

banned from advertising on certain media (large supermarket chains are not allowed to

advertise on TV in France, for example).  Other forms of promotion may also be banned or

regulated.  In some European countries, for example, it is illegal to price discriminate

between consumers, and thus coupons are banned and in some, it is illegal to offer

products on sale outside a very narrow seasonal and percentage range.

Pricing Issues in International Marketing

Price can best be defined in ratio terms, giving the equation

resources given up

price = —————————

goods received

This implies that there are several ways that the price can be changed:

"Sticker" price changes—the most obvious way to change the price is the price tag

— you get the same thing, but for a different (usually larger) amount of money.

Change quantity. Often, consumers respond unfavorably to an increased sticker

price, and changes in quantity are sometimes noticed less—e.g., in the 1970s, the

wholesale cost of chocolate increased dramatically, and candy manufacturers

responded by making smaller candy bars. Note that, for cash flow reasons,

consumers in less affluent countries may need to buy smaller packages at any one

time (e.g., forking out the money for a large tube of toothpaste is no big deal for

most American families, but it introduces a greater strain on the budget of a family

closer to the subsistence level).Change quality. Another way candy manufacturers have effectively increased prices

is through a reduction in quality. In a candy bar, the "gooey" stuff is much cheaper

than chocolate. It is frequently tempting for foreign licensees of a major brand

name to use inferior ingredients.

Change terms. In the old days, most software manufacturers provided free support

for their programs—it used to be possible to call the WordPerfect Corporation on an

800 number to get free help. Nowadays, you either have to call a 900 number or

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have a credit card handy to get help from many software makers. Another way to

change terms is to do away with favorable financing terms.

Reference Prices. Consumers often develop internal reference prices, or expectations

about what something should cost, based mostly on their experience. Most drivers with

long commutes develop a good feeling of what gasoline should cost, and can tell a bargain

or a ripoff.

Reference prices are more likely to be more precise for frequently purchased and highly

visible products. Therefore, retailers very often promote soft drinks, since consumers tend

to have a good idea of prices and these products are quite visible. The trick, then, is to be

more expensive on products where price expectations are muddier.

Marketers often try to influence people's price perceptions through the use of external

reference prices—indicators given to the consumer as to how much something should cost.

Examples include:

Manufacturer's Suggested Retail Price (MSRP). This is often pure fiction. The

suggested retail prices in certain categories are deliberately set so high that even

full service retailers can sell at a "discount." Thus, although the consumer may

contrast the offering price against the MSRP, this latter figure is quite misleading.

"SALE! Now $2.99; Regular Price $5.00." For this strategy to be used legally in

most countries, the claim must be true (consistency of enforcement in some

countries is, of course, another matter). However, certain products are put on sale

so frequently that the "regular" price is meaningless. In the early 1990s, Sears was

reported to sell some 55% of its merchandise on sale. "WAS $10.00, now $6.99."

"Sold elsewhere for $150.00; our price: $99.99."

Reference prices have significant international implications. While marketers may choose

to introduce a product at a low price in order to induce trial, which is useful in a new

market where the penetration of a product is low, this may have serious repercussions as

consumers may develop a low reference price and may thus resist paying higher prices in

the future.

Selected International Pricing Issues. In some cultures, particularly where retail storesare smaller and the buyer has the opportunity to interact with the owner, bargaining may

be more common, and it may thus be more difficult for the manufacturer to influence

retail level pricing.

Two phenomena may occur when products are sold in disparate markets. When a product

is exported, price escalation, whereby the product dramatically increases in price in the

export market, is likely to take place. This usually occurs because a longer distribution

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chain is necessary and because smaller quantities sold through this route will usually not

allow for economies of scale. "Gray" markets occur when products are diverted from one

market in which they are cheaper to another one where prices are higher—e.g., Luis

Vuitton bags were significantly more expensive in Japan than in France, since the profit

maximizing price in Japan was higher and thus bags would be bought in France and

shipped to Japan for resale. The manufacturer therefore imposed quantity limits on

buyers. Since these quantity limits were circumvented by enterprising exchange studentswho were recruited to buy their quota on a daily basis, prices eventually had to be

lowered in Japan to make the practice of diversion unattractive. Where the local

government imposes price controls, a firm may find the market profitable to enter

nevertheless since revenues from the new market only have to cover marginal costs.

However, products may then be attractive to divert to countries without such controls.

Transfer pricing involves what one subsidiary will charge another for products or

components supplied for use in another country. Firms will often try to charge high prices

to subsidiaries in countries with high taxes so that the income earned there will be

minimized.   Antitrust laws are relevant in pricing decisions, and anti dumping regulations are

especially noteworthy. In general, it is illegal to sell a product below your cost of 

production, which may make a penetration pricing entry strategy infeasible. Japan has

actively lobbied the World Trade Organization (WTO) to relax its regulations, which

generally require firms to price no lower than their average fully absorbed cost (which

incorporates both variable and fixed costs).

Alternatives to "hard" currency deals. Buyers in some countries do not have ready access

to convertible currency, and governments will often try limit firms’ ability to spend money

abroad. Thus, some firms have been forced into non cash deals. In barter, the seller takespayment in some product produced in the buying country—e.g., Lockheed (back when it

was an independent firm) took Spanish wine in return for aircraft, and sellers to Eastern

Europe have taken their payment in ham. An offset contract is somewhat more flexible in

that the buyer can get paid but instead has to buy, or cause others to buy, products for a

certain value within a specified period of time.

   Psychological issues: Most pricing research has been done on North Americans, and

this raises serious problems of generalizability. Americans are used to sales, for example,

while consumers in countries where goods are more scarce may attribute a sale to low

quality rather than a desire to gain market share. There is some evidence that perceivedprice quality relationships are quite high in Britain and Japan (thus, discount stores

have had difficulty there), while in developing countries, there is less trust in the market.

Cultural differences may influence the extent of effort put into evaluating deals

(potentially impacting the effectiveness of odd even pricing and promotion signaling). The

fact that consumers in some economies are usually paid weekly, as opposed to biweekly or

monthly, may influence the effectiveness of framing attempts—"a dollar a day" is a much

bigger chunk from a weekly than a monthly paycheck.

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International Distribution

Promotional tools.  Numerous tools can be used to influence consumer purchases:

• Advertising—in or on newspapers, radio, television, billboards, busses, taxis, or the

Internet.

• Price promotions—products are being made available temporarily as at a lower

price, or some premium (e.g., toothbrush with a package of toothpaste) is being

offered for free.

• Sponsorships

• Point of purchase—the manufacturer pays for extra display space in the store or

puts a coupon right by the product

• Other method of getting the consumer’s attention—all the Gap stores in France

may benefit from the prominence of the new store located on the Champs Elysees.

Promotional objectives. Promotional objectives involve the question of what the firm

hopes to achieve with a campaign—“increasing profits” is too vague an objective, since

this has to be achieved through some intermediate outcome (such as increasing market

share, which in turn is achieved by some change in consumers which cause them to buymore).  Some common objectives that firms may hold:

• Awareness.  Many French consumers do not know that the Gap even exists, so they

cannot decide to go shopping there.  This objective is often achieved through

advertising,  but  could  also  be  achieved  through  favorable  point of purchase

displays.  Note that since advertising and promotional stimuli are often afforded

very little attention by consumers, potential buyers may have to be exposed to the

promotional stimulus numerous times before it “registers.”

• Trial.  Even when consumers know that a product exists and could possibly satisfy

some of their desires, it may take a while before they get around to trying the

product—especially when there are so many other products that compete for theirattention and wallets.  Thus, the next step is often to try get consumer to try the

product at least once, with the hope that they will make repeat purchases.

Coupons are often an effective way of achieving trial, but these are illegal in some

countries and in some others, the infrastructure to readily accept coupons  (e.g.,

clearing houses) does not exist.  Continued advertising and point of purchase

displays may be effective.  Although Coca Cola is widely known in China, a large

part of the population has not yet tried the product.

• Attitude toward the product.  A high percentage of people in the U.S. and Europe

has tried Coca Cola, so a more reasonable objective is to get people to believe

positive things about the product—e.g., that it has a superior taste and is betterthan generics or store brands.  This is often achieved through advertising.

• Temporary sales increases.  For mature products and categories, attitudes may be

fairly well established and not subject to cost effective change.  Thus, it may be

more useful to work on getting temporary increases in sales (which are likely to go

away the incentives are removed).  In the U.S. and Japan, for example, fast food

restaurants may run temporary price promotions to get people to eat out more or

switch from competitors, but when these promotions end, sales are likely to move

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back down again (in developing countries, in contrast, trial may be a more

appropriate objective in this category).

Note that in new or emerging markets, the first objectives are more likely to be useful

while, for established products, the latter objectives may be more useful in mature

markets such as Japan, the U.S., and Western Europe.

Constraints on Global Communications Strategies. Although firms that seek

standardized  positions  may  seek  globally  unified  campaigns,  there  are  several

constraints:

• Language barriers:  The advertising will have to be translated, not just into the

generic language category (e.g., Portuguese) but also into the specific version

spoken in the region (e.g., Brazilian Portuguese).  (Occasionally, foreign language

ads are deliberately run to add mystique to a product, but this is the exception

rather than the rule).

• Cultural barriers.  Subtle cultural differences may make an ad that tested well in

one country unsuitable in another—e.g., an ad that featured a man walking in to

join his wife in the bathroom was considered an inappropriate invasion in Japan.

Symbolism often differs between cultures, and humor, which is based on the

contrast to people’s experiences, tends not to travel well.  Values also tend to differ

between cultures—in the U.S. and Australia, excelling above the group is often

desirable, while in Japan, “The nail that sticks out gets hammered down.”  In the

U.S., “The early bird gets the worm” while in China “The first bird in the flock gets

shot down.”

• Local attitudes toward advertising.  People in some countries are more receptive to

advertising than others.  While advertising is accepted as a fact of life in the U.S.,

some Europeans find it too crass and commercial.

Media infrastructure.  Cable TV is not well developed in some countries andregions, and not all media in all countries accept advertising.  Consumer media

habits also differ dramatically; newspapers appear to have a higher reach than

television and radio in parts of Latin America.

• Advertising regulations.  Countries often have arbitrary rules on what can be

advertised and what can be claimed.  Comparative advertising is banned almost

everywhere outside the U.S.  Holland requires that a toothbrush be displayed in

advertisements for sweets, and some countries require that advertising to be shown

there be produced in the country.

Some cultural dimensions:

• Directness vs. indirectness:  U.S. advertising tends to emphasize directly whysomeone would benefit from buying the product.   This, however,  is considered too

pushy for Japanese consumers, where it is felt to be arrogant of the seller to

presume to know what the consumer would like.

• Comparison:  Comparative advertising is banned in most countries and would

probably be very counterproductive, as an insulting instance of confrontation and

bragging, in Asia even if it were allowed.  In the U.S., comparison advertising has

proven somewhat effective (although its implementation is tricky) as a way to

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persuade consumers what to buy.

• Humor.  Although humor is a relatively universal phenomenon, what is considered

funny between countries differs greatly, so pre testing is essential.

• Gender roles.  A study found that women in U.S. advertising tended to be shown in

more traditional roles in the U.S. than in Europe or Australia.  On the other hand,

some countries are even more traditional—e.g., a Japanese ad that claimed a

camera to be “so simple that even a woman can use it” was not found to be

unusually insulting.

• Explicitness.  Europeans  tend  to  allow  for  considerably  more  explicit

advertisements, often with sexual overtones, than Americans.

• Sophistication.  Europeans, particularly the French, demand considerably more

sophistication than Americans who may react more favorably to emotional appeals

—e.g., an ad showing a mentally retarded young man succeeding in a job at

McDonald’s was very favorably received in the U.S. but was booed at the Cannes

film festival in France.

Popular vs. traditional culture.  U.S. ads tend to employ contemporary, popularculture, often including current music while those in more traditional cultures tend

to refer more to classical culture.

• Information content vs. fluff.  American ads contain a great deal of “puffery,” which

was found to be very ineffective in Eastern European countries because it

resembled communist propaganda too much.  The Eastern European consumers

instead wanted hard, cold facts.

Advertising standardization. Issues surrounding advertising standardization tend to

parallel issues surrounding product and positioning standardization.  On the plus side,

economies of scale are achieved, a consistent image can be established across markets,

creative talent can be utilized across markets, and good ideas can be transplanted fromone  market  to  others.  On  the  down  side,  cultural  differences,  peculiar  country

regulations, and differences in product life cycle stages make this approach difficult.

Further, local advertising professionals may resist campaigns imposed from the outside—

sometimes with good reasons and sometimes merely to preserve their own creative

autonomy.

Legal issues.  Countries differ in their regulations of advertising, and some products are

banned from advertising on certain media (large supermarket chains are not allowed to

advertise on TV in France, for example).  Other forms of promotion may also be banned or

regulated.  In some European countries, for example, it is illegal to price discriminate

between consumers, and thus coupons are banned and in some, it is illegal to offerproducts on sale outside a very narrow seasonal and percentage range.

INTERNATIONAL BRANDING

• Branding is done to differentiate one’s products in the market. It provides distinct

identity for the product in terms of quality and credibility. On the top hundred

global brands half a dozen come from Asia and the other half come from Japan and

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South Korea.

TOP TEN GLOBAL BRANDS

BRANDING ALTERNATIVES

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BRAND IMAGE

• The impression created by a brand on the consumer.

• It includes tangible and intangible aspect of the brand.

Example: Singapore airlines built its brand in international markets emphasizing the

superior services on board.

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BRAND EQUITY

A set of brand assets & liabilities linked to a brand ,its name, symbol that add to or

subtract from the value provided by a product or service to a firm and or to that firm’s

customers.

INTEGRATED MODEL OF BRAND EQUITY

BRAND LOYALTY

Attachment of the customer to the brand.

BRAND PACKAGING

It includes the brand name,symbol,or product package, which play a significant role in

enhancing and maintaining brand equity and serve as a barrier to competitors.

REFLECTION

The target customers perception of their external image.

RELATIONSHIP

The brand becomes a friend that the consumer does not want to lose

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