PGBM SSM

Principles of Global Business Management

Preface

World, today is a global village and no country can now afford to live in isolation. Globalization or integration of all the economies of the world has led to efficient utilization of resources available all over the world. Reduced trade barriers and technological revolution especially in the field of communication and transportation has made international trade faster and simpler.

The study material on Principles of Global Business Management has been developed to understand the cause and effects of international trade on global economy. Benefits of International trade have been explained with the help of trade theories of economists like Adam Smith, David Ricardo and Michael Porter in Chapter 2.

Mergers and Acquisitions, Franchising etc are some of the popular strategies used by different companies to enter different markets of the world. Strategies like export/ import, franchising, licensing, turnkey operations, strategic alliances and various other options available to a company to explore overseas market are explained in Chapter 3.

Chapter 4 and 6 deals with how global companies can organize themselves to ensure that their overseas operations are smooth and effective. It explains how global companies should be organized and how they should control the functioning of their overseas operations in the most efficient manner.

International Business is a complex process due to the difference in the Political, economical, legal and cultural environment in different countries. Chapter 5 of the study material deals with different business environment in different countries and its implications on companies engaged in international business.

Marketing, Human Resource Management, Accounting and Finance and Production are different functional areas in any business organization. Organizations have to suitable modify their strategy to ensure that each of the functional area is benefitted by international business. /marketing strategies should be modified to ensure more share of the global market. Productions strategies should be revised to bring down the cost of production. Finance manager in a global organization should devise strategies to explore more financing and investment options and Human Resource Manager should look for more productive workforce from the global marketplace. Chapter 7 – 11 deals with how companies develop strategies to ensure that they have operate most efficiently in the global market place, where each business activity is very complex and very challenging and until and unless they understand the business environment and stakeholders they will not be able to succeed in the tough competition.

International Business is a very exciting and fascinating subject and we hope that students develop the enthusiasm for the subject through this study material.

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INDEX

Chapter 1Globalization and trends in Management System............................................7

1.1 What is globalization?................................................................................71.2 Components of Globalization....................................................................71.3 Drivers of Globalization.............................................................................81.4 Globalization: Good or Bad for global economy...................................101.5 Managing in Global Marketplace.............................................................11

End Chapter Quizzes......................................................................................12

Chapter 2International Trade Theory...............................................................................14

2.1 Mercantilism..............................................................................................142.2 Theory of Absolute Advantage................................................................142.3 Theory of Comparative Advantage.........................................................162.4 Heckscher-Ohlin Theory..........................................................................172.5 The Product Life-Cycle Theory................................................................182.6 Theory of National Competitive Advantage...........................................18


Chapter 3Strategies for Going Global..............................................................................23

3.1 Entry Decision...........................................................................................233.2 Entry Modes..............................................................................................243.3 Entry Mode Selection...............................................................................27


Chapter 4Organization of International Business...........................................................30

4.1 Organizational architecture.....................................................................304.2 Structure....................................................................................................314.3 Integrating Mechanisms...........................................................................36


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Chapter 5The Cultural, Political, Legal and Economic environment facing Global Business............................................................................................................40

5.1 Influence of culture on international business......................................405.2 Economic Environment and its implications on International Business

............................................................................................................................445.3 Political Systems and International Business.......................................455.4 Legal Environment and International Business.....................................46


Chapter 6Control Strategies.............................................................................................50

6.1 International Planning Process...............................................................506.2 Control in Internationalization Process..................................................506.3 Location of Decision Making...................................................................51


Chapter 7Issues In Global Marketing...............................................................................56

7.1 Managing in the global marketplace.......................................................567.2 Product Attributes....................................................................................567.3 Distribution Strategy................................................................................567.4 Communication Strategy.........................................................................577.5 Pricing Strategy........................................................................................577.6 Configuring the Marketing Mix................................................................58


Chapter 8Global Production and Operational Strategies...............................................62

8.1 Factors determining Global Production Strategy..................................62


Chapter 9Global Human Resource Management............................................................68

9.1 Staffing......................................................................................................689.2 Management Development and Training................................................709.3 Performance Appraisal............................................................................709.4 Compensation...........................................................................................71


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Chapter 10Global Accounting and Financial Management..............................................74

10.1 Accounting and Auditing Standards.....................................................7410.2 Difference in Accounting Standards.....................................................7410.3 National and International Standards...................................................7610.4 Accounting aspects and control System.............................................7610.5 Financing Management..........................................................................77


Chapter 11Global Strategic Management..........................................................................80

11.1 What is Strategic Management?............................................................8011.2 Components of the Strategic Management Process...........................80


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Chapter 1Globalization and trends in Management System

1.1 What is globalization?

Globalization is a process of interdependence and integration of world economies, driven by international trade and investment and aided by information technology.

The definition of globalization will become clearer with the following example:In a local supermarket the consumers buy toys manufactured in Chile or tomatoes grown in Mexico, apparels made in India, Mobile Phones designed in Finland, assembled in Korea, Footwear designed in USA and made in Indonesia or China. The personal computer at the delivery counter has been imported from India. Person at the sales counter is wearing a shirt that bears a tag from China, Indonesia or El Salvador and so on.

The example clearly indicates that production and marketing activities are no longer confined within the boundary of a nation. Infact entire production and marketing activities for a particulate product utilizes resources available in different countries of the world. In we take example of clothes that we wear, the cotton for the shirt might have been sourced from China, processing of raw cotton could have been done in Indonesia, fabric was made in Malaysia, the shirt was stitched in India as per the designs provided by US designer and finally shirt was sold by the British Salesman in Retail store owned by a US multinational.

1.2 Components of Globalization

Thus it is clear from the above example that Globalization has two facets viz. Globalization of Markets and Globalization of Production (Fig 1).

1.2.1Globalization of Markets

It refers to merging of different national markets into one global marketplace. It is possible due to reduced trade barriers and development is technology. But to sell the product in different markets companies have to decide whether they should sell the standard product in all the market or they should adapt the product in different counties according to local taste and preferences. The final decision between standardization and Adaptation is based on individual market conditions and the preferences of the consumer which is primarily determined by culture, social conditions, and economic conditions etc. of a country.

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Technology

Drivers of Globalization

Liberal Policies

Growth

Consumer needs

Competition

Global Institutions

Strategic Vision

Fig 2: Major Drivers of Globalization

Components of

Globalization

Globalization of Markets

Globalization of Production

Fig 1 Components of Globalization

1.2.2 Globalization of Production

Companies source goods and services from different countries of the world to take advantage of low cost of various factors of production like land, labor and capital. The trend is referred as Globalization of Production due to which the companies are now able to bring down their cost of production and are able to offer the product at a more competitive price in the international market.

1.3 Drivers of Globalization

This current wave of globalization has been driven by lot of factors, the most important being the policies that have opened economies domestically and internationally. Some of the factors behind globalization (Fig 2) are highlighted below:

1.3.1 Liberalization

One of the most important factors behind globalization is opening up of the world economy. With international organizations like WTO promoting free and fair trade most of the member countries have made their foreign trade policy more liberal and open. Lowering of trade barriers, removal of non tariff barriers like Quota etc. and liberal norms for FII and FDIs have fostered globalization to a large extent.

1.3.2 Technological change

Another very important factor behind globalization is technology. On one hand technology have enabled firms to achieve economies of scale, increase productivity, achieve break even and on the other hand technology has also revolutionsed the communication and transportation system which

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are backbone of international trade. Micro processor, internet, mobile phone, wireless technologies and similar other technical advancement have contributed enormously to the emergence of global village. Technical advancement in the transportation like containerization and refrigeration has also made international trade easier and faster. Advancement in the case of air and sea cargo transport has made transportation of goods cheaper and faster.

1.3.3 Increased competition in the domestic market

Competition in the domestic market forces companies to explore new market. It also compels an organization to explore new production centers in the global market which can help them in reducing their production cost so that their product is more competitive in the international market.

1.3.4 Profit advantage/ Growth opportunities / increase market share

Companies also go global to increase their market share, profit and also to look for more avenues for growth.

1.3.5 Increasing consumer needs

World is a global village and with internet, consumers are aware about different products being sold in the international market. If a product is launched in USA, consumers in different part of the world are aware about the product. Demand by these consumers force the organization to indulge in international trade. Further, the consumers now have more disposable income therefore their demand is also increasing day by day.

1.3.6 Strategic vision of the organization

One of the very important factors behind globalization is the willingness of the management to make their organization a leading player in the global market.

1.3.7 Emergence of Global Institutions

Global Institutions like WTO, World Bank and IMF have also played an important role in the globalization process.

1.3.7.1 World Trade Organization

WTO is responsible for ensuring free and fair trade between the member countries. Any country who is a member of WTO has to ensure that its International Trade is governed by the provisions in General Agreement on Tariff and Trade (GATT) and General Agreement on trade in services (GATS). WTO also has an effective dispute settlement mechanism to resolve trade dispute between member countries.

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1.3.7.2 World Bank and International Monetary Fund

Both these organizations were created in 1944 during at Bretton Woods, New Hampshire. The main aim of World Bank is to ensure economic development whereas International Monetary Fund is responsible for ensure the stability of the international monetary system for sustainable economic growth

1.3.7.3 United Nations

United Nations was created on 24th October 1945 with the main objective for ensuring international peace and security through international cooperation.

1.4Globalization: Good or Bad for global economy

Globalization in itself is a very controversial topic. Different set of people have different view about globalizations, one group strongly favors globalizations and emphasize that global economic development will not be possible without globalization. While on the other hand there is a different set of people who believe that because of opening up of the economies, MNCs are exploiting the resources of the poor countries.

1.4.1 Globalization debate-Pro

Proponents of globalization argue that it allows poor countries and their citizens to develop economically and

raise their standards of living leads to employment generation lowers down the price of goods helps companies to focus on their core competencies

1.4.2 Globalization debate-Con

Opponents of globalization claim that creation of an free international free market has benefited

multinational corporations in the Western world destroys manufacturing job in developed countries MNCs shift to countries having liberal environmental and labor

regulations

1.5Managing in Global Marketplace

Companies now have a huge global market from where they can source their products and further sell it in different countries. Managing business is thus a challenge in this huge market place. Companies can successfully manage their operations in the global market place if they have:

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proper understanding of business environment in different countries and also have a proper knowledge of managing these differences.

efficient system to control the production and marketing activities in vast marketplace.

thorough knowledge of trading and investment environment of different marketplace

good knowledge of the currency market i.e. how to manage currency fluctuations

References

Hodgetts Richard M, Luthans F. & Doh Johathan P., , International Management, Tata McGrawHill Publishing Company Ltd., (2005) Chapter 1

Hill Charles W L & Jain Arun K, International Business, Tata McGrawHill Publishing Company Ltd., (2005), Chapter 1

Paul Justin (2005) International Business, Prentice Hall of India Private Ltd., Chapter 1

Cherunilam Francis, (2004), International Business, Prentice Hall of India Private Ltd. 3rd Edition, Chapter 1

Koontz Harold and Weihrich Heinz, (2001), Management : A Global Perspective, Tata McGraw Hills Publishing Co. Ltd., Chapter 1 & 4

Thakur Manab, Burton Gene E. & Srivastava B. N. (2002), International Management Concepts & Cases, Tata McGraw Hills Publishing Co. Ltd., Chapter 1

Gooderham Paul N. & Nordhaug Odd (2004), International Management, Cross-Boundry Challenges, Blackwell Publishing Ltd. Chapter 1

Bhalla V. K. & Ramu Shiva S. ( 2005). International Business, Environment and Management, Anmol Publications Pvt. Ltd., Chapter 1

Sharan Vyuptakesh, (2006), International Business, Concept, Environment and Strategy, Pearson Education, Chapter 1

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Chapter 1Globalization and trends in Management System

End Chapter Quizzes

1. What is the role of World Trade Organization? a) settle trade-related disputes between countriesb) promote free trade between countriesc) make rules about trade between counties d) All of the above

2. Which of the following organizations was established by industrialized nations to loan money to underdeveloped and developing countries?

a) OPEC b) The World Bank c) The IMF d) The United Nations

3. Which of the following is an example of a globalized product? a) different formulations of leading soft drink in France, the United Kingdom,

and Canada b) Lever Brothers bar soaps tailored to different countries' water conditions c) American movies, and music d) Colgate-Palmolive's hand-powered washing machine for LDCs

4. Which of the following is not a major driver leading behind globalization? a) Politicalb) Market c) Environmental. d) Technology

5. The most common definition of globalization is that of: a) integration of political laws and customsb) integration of countries in geographical proximity to one anotherc) integration of people with similar cultural characteristicsd) integration of goods, technology, labor, and capital

6. Advances in computers and communications technology are permitting an increased flow of ideas and information across boarders. This enables:

a) Manufacturing personnel to concentrate more on domestic productionb) Customers to learn about foreign goodsc) Sellers of products to travel to more locations worldwide in search of

buyersd) Advertisers to focus more on specific countries where demand is the

greatest

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7. One of management's goals is utilizing economies of scale to reduce unit costs. Which of the following would not necessarily lead to realization of economics of scale?

a) Globalizing product lines to reduce development costs. b) Locating production in countries where the costs of the factors of

production are lower. c) Locating production in countries where the labor force is the most

highly educated. d) Globalizing product lines to reduce production and inventory costs

8. GATT stands fora) General Agreement on Trade and Tariffsb) General Agreement on Tariffs and Tradec) General Arrangement on Tariffs and Traded) General Arrangement on Trade and Tariffs

9. Which of the following is not an advantage of globalization? a) More job opportunitiesb) goods and services available at less costc) helps companies to focus on their core competenciesd) MNCs shift to countries having liberal environmental and labor regulations

10. One of the first multinational companies in existence in the late 1800's to own foreign production facilities, worldwide distribution networks, and market its products under global brands was:

a) Eastman Kodak. b) Singer Sewing Machines. c) Ford Motor Company. d) Coca-Cola

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Chapter 2International Trade Theory

It is a fact that International trade is beneficial for overall economic development of a country. Economists have given numerous theories to explain why countries should engage in International Trade for their economic growth. This chapter will examine all the trade theories starting from Mercantilism to Michael Porter’s National Competitive advantage theory.

2.1 Mercantilism

This theory was propagated in the mid 16th century in England. According to this theory, a country’s wealth is measured by its holding of treasure, usually gold. During that time gold was the currency of trade between nations, therefore to increase its wealth; a country should encourage export and restrict import, thereby resulting in an increase of its gold reserves and also its national wealth. The drawback of this theory is that it viewed trade as a zero sum game i.e. one country’s gain results in another country’s loss. Which is not true as international trade is a positive sum game as demonstrated by Adam Smith and David Ricardo in their theory of Absolute and Comparative Advantage.

2.2 Theory of Absolute Advantage

Theory of Absolute Advantage was proposed in 1776 by Adam Smith in his book “Wealth of Nations”. According to this theory countries should specialize in producing goods which they can produce more efficiently and then trade these for goods produced by other countries.

Consider the example of trade between Brazil and South Korea. Assume that Brazil and South Korea have same amount of resources, i.e. 200 units, which can be used to produce either rice or coffee beans. Further, Brazil requires 10 units of resources to produce one ton of coffee beans and 20 units of resources to produce one ton of rice. On the other hand, South Korea requires 40 units of resources to produce one ton of coffee beans and 10 units of resources to produce one ton of rice. Different combinations of rice and Coffee Beans that both Brazil and South Korea can produce are given in Table 1. As evident from the table, Brazil has an absolute advantage in producing Coffee beans while South Korea is more efficient in producing rice. If South Korea and Brazil do not trade with each other then Brazil will produce and consume 10 tons of Coffee beans and 5 tons of rice, whereas, South Korea will produce and consume 2.5 tons of coffee beans and 5 tons of rice. The total production of these two countries without trade is 12.5 tons of coffee beans and 15 tons of rice. On the other hand if they produce the commodity in which they are more efficient, i.e. Brazil utilize all its resources in producing Coffee beans and South Korea devote all the 200 units of resources in producing rice, then the total production is 20 tons each of coffee beans and rice. Now if Brazil exports 6 tons of coffee beans

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to South Korea and import 6 tons of rice from South Korea than Brazil will have 14 tons of coffee beans and 6 tons to rice for consumption and South Korea will have 6 tons of coffee beans and 14 tons of rice to consume. After specializing in production and trading Brazil had additional 4 tons of coffee beans and 1 ton of rice for itself and South Korea has additional 3.5 tons of coffee beans and 4 tons of rice. Therefore as a result of specialization and trade production and consumption has increased thereby resulting in net gains for both Brazil and South Korea. Table 1: Theory of Absolute advantage

A. Resources required to produce one ton of coffee beansCoffee Beans Rice

Brazil 10 20South Korea 40 10Total 50 30B. Production and consumption without trade (100 units of resources are utilized for producing Rice and 100 units for producing Coffee Beans)

Coffee Beans RiceBrazil 10.0 5.0South Korea 2.5 10.0Total 12.5 15.0C. Utilizing resources for producing commodity in which the country specializes

Coffee Beans RiceBrazil 20.0 0.0South Korea 0.0 20.0Total 20.0 20.0D. Brazil trades 6 tons of Coffee Beans for 6 tons of rice from South Korea

Coffee Beans RiceBrazil 14.0 6.0South Korea 6.0 14.0E. Consumption pattern after specialization and Trade (Difference between B and D above)

Coffee Beans RiceBrazil 10.0 16.0South Korea 3.5 4.0

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2.3 Theory of Comparative Advantage

David Ricardo gave the Theory of Absolute Advantage in 1817. In his book on “Principles of Political Economy” Ricardo proposed that a country should specialize in production and export of those goods that it produces more efficiently and import goods that it produces less efficiently from other countries.

Assume that Brazil requires 10 units of resources to produce one ton of coffee beans and 13 1/3 units of resources to produce one ton of rice. South Korea on the other hand requires 40 units of resources to produce one ton of coffee beans and 20 units of resources to produce one ton of rice. Different combinations of coffee beans and rice that both Brazil and South Korea can produce are given in Table 2 (A).

Table 1: Theory of Comparative advantage

A. Resources required to produce one ton of coffee beansCoffee Beans Rice

Brazil 10 13.33South Korea 40 20B. Production and consumption without trade (100 units of resources are utilized for producing rice and 100 units for producing coffee beans)

Coffee Beans RiceBrazil 10.0 7.5South Korea 2.5 5.0Total 12.5 12.5C. Utilizing resources for producing commodity in which the country specializes (Ghana devotes 150 units of resources to produce coffee beans and 50 units of resources to produce rice and in case of South Koreas 200 units are utilized for producing rice)

Coffee Beans RiceBrazil 15.0 3.75South Korea 0.0 10.0Total 15.0 13.75D. Brazil trades 4 tons of Coffee Beans for 4 tons of rice from South Korea

Coffee Beans RiceBrazil 11.0 7.75South Korea 4.0 6.0E. Consumption pattern after specialization and Trade (Difference between B and D above)

Coffee Beans RiceBrazil 1.0 0.25South Korea 1.5 1.0

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Utilizing 200 units of resources Brazil can produce 10 tons of coffee beans and 7.5 tons of rice whereas South Korea can produce 2.5 tons of coffee beans and 5 tons of rice (Table 2 B) From the table it is evident that even though Brazil has absolute advantage in producing both coffee beans and rice, it has comparative advantage in producing only coffee beans. Now when both the countries produce those commodities in which they are more efficient, Brazil devote 150 units of resources to produce coffee beans, in which it has comparative advantage, and 50 units if resources to produce rice. South Korea devotes all its resources in producing rice (Table 2 C). Total production is 15 tons of coffee beans and 13.75 tons of rice.

If Brazil export 4 tons of coffee beans for 4 tons of rice, its consumption of coffee beans and rice increases by 1.0 and 0.25 tons respectively. South Korea also has additional 1.5 tons of coffee beans and 1.0 ton of rice to consume. Thus production and consumption increases with unrestricted trade.

2.3.1 Limitations of Theory of Absolute and Comparative Advantage

Both these theories are based on lots of unrealistic assumptions like: there are two countries and two commodities and both of them have fixed amount of resources, which is not true in real world. there is no transportation cost Cost of resources is same in both the countries is same and resources can be utilized freely from producing one commodity to another within a country. commodities are swapped on a one to one basis, exchange rate are not considered

2.4 Heckscher-Ohlin Theory

Swedish economist Eli Heckscher (1919) and Bertil Ohlin (1933) argued that countries will export those goods that are made from factors of production that are locally abundant and import goods that are made from factors of production that are locally scarce. Factors of production are the resources available with a country in terms of land, labor and capital.

Heckscher-Ohlin theory explains the fact that china excels in export of goods that are produced utilizing labor that is available in abundance at a comparatively less cost.

However the theory fails to prove the international trade pattern of US. As US has more capital as compared to other nations of the world, therefore US should be exporter of capital intensive goods and importer of labor intensive goods. On the contrary, US exports are less capital intensive than US imports. This exception to the Heckscher-Ohlin Theory is known as Leontif paradox.

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2.5 The Product Life-Cycle Theory

Raymond Vernon proposed this theory in mid 1960. The theory is based on the observation that during 20th century majority of the new products were invented and introduced by US firms in their home country.

To further explain the theory, he argued that in the introduction stage, the demand of the product is growing rapidly is US while the demand in other advanced countries is consumers in the high income bracket. The limited demand for the product is fulfilled by production in US and exports to the other advanced countries.

As the demand for the product increases in the other advanced countries, US firms might set up production facilities in the advanced countries, limiting the export from US to these advanced economies.

Further, in the product life cycle, as the demand for the product in US and other advanced countries reaches a maturity stage, costs becomes a critical factor. By this time the product has also become standardized, therefore, it becomes more practical to export he product to US from advanced economies, rather then continuing with the production facilities in US. As the labor cost is low in advanced countries than in US, producers can significantly reduce the cost of production.

When there is still more pressure to reduce cost, the production facilities are shifted to developing countries. Thus the global production shifts from US to other advanced nations and then to developing countries, as a result of which US becomes an importer of product from being an exporter and inventor of a product.

2.6 Theory of National Competitive Advantage: Porter’s Diamond Model

This theory is proposed by Michael Porter in 1990. According to the theory, four attributes determine the competitive advantage of a particular nation. These attributes are:

Factor endowmentsDemand conditionsRelating and supporting industriesFirm strategy, structure and rivalry

Porter visualizes these four attributes as constituting a diamond. According to Porter, Chance and Government are two more variables that influence the diamond.

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2.6.1 Factor Endowments

Porters factor endowments are same as that of Heckscher-Ohlin, but he further categorized the factor of production as Basic factor endowments ( natural resource, climate, location and demographics) and advanced factor endowments ( communication infrastructure, sophisticated and skilled labor, research and technical know how). Advanced factors play an important role in determining competitive advantage of a nation. He also stressed that by investing in advance factors a country can overcome its disadvantageous position in basic factors. 2.6.2 Demand conditions

Nature of demand in home country plays an important role in determining the attributes of the locally produced goods. If the domestic consumers are demanding and sophisticated they will create pressure on firms to produce innovative and better quality products.

2.6.3 Related and Supporting Industries

Presence of related and supporting industry of international standard also contributes to a nation’s competitive advantage.

2.6.4 Firm Strategy, structure and rivalry

Different countries follow different management ideologies, and this ideology plays an important role in determining their competitive advantage. In case of most of the German companies, engineers occupy the top management positions, as the focus is on manufacturing process and product design.

Further, apart from the ideology being followed by a company, presence of rivals in the home market also makes an industry more competitive as it creates pressure to innovate, improve quality and to reduce cost.

References: Hill Charles W L & Jain Arun K, International Business, Tata McGrawHill

Publishing Company Ltd., (2005), Chapter 3 Thakur Manab, Burton Gene E. & Srivastava B. N. (2002), International

Management Concepts & Cases, Tata McGraw Hills Publishing Co. Ltd., Chapter 4

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Bhalla V. K. & Ramu Shiva S. ( 2005), International Business, Environment and Management, Anmol Publications Pvt. Ltd., Chapter 2


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Chapter 2International Trade Theory

End Chapter Quizzes

1. Which one of the following is not an assumption of the Ricardo Model:a) Constant returns to scale b) Factors of production can be transferred easily one sector to

anotherc) There is perfect competition in the marketd) Technological innovation is a unique feature of the market structure

2. Which of the following statement describes the Heckscher-Ohlin Theory?a) Countries should export goods that are made of factors of production

that are available in abundance in the economyb) Countries should produce and export those goods in which they have

absolute advantagec) Countries should produce and export those goods in which they have

comparative advantaged) Increase in the endowment of one of the factors will reduce the

production of goods that intensively use the other factor

3. “If US is capital rich and innovation increases the productivity of capital, then labor intensive industries in US will get hurt” is

a) Stolper-Samuelson Theoremb) Leontief Paradoxc) Rybczynski Theoremd) Heckscher-Ohlin Theory

4. Which of the following pair is wrongly matched?a) Theory of Absolute Advantage – Adam Smithb) Theory of Comparative Advantage – David Ricardoc) Heckscher-Ohlin Theory – Wassily Leontifd) Product Life Cycle Theory – Raymond Vernon

5. According to Porter, which of the following factors will not help in determining the Global Competitive Advantage of the company?

a) Monopoly market conditions i.e. Absence of Rivalsb) Firm Strategyc) Presence of related and supporting industryd) Factor conditions

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6. The international product lifecycle is a theory explaining why: a) all international products eventually lose their profitability. b) a product that begins as a nation's import eventually becomes its

export. c) a product that begins as a nation's export eventually becomes its

import. d) the demand for international products changes over time

7. Observation that “US exports were less capital intensive the US imports” which is the contradiction to the HO model is known as

a) Leontif Paradoxb) Stopler-Samuelson Theoremc) Rybczynski Theoremd) New Product Life Cycle Theorem

8. The international product lifecycle is a theory explaining why: a) all international products eventually lose their profitability. b) a product that begins as a nation's import eventually becomes its

export. c) a product that begins as a nation's export eventually becomes its

import. d) the demand for international products changes over time.

9. International trade occurs primarily because of: a) price differences among nations. b) supply and demand. c) capitalism. d) none of the above

10. The Heckscher-Ohlin theory of factor endowment states that international and interregional differences in production costs occur because of:

a) differences in the supply of production factors. b) government controls. c) differences in technology factors. d) import and export regulations

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Chapter 3Strategies for Going Global

The choice of which market to enter is driven by an assessment of long term growth and profit potential. The choice of mode of entry can be exporting, licensing, franchising, establishing joint ventures, setting a wholly owned subsidiary, or acquiring an established firm in the host market. Naturally each entry mode has its own advantages and disadvantages. Various factors which can bring advantages or disadvantages to a firm can be transport costs, political risk, trade barriers, economic risk, and firm’s strategy. The optimal entry mode depends on these factors and varies by the situation. Thus whereas some firms may work best by setting up a wholly owned subsidiary, others work best by acquiring an established enterprise.

In this chapter we will also focus on strategic alliances. Strategic alliances are cooperative arrangements between actual and potential competitors. It means a variety of arrangements like cross share holding deals, licensing arrangements, formal joint ventures, and informal cooperative arrangements.

3.1 Entry Decision

3.1.1 Choice of Foreign Markets

Two major considerations facing managers are which markets to serve and where to locate the production to serve that market.

Because each company has unique competitive capabilities and objectives, the factors affecting geographic expansion pattern is different from others. Most companies take into consideration, environmental climate like relative size of the country market, the ease of operating, the availability and cost of various resources, the relative risk and uncertainties related to a particular market, the purchasing power of consumers, and the likely wealth of the consumers in the future.

Companies collect information about various countries through scanning process. Scanning techniques help managers in considering alternatives that might otherwise be overlooked. They also help limit the final detailed feasibility studies to a manageable number of those that appear most promising. The ranking of countries is done to determine the order of entry into potential markets and for setting the allocation of resources and the rate of expansion to different markets.

Companies frequently use several tools for comparing opportunities in various countries like grids and matrices. Grids that rate country projects according to separate dimensions and matrices on which companies may plot one attribute on a vertical axis and another on horizontal axis.

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Companies must develop location strategies for new investments and devise means of deemphasizing certain areas and divesting if necessary.

3.1.2 Timing of Entry

Ones attractive markets have been identified, it is important to conceder the time of entry. Entry may be early when an international business enters a foreign market before other foreign firms and late when it enters after other international firms have already established and developed there business.

3.1.3 Scale of Entry

The entry can be a large scale or a small scale entry. Entering a foreign market on a large scale implies rapid entry. The large scale entry gives both distributors and customers reasons to believe that the company will remain in the market for a long time. On the other hand small scale entry allows a firm to learn about the foreign market while limiting the firm’s exposure to the market.

3.2 Entry Modes

Firms can use various entry modes to enter the foreign market: exporting, turnkey projects, licensing, franchising, joint ventures, and setting up a wholly owned subsidiary in the host country.

3.2.1 Exporting

Many manufacturing firms begin there global expansion as exporters and then may switch to another mode for doing business in a foreign market.

Advantages:

Avoidance of substantial costs of establishing manufacturing operations in the host country.

It helps a firm achieve experience curve and location economics.

Disadvantages:

Exporting may not be appropriate if there are low cost locations for the production abroad.

High transportation costs can make exports uneconomical. Tariff barriers also can make exports non lucrative. Problems may arise due to the delegation of marketing activities to a local

agent.

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3.2.2 Turnkey Projects

In a turnkey project, the contractor agrees to handle every detail of the project for a foreign client including training. The contractor handovers the key of the plant to the foreign client to simply ‘turnkey’ and start operation.

Advantages Best suitable for technologically complex projects. Good strategy when FDI is limited by the host government. This is useful in case of unstable political or economic environment in the host

country.

Disadvantages

The contractor firm has no long term interest in the host country. The company may create its own competitor in a foreign land. If technology is the competitive advantage, then this advantage is lost.

3.2.3 Licensing

It is an arrangement in which a licensor grants the rights to intangible property to another entity for a particular period, and the licensee in return, pays royalty fee. Intangible property includes formulas, inventions, patents, processes, copyrights, designs, trademarks etc.

Advantages

The firm does not have to bear the development cost and risks associated with the foreign market.

If the firm lacks capital and other resources in developing a foreign market, licensing can be very useful.

Very useful in economically or politically volatile foreign market. Useful when participation is restricted by barriers to investments. If a firm posses some intellectual property, but does not want to involve in the

business directly, then licensing can be very useful.

Disadvantages

The firm can not have a tight control over manufacturing or marketing activities.

The firm can not make a competitive move in other country by using the money generated in a country, except the royalty money.

The firm loses its competitive advantage of technical knowhow.

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3.2.4 Franchising

It is a kind of licensing in which the franchiser gives the intangible property on conditions that the franchisee abides by the rules as to how it does business. Assistance to run the business on an ongoing basis is given. Royalty is paid in form of some percentage of the revenues generated by the franchisee.

Advantages

The firm does not have to bear the development cost and risks associated with the foreign market.

If the firm lacks capital and other resources in developing a foreign market, licensing can be very useful.

Very useful in economically or politically volatile foreign market. Useful when participation is restricted by barriers to investments. If a firm posses some intellectual property, but does not want to involve in the

business directly, then licensing can be very useful.

Disadvantages

Managing quality control is difficult. 3.2.5 Joint Ventures

A joint venture entails establishing a firm that is jointly owned by two or more otherwise independent firms.

Advantages

A firm can take advantage from the knowledge and experience of local partner about host country’s culture, politics, languages, social system etc.

When costs and risks in operating in a foreign market are high, a firm can share them with the local partner.

Political opposition can be minimized by having a local joint venture partner.

Disadvantages

Risk of loosing control over technology. Tight control over subsidiaries is difficult. Shared ownership can lead to conflicts among the partners.

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3.2.5 Wholly Owned Subsidiaries

The firm owns 100% of the stocks in a subsidiary located in a foreign land. It can be done in two waysa) Green Field Venture- The firm starts an entirely new operation. b) Can acquire an established firm in the host country.

Advantages Technological competence remains intact. Better global strategic control and coordination. Helps in realizing location and experience curve economies.

Disadvantages

Very costly method. Adapting with a new culture may be difficult.

3.3 Entry Mode Selection

The optimal choice of entry mode for firms pursuing a multinational strategy depends to some degree on the nature of their core competency. If a firm’s competitive advantage (its core competence) is based upon control over proprietary technological know-how, licensing and joint venture arrangements should be avoided if possible in order to minimize the risk of losing control over that technology, unless the arrangement can be structured in a way where these risks can be reduced significantly. When a firm perceives its technological advantage as being only transitory, or the firm may be able to establish its technology as the dominant design in the industry, then licensing may be appropriate even if it does involve the loss of know-how. By licensing its technology to competitors, a firm may also deter them from developing their own, possibly superior, technology. The competitive advantage of many service firms is based upon management know-how. For such firms, the risk of loosing control over their management skills to franchisees or joint venture partners is not that great, and the benefits from getting greater use of their brand names can be significant.

References:

John D Daniels, Lee H Radebaugh, Daniel P Sullivan (2004) International Business, Pearson Education

Charles W Hill, Arun K Jain (2005) International Business, Tata McGraw Hill Cavusgil, Knight, Riesenberger (2009) International Business, Pearson

Education Francis Cherunilam (2006) International Business, Prentice Hall

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Chapter 3Strategies for Going Global

End Chapter Quizzes

Q 1) One of the following is not among the main internal factors affecting the choice for market entry mode:

a) international experience. b) firm size. c) product. d) demand uncertainty.

Q 2) One of the following is not a main external factor affecting the choice for market entry mode:

a) intensity of competition. b) international experience. c) market size. d) demand uncertainty.

Q3) An appropriate entry strategy for a company seeking a limited form of participation in global markets is:

a) licensing. b) Internet selling. c) Piggybacking. d) joint-venturing.

Q 4) firm globalizing within the international tourism industry must be aware of the fact that comparable international data is:

a) somewhat limited. b) censored. c) non-existent. d) widely available.

Q 5) Which factors affecting the choice for foreign market entry are categorized as being external?

a) Country risk, demand uncertainty and intensity of competition. b) Direct and indirect trade barriers. c) Socio-cultural distance between home country and host country. d) All of the above.

Q 6) ______ is Africa's largest country. a) Kenya b) Zimbabwe c) South Africa d) Sudan

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Q 7) Which country continues to be ruled by one of the most repressive regimes in the world?

a) Burma b) China c) Belarus d) Namibia

Q 8) When GDP growth falls below 2 %, tourism growth tends to: a) double. b) be higher. c) be even lower. d) stagnate.

Q 9) Franchising is a common route to internationalization used by a) manufacturing industries b) small firms c) service industries d) industrial conglomerates

Q 10) The Grummond Group buys computer peripherals in industrialized countries and sells them to developing countries. Grummond would most likely be classified as a

a) trading company. b) strategic alliance. c) joint venture. d) licensee. e) subsidiary

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Chapter 4Organization of International Business

The theme of this chapter is that in order to succeed an international business must have the appropriate formal and informal organizational structure and control mechanisms.

4.1 Organizational architecture

This term refers to the totality of firm’s organization including the formal organization structure, control systems and incentives, organizational culture, process and people.

What is appropriate depends upon the strategy of the firm, which as we saw in the last chapter is inter-related with the demands of the industry environment.

4.1.1 Organization Structure

The organization structure means three things: the formal division of the organization into sub units such as product divisions, national operations and functions. (Organizational charts), the location of decision making responsibilities within that structure (e.g., centralized or decentralized etc) and the establishment of integrating mechanisms to coordinate the activities of sub units including cross functional terms or regional committees.

4.1.2 Control systems

Control systems are the metrics used to measure the performance of sub units and make judgments about how will the mangers are running the sub units. Unilever measured the performance of its subsidiary companies according to profitability. Profitability was the control systems.

4.1.3 Incentives

Incentives are the devices used to reward the appropriate managerial behavior. Incentives are very ties to performance metrics. e.g. a bonus for exceeding performance targets.

4.1.2 Process

Process are the manners in which the decisions are made and work is performed within an organization. Examples are the processes for formulating

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strategy, for deciding how to allocate the resources within the firm, or for evaluating the performance of managers and giving feedback.

4.1.3 Organization culture

Organization culture are the norms and value systems that are shared among the employees of an organization. Just are societies having distinct patterns of culture and sub couture. The organizational culture can have a profound impact on how a firm performs.

4.1.4 People

People comprises not just the employees of the organization but also the strategy used to recruit, compensate and retain those individuals and the types of people that they are in terms of their skills values and orientation.

4.2 Structure

Vertical differentiation is principally about the centralization and decentralization of decision-making responsibilities. It is concerned with identifying where in a hierarchy decision making power should be concentrated.

There are four main arguments for centralization: (1) Facilitating coordination(2) Ensuring consistency between decisions and organizational objectives(3) Providing top managers the means to push through major changes, and (4) Avoiding duplication of activities.

There are five main arguments for decentralization: (1) Overburdened and hence poor decision-making at the top of the organization, (2) Increased motivation at lower levels(3) Greater flexibility(4) Better decisions on the spot by the people directly involved, and (5) Increased accountability and control.

The choice between centralization and decentralization is not an absolute one. Frequently it makes sense to centralize some decisions and decentralize others depending upon the type of decision and the strategy of the firm. For firms pursuing a global strategy, there is clearly more of a need for centralized decision making than for firms pursuing a multidomestic strategy. For transnational, it is less clear, as some decisions should perhaps be centralized while others are decentralized.

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4.2.1 Horizontal Differentiation

Horizontal differentiation is concerned with how the firm decides to divide into sub-units. The decision is typically made upon the basis of functions, business areas, or geographical areas.

4.2.1.1 Functional organization

The firm is organized on the basis of various functions like Marketing, Finance, Manufacturing and Purchasing as shown in the figure given below.

FUNCTIONAL STRUCTURE

TOP MANAGEMENT

PURCHASING MANUFACTURING MARKETING FINANCE

4.2.1.2 Product organization

As firms diversify into multiple product lines, a product division structure that allows autonomous responsibility in the operating units is usually chosen as is shown in figure below. As can be seen in the figure for each product there are separate functional department that is responsible for the marketing, finance, manufacturing and purchasing activities.

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PRODUCT STRUCTURE

TOP MANAGEMENT

DIVISION PRODUCT LINE ADIVISION PRODUCT LINE B DIVISION PRODUCT LINE C

PURCHASING MANUFACTURING MARKETING FINANCE

4.2.1.3 International division (functional)

Historically, when many firms began to expand abroad they typically grouped their international activities into an international division. This tended to be the case whether the firm was organized on a functional basis or based on product divisions. No matter whether the domestic structure of the firm was based primarily upon functions or upon product divisions, the international division tends to be organized on geographical lines.

4.2.1.4 International division (product)

This structure rarely lasts due to the inherent potential for conflict and coordination problems between domestic and foreign operations. Firms then switch to one of two structures -- a worldwide area structure (undiversified firms) and a worldwide product division structure (diversified firms).

4.2.1.5 Worldwide area structure

A worldwide area structure tends to be favored by firms that have a low degree of diversification and domestic structure based on functions. Each area tends to have a self contained largely autonomous entity with tits own set of value creation activities.

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Worldwide product division structure:

A worldwide product division structure tends to be adopted by firms that are reasonably diversified and accordingly, originally had a domestic structure that was based on product divisions.

WORLDWIDE AREA STRUCTURE

HEADQUARTERS

NORTHAMERICAN

AREA

LATINAMERICAN AREA

EUROPEANAREA

MIDDLE-EASTERN

AFRICAN AREA

FAR EASTAREA

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4.2.1.6 The Global Matrix Structure

Since neither of these structures achieves a balance between the need to be both locally responsive and to achieve location and experience curve economies, many multinationals adopt matrix type structures. However, global matrix structures have typically failed to work well, primarily due to bureaucratic problems.The Global Matrix Structure contains simultaneous, intersecting differentiation bases, with employees reporting to a functional and a product manager simultaneously.An example of global matrix structure is given below.

Area Specialists

Martha Stewart

6 6 -- 2929

Magazines

Books

Internet

Radio/ Newspaper

Network/ Cable TV

K-mart Line

Sears Paint

Catalog Line

Specialty/ Retailing

Cooking

Entertainment

Weddings

Crafts

Gardening

Home

Holidays

Children

Media Group Merchandising Group

Matrix Organization at

4.2.1.7 The Mixed Structure

Is most common in the Multinational Enterprises. It uses localization in product development, marketing, sales, and service. At the same time functions that benefit from scale advantages, like purchasing, are centralized.

4.2.2 Vertical differentiation

Vertical differentiation is principally about the centralization and decentralization of decision-making responsibilities. It is concerned with

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identifying where in a hierarchy decision making power should be concentrated.

4.2.2.1 Centralization

There are four main arguments for centralization (1) Facilitating coordination

(2) Ensuring consistency between decisions and organizational objectives (3) Providing top managers the means to push through major changes (4) Avoiding duplication of activities.

4.2.2.2 Decentralization

There are five main arguments for decentralization

(1) Overburdened and hence poor decision-making at the top of the organization (2) Increased motivation at lower levels (3) Greater flexibility (4) Better decisions on the spot by the people directly involved (5) Increased accountability and control.

The choice between centralization and decentralization is not an absolute one. Frequently it makes sense to centralize some decisions and decentralize others depending upon the type of decision and the strategy of the firm.

4.3 Integrating Mechanisms

Both formal and informal mechanisms can be used to help achieve coordination. The need for coordination (and hence integrating mechanisms) varies systematically with the strategy of the firm. It is lowest in multidomestic firms, higher in international firms, higher still in global firms, and highest of all in transnational firms. Integration is inhibited by a number of impediments to coordination, particularly different sub-unit orientations. To the extent that different sub-units have different objectives and ways of operating, integration becomes more difficult. Integration can be achieved through formal integrating mechanisms. Formal integrating mechanisms vary in complexity from direct contact and simple liaison roles, through teams, to a matrix structure. However, formal integrating mechanisms can become bureaucratic. To overcome the bureaucracy associated with formal integrating mechanisms, firms often use informal mechanisms. These include management networks and organization culture. For a network to function effectively it must embrace as many managers within the organization as possible. Information systems and management development policies (including job rotation and management education programs) can be used to establish firm wide networks. For a network to function properly, managers in different sub-units must be committed to the same goals.

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One way of achieving this is to foster the development of a common organization culture. Leadership by example, management development programs, and human relations policies are all-important considerations in building a common culture. Taken together, managerial networks and a common culture can serve as valuable coordination mechanisms in international firms that can help overcome the deficiencies of formal mechanisms.

References:




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Chapter 4Organization of International Business

End Chapter Quizzes

Q 1) Which of the following is an example of a globalized product? a) different formulations of Hills Bros. Coffee in France, the United Kingdom,

and Canada b) Lever Brothers bar soaps tailored to different countries' water conditions c) American clothing, movies, and music d) Colgate-Palmolive's hand-powered washing machine for LDCs

Q 2) Being a global organization means:

a) customizing the product range for each segment in part. b) creating standardized products for homogeneous markets. c) creating both standardized and customized products. d) any of the above.

Q 3) A global market leader is an organization which:

a) has more than 50% global market share. b) is recognized as being ahead of the rest in terms of market share. c) has the monopoly over several foreign markets. d) is ahead of the competition in terms of global innovation.

Q 4) What elements can a global company choose to emphasize in selecting its organization structure?

a) Technology, teamwork, or culture. b) Regions, functions, or products. c) Functions, technology, or country. d) Regions, teamwork, or conflict.

Q 5) Why would a company expanding internationally choose to have an international division?

a) It allows the firm to focus on international operations separately from domestic operations.

b) Having an international division helps a company to find general managers with international experience.

c) It allows the international division to develop critical mass and thus compete effectively for scarce resources.

d) All of the above are correct. Q 6) What kinds of organizations should use the matrix organizational structure?

a) Moderate sized organizations that have only a few product lines. b) Large sized organizations that have many product lines. c) Complex organizations that operate in several different industries. d) Simple organizations that have a single product.

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Q 7) What factors cause organizational structures to evolve over time? a) Technology, cultural trends, and teamwork. b) Technology, competition, and employee empowerment. c) Growth, integration, and industry crisis. d) Growth, strategy, and business crisis.

Q 8) Which of the following terms is incorrectly matched with its definition? a) Vertical firms are companies in which decisions are made by matrix

managers. b) Horizontal firms are companies in which decisions are made by teams

rather than through organizational hierarchy. c) Horizontal differentiation - degree to which labor is divided. d) Vertical differentiation - distribution of authority from lower to higher level

managers.

Q 9) Which organizational structure is considered to be the most complex onea) Product structureb) Matrix structurec) Functional structured) Area structure

Q 10) when firms began to expand abroad they typically group their international activities through

a) Product structureb) International divisionc) Functional structured) Area structure

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Chapter 5The Cultural, Political, Legal and Economic environment facing

Global Business

5.1 Influence of culture on international business

“Culture is the integrated sum total of learned behavior traits that are shared by the members of a society”- Hoeble

Culture is the way that we do things around here. Culture could relate to a country (national culture), a distinct section of the community (sub-culture), or an organization (corporate culture). You are not born with a culture, and that it is learned. So, culture includes all that we have learned in relation to values and norms, customs and traditions, beliefs and religions and rituals. International business needs to take into account the local culture of the country in which you wish to market.

5.1.1 MAIN PROPOSITIONS ABOUT CULTURE

- Culture is learned- Culture is structured- It is divided into aspects- Culture is dynamic

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- Culture derives from the biological, environmental, psychological, and historical components of human existence

- Culture is variable- Culture exhibits regularities that permits its scientific analysis

5.1.2 Cultural Framework

It uses eight categories in its analysis. The Eight categories are Language, Religion, Values and Attitudes, Education, Social Organizations, Technology and Material Culture, Law and Politics and Aesthetics.

5.1.2.1 Language

With language one should consider whether or not the national culture is predominantly a high context culture or a low context culture (Hall and Hall 1986). The concept relates to the balance between the verbal and the non-verbal communication. In a low context culture spoken language carries the emphasis of the communication i.e. what is said is what is meant. Examples include Australia and the Netherlands.In a high context culture verbal communications tend not to carry a direct message i.e. what is said may not be what is meant. So with a high context culture hidden cultural meaning needs to be considered, as does body language. Examples of a high context cultures include Japan and some Arabic nations.

5.1.2.2 Religion

The nature and complexity of the different religions an international marketer could encounter is pretty diverse. The organization needs to make sure that their products and services are not offensive, unlawful or distasteful to the local nation. This includes marketing promotion and branding. In China in 2007 (which was the year of the pig) all advertising which

included pictures of pigs was banned. This was to maintain harmony with the country's Muslim population of around 2%. The ban included pictures of sausages that contained pork, and even advertising that included an animated (cartoon) pig.

In 2005 France's Catholic Church won a court injunction to ban a clothing advertisement (by clothing designers Marithe and Francois Girbaud) based upon Leonardo da Vinci's Christ's Last Supper.

5.1.2.3 Values and Attitudes

Values and attitudes vary between nations, and even vary within nations. So if you are planning to take a product or service overseas make sure that you have a good grasp the locality before you enter the market. This could mean

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altering promotional material or subtle branding messages. There may also be an issue when managing local employees. For example, in France workers tend to take vacations for the whole of August, whilst in the United States employees may only take a couple of week's vacation in an entire year. In 2004, China banned a Nike television commercial showing U.S.

basketball star LeBron James in a battle with animated cartoon kung fu masters and two dragons, because it was argued that the ad insults Chinese national dignity.

In 2006, Tourism Australian launched its ad campaign entitled "So where the bloody hell are you?" in Britain. The $130 million (US) campaign was banned by the British Advertising Standards Authority from the United Kingdom. The campaign featured all the standard icons of Australia such as beaches, deserts, and coral reefs, as well as traditional symbols like the Opera House and the Sydney Harbor Bridge. The commentary ran: "We've poured you a beer and we've had the camels shampooed, we've saved you a spot on the beach. We've even got the sharks out of the pool,". Then, from a bikini-clad blonde, come the tag line:

"So where the bloody hell are you?"

5.1.2.4 Education

The level and nature of education in each international market will vary. This may impact the type of message or even the medium that you employ. For example, in countries with low literacy levels, advertisers would avoid communications which depended upon written copy, and would favor radio advertising with an audio message or visual media such as billboards. The labeling of products may also be an issue.

5.1.2.5 Social Organizations

This aspect of Cultural Framework relates to how a national society is organized. For example, what is the role of women in a society? How is the country governed - centralized or devolved? The level influence of class or casts upon a society needs to be considered. For example, India has an established caste system - and many Western countries still have an embedded class system. So social mobility could be restricted where caste and class systems are in place. Whether or not there are strong trade unions will impact upon management decisions if you employ local workers.

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5.1.2.6 Technology and Material Culture

Technology is a term that includes many other elements. It includes questions such as is there energy to power our products? Is there a transport infrastructure to distribute our goods to consumers? Does the local port have large enough cranes to offload containers from ships? How quickly does innovation diffuse? Also of key importance, do consumers actually buy material goods i.e. are they materialistic?

5.1.2.7 Law and Politics

The underpinning social culture will drive the political and legal landscape. The political ideology on which the society is based will impact upon your decision to market there. For example, the United Kingdom has a largely market-driven, democratic society with laws based upon precedent and legislation, whilst Iran has a political and legal system based upon the teachings and principles Islam and a Sharia tradition.

5.1.2.8 Aesthetics

Aesthetics relate to your senses, and the appreciation of the artistic nature of something, including its smell, taste or ambience. For example, is something beautiful? Does it have a fashionable design? Was an advert delivered in good taste? Do you find the color, music or architecture relating to an experience pleasing? Is everything relating to branding aesthetically pleasing?

5.1.3 Cultural Attitude and International Business

Cross cultural literacy

Individuals and firms must develop cross-cultural literacy. International businesses that are ill informed about the practices of another culture are unlikely to succeed in that culture. One way to develop cross-cultural literacy is to regularly rotate and transfer people internationally.Dressing habits, living styles, eating habits and other consumption patterns, priority of needs are dictated/influenced by culture. Some Thai and Chinese and most of the Indians do not consume beef. Thailand Chinese believe that consumption of beef is improper and Indians (particularly Hindus) believe that eating beef is a sin as they believe cow is sacred. The eating habits vary widely. Chinese cat fish stomachs, and bird’s nest soup, Japanese eat uncooked sea food, Iraqis eat dried, salted locusts and snakes while drinking. The French eat snails, Americans and Europeans eat mostly nonvegetarian food. Indians eat mostly vegetarian food. It was surprising to the rest of the world to know that there were pure vegetarians

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in India. Similarly, dressing habits also vary from country to country based on their culture. We observe different dress styles of West, Middle East, India, and Pacific etc. Wearing ‘saree’ by Indian women is a peculiar dressing habit, which is influenced by the culture. Similarly, wearing ‘burka/ parcia’ by the women of Middle East is another example for the influence of culture on the dressing.

5.2 Economic Environment and its implications on International Business

There are four broad types of economic systems: market, command, mixed, and state-directed.In reality almost all are mixed to some extent, for even the most market oriented systems have some governmental controls on business and even the most command based systems either explicitly allow some free markets to exist or have black markets for some goods and services. Yet, all countries can be considered to be at some point on a continuum between pure market and pure command.

5.2.1 Market Economy

In a pure market economy, the goods and services that a country produces, as well as the quantity in which they are produced, is not planned by anyone. Rather price and quantity are determined by supply and demand.

5.2.2 Command economy

In a pure command economy, the government plans what goods and services a country produces, the quantity in which they are produced, and the price at which they are sold.

5.2.3 Mixed economy

A mixed economy includes some elements of each. In Canada, for example, while most business is privately owned and operated under market principles, health care, electrical power, and liquor distribution are run by state owned enterprises in most provinces.

5.2.4 State-directed economy

In a state-directed economy, the government plays a significant role in directing the investment activities of private enterprises through “industrial policy.” Both Japan and South Korea are often cited as examples of state-directed economies.

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5.3 Political Systems and International Business

Definition: Political system refers to the system pf Government in a nation. The economic and legal systems of the country are often shaped by its political system. There are two separate polarities to consider when discussing political systems: collectivism vs. individualism and democracy vs. totalitarianism.

Democratic or totalitarian

.These two dimensions are interrelated, systems that emphasize collectivism tend to be totalitarian while, systems, that pace a high value on individualism tend to be democratic.

5.3.1 Collectivism vs. individualism

Collectivism

Definition: political system that stresses the primacy of collective goals over individual goals.The system, which advocates Collectivism, is called socialism and these activists are called socialists.

Socialism

Socialism roots from the intellectual lessons from Karl Marx (1818-1883). Marx’s basic argument is that in a capitalist society where individual freedom is not restricted, the few benefit at the expense of many. Marx advocated state ownership of the basic means of production, distribution and exchange (business). His point is that if the state owned the means of production, the states could ensure that the workers were fully compensated for their labor.

Individualism

This is the opposite of collectivism. Individualism refers to a philosophy that an individual should have the freedom in his or her economic and political pursuits.Individualism focuses on (1) guaranteeing individual freedom and self-expression, and (2) letting people pursue their own economic self-interest in order to achieve the best overall good for society.

5.3.2 Democracy Vs. totalitarianism

Democracy

Democracy refers to apolitical system in which the government is by the people, exercised either directly or through elected representatives.

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Totalitarianism

Totalitarianism is a form of Government in which one person or political party exercises absolute control over all spheres of human life, and opposing political parties are prohibited.

There are four major forms of totalitarianism: communist, theocratic, tribal, right wing (often military).

5.4 Legal Environment and International Business

5.4.1 Origins of International Law• Commercial codes date back to Egypt in 1400 B.C.• Early trade centered around law of the sea• Greek/ Roman Empires both had codes of international trade• Middle Ages: Lex Mercatoria (Merchant Law) – Governed trading customs in Europe• Today’s codes still partially derived from early efforts

5.4.2 Sources of International Law

• Individual countries create their own laws• Trade agreements between countries• Worldwide/regional organizations, i.e.– United Nations– European Union (EU)• No universal international court system for resolving international conflicts of businesses• Difficult to enforce decisions and contracts• Selected Organizations Affecting the International Legal Environment

5.4.3 International Trade Agreements

• Improve economic relations of countries• Cover variety of commercial issues• Tax agreements prevent double taxation• Examples:– North American Free Trade Agreement (NAFTA, 1992) Canada/US/Mexico– General Agreement on Tariffs & Trade (GATT) replaced in 1995 by World Trade Organization (WTO)

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5.4.4 International Dispute Resolution

• Litigation

– Differs within countries– Complication of evidence, witnesses and documents– Judicial system may be different from country to country– Some courts more influenced by political pressures– Not enforceable outside of country– Treaties/Conventions may assist potential parties– Contract clauses assist courts in enforcement of claims– Usually need “minimum contacts” for jurisdiction

Arbitration

3rd neutral party decides outcome, which is binding. Rules and regulations for arbitration laid down by International Court of Arbitration

Mediation

3rd neutral party “suggests” outcome, which is not binding

• International Court of Justice (ICJ) – Only nations have standing--not individuals– Nations may make claims on behalf of persons– No mandatory compliance requirement– UN Security Council must enforce

References:




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Chapter 5The Cultural, Political, Legal and Economic environment facing Global

BusinessEnd Chapter Quizzes

Q 1) Standardized Nike and Adidas shoes worldwide is an example of a) globalization. b) customization. c) collateralization. d) internationalization.

Q 2) Culture includes a) a country's political system and national laws. b) the concepts, values, and tangible items that make up a particular society. c) a measure of a nation's economic standing. d) quotas on imports and stringent health and safety requirements. e) the stability of the government.

Q 3) ) When a glove manufacturer is allowed to sell only a certain number of plastic gloves in a particular country, the firm is facing

a) a tariff. b) an embargo. c) a restrictive product standard. d) a quota. e) a balance of trade restriction

Q 4) Taxes levied by a nation on goods bought outside its borders and brought in are called

a) import duties. b) export duties. c) export tariffs. d) quotas. e) import tariffs.

Q 5) ) When a firm's products are marketed outside its home market and home production is used to supply these markets, the firm is engaging in

a) international marketing. b) global marketing. c) exporting. d) domestic marketing. e) unplanned exporting.

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Q 6) Regionalism is: a) an international management orientation. b) a protectionist policy created to exclude third world countries from certain

forms of international trade. c) an international management orientation and a protectionist policy created

to exclude third world countries from certain forms of international trade. d) the grouping of countries into regional clusters based on geographic

proximity.

Q 7) The highest level of international business involvement is the

a) multinational corporation. b) joint venture. c) strategic alliance. d) franchise. e) contract manufacturer.

Q 8) The most recent round of GATT provided new rules to prevent dumping. This round was the

a) Kennedy Round. b) Uruguay Round. c) Merry-Go Round. d) American Round.

Q 9) If IBM was concerned about the interest rate it must pay in the next quarter to acquire needed financial resources, this concern would involve which one of the following

a) A business environment input b) Its marketing mix c) Its business approach d) A business environment output

Q 10) Many companies view political forces as: a) easily ignored b) easily influenced c) simple to recognize d) beyond their control

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Chapter 6Control Strategies

6.1 International Planning Process

It is a 6 step processA. Set long range strategic interestB. Analyze internal corporate resources like financial, human, product

resources and environmental effects on them.C. Set international corporate objectives

* Sales objectives* Resource acquisition objectives* Diversification objectives* Competitive risk minimization objectives

D. Analyze local conditions in current or prospective host countries including analysis of factors like financial and marketing factors.

E. Select various alternatives and priorities.F. Implement strategy.

One of the most common sets of activities in the management is planning. Very simply put, planning is setting the direction for something -- some system -- and then working to ensure the system follows that direction. Systems have inputs, processes, outputs and outcomes. To explain, inputs to the system include resources such as raw materials, money, technologies and people. These inputs go through a process where they're aligned, moved along and carefully coordinated, ultimately to achieve the goals set for the system. Outputs are tangible results produced by processes in the system, such as products or services for consumers. Another kind of result is outcomes, or benefits for consumers, e.g., jobs for workers, enhanced quality of life for customers, etc. Systems can be the entire organization, or its departments, groups, processes, etc.

6.2 Control in Internationalization Process

Various factors influence how much control a company needs at different stages of internationalization. We discuss these factors below.

Level of ImportanceThe more important the foreign operation, the higher is the organizational structure they report.

Changes in competencies

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The larger the total foreign operations, the more likely that headquarters has specialized staff with international expertise. The larger the operations in a given country, the more likely that the country unit has specialized staff.

Changes in operating formsThe use of multiple operating forms such as exporting.

There are four main types of controls -- personal controls, bureaucratic controls, output controls, and cultural controls.

6.2.1 Personal control

It involves control by personal contact with subordinates. This type of control system tends to be most widely used within small firms where it finds expression in the direct supervision of the actions of subordinates, but is also applicable in large international firms.

6.2.2 Bureaucratic control

It involves control through the establishment of a system of rules and procedures that are used to direct the actions of sub-units. With regard to headquarters control of sub-units within multinational firms, the most important form of bureaucratic controls are sub-unit budgets and capital spending rules.

6.2.3 Output controls

It involve setting goals for sub-units to achieve, expressing those goals in terms of relatively objective criteria such as profitability, productivity, growth, market share, or quality, and then judging the performance of sub-unit management by their ability to achieve these goals.

6.2.4 Cultural controls

Such controls exist when employees buy into the norms and value systems of the firm. When this occurs, employees tend to control their own behavior, which reduces the need for direct management supervision. Cultural controls require substantial investments of time and money by the firm in building organization wide norms and value systems.

6.3 Location of Decision Making

Vertical differentiation is principally about the centralization and decentralization of decision-making responsibilities. It is concerned with identifying where in a hierarchy decision making power should be concentrated.

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6.3.1 Centralization

There are four main arguments for centralization (1) Facilitating coordination

(2) Ensuring consistency between decisions and organizational objectives (3) Providing top managers the means to push through major changes (4) Avoiding duplication of activities.

6.3.2 Decentralization

There are five main arguments for decentralization

(1) Overburdened and hence poor decision-making at the top of the organization (2) Increased motivation at lower levels (3) Greater flexibility (4) Better decisions on the spot by the people directly involved (5) Increased accountability and control.

The choice between centralization and decentralization is not an absolute one. Frequently it makes sense to centralize some decisions and decentralize others depending upon the type of decision and the strategy of the firm.

References:




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CHAPTER 6Control StrategiesEnd Chapter Quizzes

Q 1) A marketing plan a) is characteristic of production-oriented firms and other mass producers. b) provides a framework for implementing and controlling marketing

activities. c) always increases the marketing manager's operating costs. d) produces plans that are short-term in orientation. e) restricts the marketing manager's future options.

Q 2) A firm should develop a marketing plan a) for each strategic business unit. b) for each different marketing strategy. c) for each different target market. d) for each good or service. e) once a month.

Q 3) A marketing plan usually begins with a(n) a) executive summary. b) introduction to the company's marketing objectives. c) summary of current performance as compared with past performance. d) situation analysis. e) opportunity and threat analysis.

Q 4) The __________ is sometimes considered to be the most important part of a marketing plan because it is often given to people outside the firm.

a) SWOT analysis b) market analysis c) mission statement d) marketing strategy e) executive summary

Q 5) Which of the following is NOT a purpose of a marketing plan? a) it specifies how resources are to be allocatedb) it co-ordinates marketing and production activitiesc) it assigns responsibilities, tasks and timingd) it assists in management controle) it offers a road map for implementing marketing strategy

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Q 6) In the marketing planning cycle, the final stage is: a) implementation of the marketing plan. b) revision or formulation of marketing strategy.c) development or revision of marketing objectivesd) assessment of marketing opportunities and resources. e) development or revision of the plan for implementation and control.

Q 7) Marketing plans that cover a period of more than 5 years are a) long-range plans. b) short-range plans. c) medium-range plans. d) average-range plans. e) normal-range plans.

Q 8) An intuitive manager could best be described as one who: a) uses scientific problem solving b) eliminates uncertainty in decision making c) searches out facts and data systematically d) uses an orderly approach to gathering information e) uses personal knowledge and experience to make decisions

Q 9) In a specific strategic market plan, a profit centre that is self-supporting in terms of sales, markets, production, and other resources is known as:

a) profit unit. b) strategic business unit. c) marketing unit. d) small business unit.

Q 10) The long-term view, or vision, of what the organization wants to become is called the

a) mission statementb) purpose statementc) vision statementd) marketing plan. e) strategic vision.

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Chapter 7Issues In Global Marketing

7.1 Managing in the global marketplace

A firm does not have to be an MNC investing directly in operations in other countries to engage in International Business. All a firm has to do is to start exporting products or importing products from other countries. As the world shift toward a truly integrated global economy, more firms, both the large and small, are becoming international businesses. As their organizations increasingly engage in cross-border trade and investment, it means managers need to recognize that the task of managing an international business differs from that of managing a purely domestic business in many ways. Countries differ in their cultures, political systems, economic systems, legal systems, and levels of economic development. These differences require that business people vary their practices country by country, recognizing what changes are required to operate effectively. It is necessary to strike a balance between adaptation and maintaining global consistency.

7.2 Product Attributes

A product can be viewed as a bundle of attributes. Different customers value different attributes, as well as value the same attributes differently. A soccer mom in the USA may value her automobile for its ease of use, but her Latin American counterpart may value its durability. Product attributes have to be varied from country to country to account for differences in consumer tastes and preferences. Differences in consumer tastes and preferences between countries are a function of differences in culture and economic development.

New Product Development

New product development is a high risk but high return activity. In order to build up a competency in new product development, the international business must do two things:

1) Disperse R&D activities to those countries where new products are being pioneered

2) Integrate R&D with marketing.

7.3 Distribution Strategy

Distribution strategy is about choosing the best channel to deliver a product to the consumer. Significant country differences with regard to distribution systems exist. In some countries, the retail system is very concentrated, whereas in others it is very fragmented. In some countries channel length is short, whereas in others it is long. While in some countries access to distribution channels may be difficult.

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The longer the channel, the greater the aggregate mark-up and the higher the price that consumers are charged for the final product.When there are exclusive distribution channels, it can be difficult for outsiders to obtain access to markets. Exclusive channels are often based on long established and successful relationships.Occasionally in order to gain market access a firm may have to devise an entirely new distribution strategy. While costly, that may be the only way to obtain access, and it may even give the firm a competitive advantage.

7.4 Communication Strategy

A critical element in the marketing mix is communication strategy. This is the process of communicating the attributes of a product to prospective customers. A number of different communications channels are available to a firm. These include direct selling, sales promotion, direct marketing, and advertising via many different media.

7.4.1 Push strategy and a pull strategy

The main choice with regard to communication strategy is between a push strategy and a pull strategy. A push strategy emphasizes personnel selling which requires a competent sales force and is costly. Whereas a pull strategy emphasizes mass media advertising to communicate the marketing message to potential customers. The choice between push and pull strategies depends upon product type and consumer sophistication, channel length, and media availability.

Push strategies tend to be emphasized more in the following circumstances:

1) For industrial products and/or complex new products 2) When distribution channels are short 3) When few print or electronic media are available. Pull strategies tend to be emphasized more in the following circumstances

1) For consumer goods products 2) When distribution channels are long 3) Sufficient print and electronic media are available to carry the marketing message.

7.5 Pricing Strategy

The concept of strategic pricing has two aspects, which are referred as predatory pricing and experience curve pricing.Price discrimination exists whenever consumers in different countries are charged different prices for the same product.

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The concept of strategic pricing has two aspects, which are refereed as predatory pricing and experience curve pricing. Predatory pricing involves using the profit gained in one market to support aggressive pricing in another market, the objective being to drive competitors out of the market. Here the price is used as competitive weapon to drive weaker competitors out of a national market by pricing very low. Once the competitors have left the market, the firm can raise prices and enjoy high profits. Many Japanese firms have been accused of pursuing this strategy.Experience curve pricing involves aggressive pricing to build up accumulated global volume as rapidly as possible, thereby moving the firm down the experience curve as rapidly as possible. A firm builds its accumulated production volume over time, unit costs fall due to “experience effects” due to learning curves and economies of scale.

7.6 Configuring the Marketing Mix

Standardization versus customization

In reality, most firms standardize some things and customize others. When looking at the overall marketing mix and message, one often finds some aspects of standardization and some aspects of customization in all products depending on local requirements and overall cost structures.

References Hodgetts Richard M, Luthans F. & Doh Johathan P., , International

Management, Tata McGrawHill Publishing Company Ltd., (2005) Chapter 1




Koontz Harold and Weihrich Heinz, (2001), Management : A Global Perspective, Tata McGraw Hills Publishing Co. Ltd., Chapter 1 & 4





57

Chapter 7Issues In Global Marketing

End Chapter Quizzes

Q 1) ) Swiss-based Nestlé takes a global approach to marketing its chocolate products, it probably finds that which of the following is MOST easily standardized?

a) Product b) Promotion c) Distribution d) Advertising e) Price

Q 2) The main aim of global marketing is to: a) find global customers. b) coordinate the marketing activities within the constraints of the global

environment. c) satisfy global customers better than competition. d) achieve all of the above.

Q 3) The work of an international marketer is mainly concerned with: a) establishing global brands. b) translating product instructions and advertising messages. c) transferring a marketing mix to enter a market in another country. d) adapting a marketing mix to enter a market in another country.

Q 4) Key controllable factors in global marketing are: a) social and technical changes. b) government policy and legislation. c) marketing activities and plans. d) all of the above.

Q 5) From the point of view of marketing, an organization that enjoys competitive advantage in an industry has done so by:

a) creating superior value for customers. b) constantly enlarging its marketing activities. c) focusing on long-term profit. d) charging lower prices than competition.

Q 6) Which of the following represents a company's effort to identify and categorize groups of customers and countries according to common characteristics?

a) Global market segmentation. b) Global marketing research. c) Global targeting.

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d) Global positioning.

Q 7) The main advantage of a differentiation strategy in international markets lies in that:

a) imitators cannot reduce margins. b) consumers in foreign markets pay less for the same product. c) it enables brand stretching and extension. d) the focus is taken away from price.

Q 8) The goals of international marketing are to: a) expand business activities abroad. b) gain market share and increase profit. c) create and retain customers in global markets. d) eliminate competition in international markets.

Q 9) The target audience for an advertising campaign is the a) information base on which to develop the campaign. b) location and geographic distribution of persons. c) group of people toward whom the advertisements are directed. d) overall goal of the advertising campaign.

Q 10) A marketer that wanted to include detailed explanations in advertisements would be most likely to use

a) radio b) television. c) outdoor displays. d) magazines.

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Global Production Strategy

Country Factors

Technological Factors

Product Factor

Location of

manufacturing facility

Fig 1 : Factors effecting global sourcing strategy

Chapter 8Global Production and Operational Strategies

Globalization of Production

As discussed in chapter 1, due to globalization, companies have many options for setting up their production facilities in different parts of the world. Rather than opting for manufacturing facilities in the home country, companies are now considering having production facilities in one, two or many countries depending upon how much cost advantage they will get. But while deciding upon the manufacturing strategies the company should carefully develop strategies to decide upon the following points :

Whether production should be centralized (factories at few locations) or decentralized ( factories at multiple locations)

Issues related to global sourcing Make or buy decisions I,e whether the company should manufacture the

goods itself or it should outsource to other companies that are most efficient in manufacturing the product.

8.1 Factors determining Global Sourcing Strategy

8.1.1 Country Factors

Companies should critically evaluate the political, economical, cultural and other relevant factors that vary from country to country to ascertain attractiveness of a particular country. Apart from these factors, companies should also look at country’s comparative advantage in terms of factor cost i.e cost at which land, labor and capital are available..

Countries having conducive political, economical, cultural and other relevant factors are the one preferred by companies for carrying out the manufacturing facilities.

Apart from the factors mentioned above, companies also analyze the country factors in terms of :

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Technological Factors

Fixed Cost

Minimum Efficient Scale

Flexible Manufacturing

Presence of skilled labor Supporting industries Formal (import duties etc.) and informal trade barriers (Quotas, subsidies

etc.) Transportation cost Regulations regarding FDI Stable exchange rate

8.1.2 Technological Factors

Technology plays a very important role in deciding upon the location of manufacturing facility. In some cases due to technological limitations manufacturing facility has to be located at just one location whereas in certain other cases due to technical advancement goods can be produced at multiple locations.To understand the importance of technology in deciding upon the manufacturing locations company must carefully look at the following three factors:

Fixed Costs Minimum Efficient

Scale Flexible

Manufacturing Technology

8.1.2.1 Fixed Cost

These are the cost incurred by the company to set up a production facility. Fixed cost includes cost of land, cost of procuring plant and machinery etc.If fixed cost are high it is more practical to serve the global market from manufacturing facility located at one or few locations. On the other hand if the fixed cost is less than companies can plan to have manufacturing facility at multiple locations. This will also help them in responding quickly to consumer demands and they do not have to rely on just one locations for souring the products.

8.1.2.2 Economies of Scale

As the production output of a plant increase the cost per unit comes down i.e plant achieves economies of scale and beyond a point there is not significant change in coast with further increase in output. Point at beyond which producing additional units will not result in lowering the production cost is known as minimum efficient scale.

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Fig 2 Technological Factors and location of manufacturing facility

Companied should opt for centralized production facility i.e at one or few locations if economies of scale is high and decentralised productions if favourable in those cases where minimum efficient scale is low.

8.1.2.3 Flexibility

. Unlike mass production where company produced similar goods, in case of flexible manufacturing companies produce different kind of goods to serve the varied customer needs, while ensuring low per unit production cost.

8.1.3 Quality

Quality is the most important aspect of production process. Major characteristics of product quality includes : product performance, timely delivery and most importantly the quality of service before, during and after product delivery. Companies all over the world try to maintain high quality standards. Some of the techniques adopted by companies to maintain quality are :

8.1.3.1 TQM

This quality management technique focuses on the following aspects:Elimination of defects, mistakes and poor quality inputs in the production processBetter supervision of the production processEncouraging recommendations from employees for improving quality Committed workers

8.1.3.2 Six Sigma

This techniques advocates producing 3.4 defects per million units i.e 99.99966 percent defects, by ensuring producing less number of defective units thereby increasing productivity, eliminating waste and cutting costs.

8.1.4. Location of Manufacturing facility

Both centralized and decentralized production facilities have their own advantages and disadvantages. Centralized production results in comparatively less total production cost whereas decentralisations helps customizing the product according to customer needs. A company can follow either a centralized or a decentralized approach depending upon the following factors ::

8.1.4.1 Flexibility

With Flexible manufacturing facility decentralised productionFlexible manufacturing not possible – centralised production

8.1.4.2 Economies of scale

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High minimum efficient scale – centralized productionLow minimum efficient scale – decentralized production

8.1.4.3 Fixed cost

High fixed cost – centralized production Less fixed cost – decentralized production

References:


Koontz Harold and Weihrich Heinz, (2001), Management : A Global Perspective, Tata McGraw Hills Publishing Co. Ltd., Chapter 22

64

Chapter 8Global Production and Operational Strategies

End Chapter Quizzes

1. The most important reason for global sourcing is: a) to procure foreign products b) the firm's worldwide operation and attitude. c) to procure advanced technology from foreign sources. d) to procure lower prices from foreign sources.

2. Six sigma advocates many defects if one million units are produced?a) 3.4 unitsb) 1.7 unitsc) 10 unitsd) 99 units

3. To lower manufacturing costs, the principal goal of Japanese firms is to:

a) eliminate inventories. b) reduce the process time. c) lower labor costs. d) reduce inventory costs.

4. Managing the entire organization in such a manner that it excels on all dimensions of product and services is known as:

a) quality circles. b) quality control circles. c) total quality management. d) just-in-time.

5. A radical redesign of business processes to achieve dramatic improvements in critical measures of performance is referred to as:

a) redesign. b) delayering. c) reengineering. d) TQM.

6. __________ has become a global center for labor intensive industry. a) China b) Indonesia c) Vietnam d) India

7. Which of the following is an unfavorable factor if a US automobile company plans to set up a manufacturing facility in China?

a) Presence of ancillary units for supplying auto partsb) Liberal norms for FDI

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c) Government policies favoring domestic automobile industryd) Presence of skilled labor

8. __________, the most comprehensive of standards applies to industries involved in the design, development, manufacturing, installation and servicing of products and services:

a) ISO 9001 b) ANSI/AQC90 c) ISO 9000. d) ISO 14000.

9. Backward vertical integration refers to establishing facilities to manufacture: a) products that are complementary to the firm's main product line. b) inputs used in the production of the firm's final products. c) products that are best capable of competing in the global marketplace. d) outputs from the firm's main source of raw materials.

10. The company should not opt for decentralized manufacturing in which of the following situations?

a) High Fixed costb) Non availability of flexible manufacturing facilityc) Low fixed costd) Minimum efficient scale is high

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Salary & Perks

Appraisal

Training and MDP

Staffing

Global Human

Resource Managem

ent

Chapter 9Global Human Resource Management

The typical functions of HR department of any organization are staffing, performance evaluation or appraisals, training and management development and compensation (salary and perks) (Fig 1). All these activities become more complex for an organization that has international operations. The reasons being the complexity of the job is the difference in culture, labor market and regulations, economic system and legal system. This chapter will be the focusing on how these activities are managed a global environment.

9.1 Staffing

Staffing policy deals with selecting the right person for the right job. Staffing becomes more complicated in a global environment because apart from selecting the individual to do a particular task it is equally important to ensure that he will be able adapt to the organization culture.

In International Business three different staffing policies are in practice viz. Ethnocentric, Polycentric and Geocentric (Fig 2).

9.1.1 Ethnocentric Staffing Policy

In this type of staffing policy key management positions are occupied by the home country nationals. For example if a French MNC has a subsidiary in India and Russia, then the key positions will be held by French nationals.

9.1.2 Polycentric Staffing Policy

As part of this staffing policy host country nationals manage the subsidiary operations while the key positions in the home country are managed by the local employees. Again in the example of the French MNC having operations in India and Russia, subsidiaries in India and Russia will be managed by the Indians and Russians respectively; however the key management positions in France in will held by the French nationals.

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Fig 1 Managing Human Resources in Global Organizations

9.1.3 Geocentric Staffing Policy

Firms using this staffing policy look for the best professional available, irrespective of the nationality, for all the key management positions in the organization i.e. both in the headquarter and subsidiaries

Each of these staffing policies has its merits and demerits which have been summarized in table 1.

Table 1 Advantages and Disadvantages of Ethnocentric, Polycentric and Geocentric staffing policy

Ethnocentric Staffing PolicyAdvantage DisadvantageHelps in maintaining unified corporate culture

Limited growth opportunity for the host country professions

Beneficial in those cases where qualified professionals are not available in the host country.

Firm will not be able to understand the culture of the host country

Facilitate transfer to core competency to host country. Host country managers learn from the experience and knowledge of the home country national.Polycentric Staffing PolicyDue to host country nationals occupying the top positions in the subsidiary, firm will have a good knowledge of the culture

No growth opportunities for host country nations beyond their own subsidiary

As local individuals will be hired to manage the subsidiary operations, it is less expensive to maintain.

Due to language barrier, loyalty of their own countries and cultural difference this approach can lead to communication gap between the home country and host country nationals

Geocentric Staffing PolicyUse of best talent available globally. This staffing policy is expensive as the

compensation package of the best

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Geocentric

Polycentric

Ethnocentric

Staffing Policies

Fig 2 Different Staffing Policies

professional will be highAs key management positions are occupied by third country nationals therefore it helps in building strong culture and also informal networks in an organization

Immigration policies of certain countries may limit movement of an individual from one country to another.

9.2 Management Development and Training

In International Business, it is important to provide training to the expatriate manager (home country manager working in another country where the firm is having its operations) in the following sphere:

9.2.1 Language Training

To acquaint the manager with the local language so that they can relate better with the culture of the foreign country.

9.2.2 Cultural Training

Help in understanding the culture being practiced in a particular country.

9.2.3 Practical Training

Aimed at providing an understanding of the day to day activities in the host country.

Apart from the training employees also learn through the management development programs that imparted through:Enrolling for various management education programsRotation of managers within the organization

9.3 Performance Appraisal

Performance Appraisal in international business is again a complicated process due to unintentional bias of the person who is evaluating the performance on an employee. Moreover, adverse business environment i.e. economical, political and economic condition in the host country can also result in an adverse appraisal of the host country manager even though these parameters are outside his control. Therefore if the home country manager is appraising an employee in the host country, due care considerations should be given to the factors outlined below:More weight age to be given to the appraisal done by the on-site manager as he will be acquainted well with the external and internal environment in which manager is operating.

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Appraisals should also be done by the home country managers who have worked in the country in which manager is workingOn the other hands if on site manager is doing the appraisal, then home country nationals should be consulted while doing the appraisal.

9.4 Compensation

To ensure that employees are motivated to work in foreign locations, proper compensations should be given to them. Therefore apart from the basic salary, compensation package should include some allowances to ensure that the employees are able to maintain the same standard of living. The allowances can be in terms of:Foreign Service AllowanceSpecial Allowances

House Rent AllowanceEducation Allowance etc.

Income Tax payable in the host country Other Benefits

Medical ExpensesPension BenefitsTravelling Expenses etc.






Koontz Harold and Weihrich Heinz, (2001), Management : A Global Perspective, Tata McGraw Hills Publishing Co. Ltd., Chapter 13, 14 & 15





70

Chapter 9Global Human Resource Management

End Chapter Quizzes 1. While selecting a good manager for an overseas operations organizations should look at the following attributes :

a) being bicultural and bilingual. b) knowing business practices in the home country and in the host country. c) having a broader skill set than domestic managers. d) all of the above.

2. An employee who is a citizen of neither the home nor the host country is known as a:

a) third country national. b) foreign national. c) nonresident alien. d) foreign employee.

3. ___________ is related to hiring and promoting employees on the basis of ability and experience without considering race or citizenship.

a) Discrimination b) Monocentric c) Ethnocentric d) Geocentric

4. A person living outside of his or her country of citizenship is known as:

a) a foreigner. b) a nonresident alienc) a resident alien. d) an expatriate.

5. Before going on the first overseas assignment, you should:

a) arrange with someone fairly high in the company hierarchy to be your mentor.

b) insist that your bosses tell you exactly what the company expects you to accomplish.

c) Try and learn some basic facts about the culture of the country d) all of the above.

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6. The ability of a company to succeed in another country rests heavily on: a) Favourbale environment in the host country b) the managers' abilities to function in that country's culture. c) adequate financing. d) all of the above.

7. In selecting executives for foreign operations:

a) don't promote from within. b) do promote an insider. c) do assume that language fluency is the most important criterion. d) do assess the total person.

. 8. Bonuses are paid by firms in recognition that expatriates and their families undergo some hardships and inconveniences and make sacrifices while living abroad. Bonuses include:

a) overseas premiums. b) Overseas medical benefits. c) Education benefits . d) all of the above.

9. Employee compensation payments added to base salaries because higher expenses are encountered when living abroad are known as:

a) bonuses. b) add-ons. c) allowances. d) expatriate compensation

10. To truly understand a culture, it is necessary to: a) speak the language. b) Dress like the locals. c) spend time in the locale. d) all of the above

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Chapter 10Global Accounting and Financial Management

Overview

For any organization it is necessary to maintain a record of all the financial transactions, as it helps them to

evaluate and compare its performance with their previous performances and also with its competitors

control internal expenditure Provide an insight about the organization to the providers of capital so that

they can access the value of their investment and also the security of their loan

Assess the amount of Tax to be paid by them Plan efficiently for future expenditure and income Make decisions about future resource allocation

10.1 Accounting and Auditing Standards

Every country has its own set of rules to prepare the financial statements (known as accounting standards) and also a set of rule for performing an audit for ascertaining the accuracy of these financial statements (known as Auditing standards).

10.2 Difference in Accounting Standards

Accounting and auditing standards vary from country to country. Various factors that determine the standard to be followed by a country are:

10.2.1 Level of inflation

UK Accounting standards are based on current cost principle (inflation is taking into accounting while ascertaining the current value of assets). While other accounting standards like in US and Japan follow the historic cost principle (historic value of asset is considered and inflation is not taken into account)

10.2.2 Level of economic development

Financial statements of the developed nations are complex because of the following factors:Organizations in developed nation are huge and very complex e.g. a US MNC might be having subsidiaries in 20 difference countries of the world. Presence of sophisticated capital marketHighly educated workforce that can prepare complex financial statements

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Whereas the financial statement of the organizations in developing and less developed nations are simple in nature because of Less complex nature of business organizationsNo-availability of trained workforce and prepare complex financial statements.

10.2.3 Culture

As discussed in chapter 5, according to Hofstede one of the parameter to understand the culture of a country is to look at the extent to which people in different countries of the world can accept or avoid uncertain and ambiguous situations, i.e. whether a country has low uncertainty avoidance (accept and cope well with uncertain situations) and high uncertainty avoidance (try to avoid uncertain situations).Countries with low uncertainty avoidance rely heavily on rules and regulations and ensure that financial statements comply with all the standards practiced in the country.

10.2.4 Political and economical ties with other countries

Countries have historic political or economic ties with other countries follow the same standards. For example Canada and Mexico follow US standard because of economic ties with US. US, Mexico and Canada are members of NAFTAIndia and all the other former British colonies follow the UK standard. 10.2.5 Relationship between business and providers of capital

Three main sources from where a business entity can raise capital are Investors: Shares and BondsBanksGovernment

Importance of these sources in a country also determines the standards being followed in a country. For example US firms rely more on share and bond market to fulfill their capital requirement, therefore the financial statements are prepared in such a manner to ensure that it fulfills all the information need of the individual investor. On the other hand in countries like Germany and Japan, bank play an important role in fulfilling the capital needs of the business organizations, thus financial statements are oriented towards providing maximum information to the banks. In these countries assets are valued conservatively and liabilities are overvalued to provide cushion for the banks. In countries like France Government either invest or provide loans to the business organizations. The financial accounting practices are therefore oriented towards providing information to the government.

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10.3 National and International Standards

Due to the different accounting standards being followed in different countries it becomes difficult to compare the financial statement from one country to another. Therefore efforts are being made to develop international accounting standards. International Accounting Standards Board was set up in 2001 to form international financial reporting standards. Even though the awareness is increasing day by day about the international standards but the acceptability is still less because IASB has no power to ensure strict compliance of these standards and thus the Compliance of these standards is voluntary in nature.

10.4 Accounting aspects and control System

As discussed in Chapter 6 accounting is used as a tool by the parent company to control the performance of their subunits in different countries of the world. The control process involves setting up the targets for the subunit, monitoring the performance of the subunits and take corrective steps if subunits fail to achieve desired results. But the control aspect becomes a complicated process for a firm engaged in international business due to the following reasons:

10.4.1 Exchange Rate Fluctuations

Targets agreed between the subunits and headquarter in the beginning of the financial year and the actual performance towards the end of the financial year may not tally due to adverse exchange rate fluctuations in the country where the headquarter is located or the country in which the subunit is situated. Lessard-Lorange model is used by most of the MNCs to tackle such problems. According to this model:

the target and performance should be evaluated at the spot rate on the date when the budget is adopted.

the target and performance should be evaluated according to the projected rate towards the end of the budget period.

the target and performance should be evaluated at the spot rate on the date of the end of the budget period.

10.4.2 Transfer Pricing

Transfer pricing is the price at which the goods and services are transferred between the different subsidiaries of the same company. These prices should also be decided in the beginning of the budget period itself to avoid any complexities in the control process later on.

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10.5 Financing Management

Financial management involves taking decisions regarding the:

10.5.1 Investment Decision

Investment decisions are basically to evaluating various options available with a firm to invest the capital and also evaluating identify the best option. Capital budgeting technique is used by finance managers to identify the best alternative where the financial resources should be invested. This technique evaluates given project in terms of the benefits, costs and risks. While evaluating different projects across different countries due care should be taken to analyze the political and economic environment of the country as unfavorable conditions might result in difference in parent and project cash flow.

10.5.2 Financing decisions

After deciding about the alternative where the firm will be investing its capital, its must identify various sources from where it can raise the required capital. The source can be internal or external i.e. shares, bonds, loan etc. While deciding the source from where firm will be raising the capital it must ensure that its cost of capital should be minimum and it should also have optimal capital structure i.e. a perfect mix of debt and equity. References:


Sharan Vyuptakesh, (2006), International Business, Concept, Environment and Strategy, Pearson Education, Chapter 19 & 21

76

Chapter 10Global Accounting and Financial Management

End Chapter Quizzes

1. Foreign currency exchange risk arises when: a) business transactions are denominated in foreign currencies. b) sales are made to customers in a foreign country. c) goods or services are purchased from suppliers in a foreign country. d) accounting reports are prepared in a foreign currency.

2. What is transfer pricing?”a) The cost to convert from one country's standards to another country's

accounting standards. b) The value of sales made in a foreign country. c) The method of recording transactions between divisions within the same

company. d) The taxes paid on sales in a foreign country.

3. The chance that events such as political uncertainty, economic downturn, or natural disasters will weaken a nation's securities market is called: a) currency risk. b) foreign exchange risk. c) country risk. d) exposure

4. Which functional areas are included in the study of international Financial

Management ? a) Investment decisionsb) Accounting Information Systems c) Taxation d) Auditing

5.Why is auditing a multinational corporation potentially more difficult than

auditing an entity that has only domestic operations?

a) Cultural differences b) Multiple sets of accounting standards c) Different currenciesd) All of the above

6.Which group is primarily responsible for preparing international accounting standards?

a) Financial Accounting Standards Board (FASB) b) American Accounting Association (AAA) c) International Federation of Accountants (IFA)

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d) International Accounting Standards Board (IASB) 7.Which of the following is an advantage of having a single set of accounting

standards used worldwide? a) Reduce the accounting costs for multinational corporations. b) Increase the power of the IASB. c) Reduce the number of multinational corporations on the NYSE d) Increase the diversity of accounting methods used by multinational

corporations

8.The factor used to convert from one country's currency to another country's currency is called the:

a) Hedgingb) Capital Budgetingc) Exchange rate. d) Transfer price

9. _________________ are set to rules that define how the financial statements will be prepared.

a) Auditing Standardsb) Accounting Standardsc) Capital Budgetingd) Transfer pricing

10. Which of the following is not a part of financial decisions making process? a) Sourcing financeb) Ensuring optimal capital structurec) low cost of capitald) capital budgeting

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Mission and Vision

Environmental Scan

Strategy Formulation

Strategy Implementation

Strategy Evaluation

Figure 1 Strategic Management Process

Chapter 11Global Strategic Management

11.1 What is Strategic Management?

Strategic management is a process as part of which organizations evaluate the environment in which they are operating and on the basis of the analysis of the external and the internal environment sets goals and strategies to operate in the most efficient manner. As part of strategic management organizations prepare mission and vision statement and develop plans accordingly to ensure that they are able to achieve the long terms objectives that are integral part of the mission and vision of the organization.

11.2 Components of the Strategic Management Process

Strategic management is a combination of the following five tasks:

11.2.1 Task 1 Identifying Mission, Vision & Objectives

The mission statement describes the purpose of the firm and its goals whereas the vision of a firm is its fundamental aspirations and values. On the basis of the mission and the vision statement firms define strategic objectives or financial objectives. Strategic objectives are related to enhancing firm's competitiveness whereas financial objectives are related with improving firms financial performance.

11.2.1.1 Financial Objectives setting level of profits,

ROI, ROA etc. market share – worldwide,

region, country, growth ratio of foreign to domestic

production volume, quality and cost control

minimizing tax burden globally, optimal capital structure

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11.2.1.2 Strategic objectives improve quality focus on innovations be a cost leader improve technology

11.2.2 Task 2 Environmental Scan: Analyze the Internal and External Environment

The environmental scan includes analyzing both the internal and the external environment in which the firm is operating and includes the following components:

11.2.2.1 External environment

Analyzing the Political, Social, Technological and Economic Business environment in which the company is operating (PEST analysis) (discussed in detail in chapter 5)

11.2.2.2 Internal analysis of the firm

SWOT Analysis:The internal analysis is done by identifying the firm's own strengths and weaknesses and the opportunities and threats in the external environment. Porter's five forces (discussed in chapter 2)This model helps in evaluating the entry barriers, suppliers, customers, substitute products, and industry rivalry.

11.2.3 Task 3: Strategy Formulation

Third task involved in Strategic Management is related to forming the strategy. On the basis of the environmental scan, the firms devise the strategy which matches the long term objective of the firm. Michael Porter identified three generic strategies from which the firm can choose.

Cost leadership; by becoming the lowest cost producer Differentiation: by being unique in the industry. Focus: by choosing a narrow competitive scope within the industry

11.2.4 Task 4: Strategy implementation

It is very important to ensure that the strategy is implemented in such a way that the firm is able to achieve its desired goals. Following process are normally involved in strategy implementation:

Allocation and management of available resources like financial, personnel, operational support, and technology support etc.

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Assigning responsibility of specific tasks or processes to specific individuals or groups

Designing system to monitor results Utmost care must be taken to communicate the strategy to the

stakeholders. Otherwise, the implementation might not succeed if the strategy is

11.2.5 Task 5: Strategy evaluation

Corporate activities and performance results are monitored so that the actual performance can be measured with the desired results. Evaluation and control consists of the following steps:

Identify parameters and variable that can be measures Determine desired values for those parameters Tools for measuring the performance Comparison of the measured results with the pre-defined standard Make necessary changes to achieve desired results






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Chapter 11Global Strategic Management

End Chapter Quizzes

1. To succeed in today's global market place, a company must: a) have ample supplies of financing. b) be able to quickly identify and exploit opportunities whenever they may

occur. c) world-wide sources of cheap raw materials. d) form strategic alliances with competitors

2. The process of strategic planning provides a formal structure in which managers:

a) analyze the company's external environments. b) define the company's business and mission. c) set corporate objectives. d) all of the above.

3. A firm can evaluate its internal environment by analyzing

a) Its own Strengthsb) Competitor’s Weaknessesc) Opportunities in the external environmentd) Proposed changes in the international trade laws

4. To find out what an organization's strategy is, you should:a) Read the mission statementb) Look at what the organization actually doesc) Read the strategic pland) Ask the CEO

5. The key activities in the strategic management process are: a) Analysis, formulation, review b) Analysis, implementation, reviewc) Analysis, formulation, implementationd) Formulation, analysis, implementation

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6. The statement of an organization's aspirations can be found in the organizations:

a) Mission statement b) Strategic objectivesc) Actionsd) Vision statement

7. It is generally agreed that the role of strategy is to:

a) Make best use of resourcesb) Achieve competitive advantagec) Make profits for the organization d) Make the best products and services

8. An organization's external environment consists of the general or macro environment and:

a) The internal environmentb) The competitive environmentc) The specific environmentd) The micro-environment

9. Strategy formulation takes place at two levels. These are:

a) Conscious and sub-consciousb) Implicit and explicitc) Corporate and businessd) Business and operational

10. The PEST analysis consists of:

a) Political, economic, scientific, technologicalb) Political, environmental, social, technologicalc) Political, economic, social, technicald) Political, economic, social, technological

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KEY TO END CHAPTER QUIZZESChapter 1 1 d, 2 c, 3 c, 4 c, 5 d, 6 b , 7 c, 8 b, 9 d, 10 b

Chapter 21 d, 2 a, 3 b, 4 c, 5 a, 6 c, 7 a, 8 c, 9 b, 10 a

Chapter 31 d, 2 b, 3 a, 4 a, 5 d, 6 d, 7 a, 8 c, 9 c, 10 a

Chapter 41 c, 2 c, 3 b, 4 b, 5 d, 6 a, 7 d, 8 a, 9 b,10 b

Chapter 51 a, 2 b, 3 d, 4 e, 5 c, 6 d, 7 a, 8 b, 9 a,10 d

Chapter 61 b, 2 b, 3 a, 4 e, 5 b, 6 a, 7 a, 8 e, 9 b, 10 a

Chapter 71 a, 2 d, 3 d, 4 c, 5 a, 6 a, 7 d, 8 c, 9 c,10 d

Chapter 81 d, 2 a, 3 a, 4 c, 5 c, 6 a, 7 c, 8 a, 9 b, 10 c

Chapter 91 d, 2 a, 3 d, 4 d, 5 c, 6 b, 7 d, 8 d, 9 c, 10 a

Chapter 101 a, 2 c, 3 c, 4 a, 5 d, 6 d, 7 a, 8 c, 9 a, 10 d

Chapter 111 b, 2 d, 3 a, 4 a, 5 c, 6 d, 7 b, 8 b, 9 c, 10 d

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PGBM SSM

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