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Aureus SummaryInternational Strategy (Book)
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1
International Business - Book Summary
Chapter 1: Globalization
- Globalization is the shift toward a more integrated and interdependent world
economy. Globalization has several facets, including the globalization of markets and
the globalization of production.
- The Globalization of Markets refers to the merging of historically distinct and
separate national markets into one huge global marketplace. Falling barriers to cross-
border trade have made it easier to sell internationally. It has been argued for some
time that the tastes and preferences of consumers in different nations are beginning to
converge on some global norm, thereby helping create a global market.
- The Globalization of Production refers to the sourcing of goods and services from
locations around the globe to take advantage of national differences in the cost and
quality of factors of production. By doing so, companies aim to lower their overall cost
structure or improve the quality or functionality of their product offering, thereby
allowing them to compete more effectively.
- As markets globalize and an increasing proportion of business activity transcends
national borders, institutions are needed to help manage, regulate, and police the
global marketplace and to promote the establishment of multinational treaties to
govern the global business system.
- Important global institutions:
• General Agreement on Tarriffs and Trade (GATT)
Purpose to promote international trade by reducing or eliminating trade barriers such
as tariffs or quotas.
• World Trade Organizations (WTO)
Responsible for policing the world trading system and making sure nation-states
adhere to the rules laid down in trade treaties signed by WTO member states.
• International Monetary Fund (IMF)
Aims to maintain order in the international monetary system.
• World Bank
Set up to promote economic development and focusses on making low-interest loans
to cash-strapped governments in poor nations that wish to undertake significant
infrastructure investments.
• United Nations (UN)
Established to preserve peace through international cooperation and collective
security.
• Group of Twenty (G20)
2
Comprises the finance ministers and central bank governors of the 19 largest
economies in the world and represent 90% of global GDP.
- Two macro factors underlie the trend toward great globalisation:
1. The decline in barriers to the free flow of goods, services, and capital that has
occurred since the end of World War II.
2. The technological change, particularly the dramatic developments in recent
decades in communication, information processing, and transportation
technologies.
- International Trade occurs when a firm exports goods or services to consumers in
another country.
- Foreign Direct Investment (FDI) occurs when a firm invests resources in business
activities outside of its home country.
- Many of the barriers to international trade took the form of high tariffs on imports of
manufactured goods. The typical aim of such tariffs was to protect domestic industries
from foreign competition.
- The lowering of trade barriers made globalization of markets and production a
theoretical possibility. Technological change has made it a tangible reality.
- The cost of microprocessors continues to fall, while their power increases, a
phenomenon known as Moore's Law - which predicts that the power of
microprocessor technology doubles and its cost of production falls in half every 18
months.
- The most important transportation technologies include the development of
commercial jet aircraft and super freighters and the introduction of containerisation,
which simplifies transshipment from one mode of transport to another.
- In addition to the globalization of production, technological innovations have facilitated
the globalization of markets. Low-cost global communications networks, including
those built on top of the Internet, are helping create electronic global marketplaces.
- Hand in hand with the trend toward globalization there has been a fairly dramatic
change in the demographics of the global economy over the past 30 years. As late as
the 1960s, four stylised facts described the demographics of the global economy:
1. The U.S. dominance in the world economy and world trade picture
2. The U.S. dominance in world foreign direct investment
3. The dominance of large, multinational U.S. firms on the international business
scene
4. Roughly half the globe - the centrally planned economies of the communist world -
was off-limits to Western international businesses
3
- Stock of Foreign Direct Investment (FDI) refers to the total cumulative value of
foreign investments.
- A Multinational Enterprise (MNE) is any business that has productive activities in
two or more countries. Since the 1960s, two notable trends in the demographics of the
multinational enterprise have been:
1. The rise of non-US multinationals - the globalization and growth of the world
economy has resulted in a relative reduction in the dominance of US firms in the
global marketplace.
2. The growth of mini-multinationals - despite that most international trade and
investments are still conducted by large firms, many medium-size and small
businesses are becoming increasingly involved in international trade and investment.
- One of the most dramatic developments of the past 30 years has been the collapse of
communism in eastern Europe, which has created enormous opportunities for
international businesses. Moreover, the move toward free market economies in China
and Latin America is creating opportunities (and threats) for Western international
business.
- The benefits and costs of the emerging global economy are being hotly debated
among businesspeople, economists, and politicians. The debate focuses on the
impact of globalization on jobs, wages, the environment, working conditions, national
sovereignty, and extreme poverty in the world's poorest nations.
- An International Business is any firm that engages in international trade or
investment. A firm does not have to become a multinational enterprise, investing
directly in operations in other countries, to engage in international business, although
multinational enterprises are international businesses.
- Managing an international business is different from managing a domestic
business because:
• Countries are different
• The range of problems confronted by a manager in an international business is wider
and the problems themselves more complex than those confronted by a manager in a
domestic business
• Managers in international business must find ways to work within the limits imposed
by governments' intervention in the international trade and investment system
• International transactions involve converting money into different currencies
4
Chapter 13: The Strategy of International Business
- A firm's Strategy can be defined as the actions that managers take to attain the goals
of the firm. Commonly, the preeminent goal is to maximise the value of the firm for its
owners and its shareholders.
- To maximize the value of a firm, managers must pursue strategies that increase
profitability of the enterprise and its rate of profit growth over time.
- Profitability is the rate of return that the firm makes on its invested capital (ROIC),
which is calculated by dividing the net profits of the firm by the total capital invested.
- Profit Growth is measured by the percentage increase in net profits over time.
- The way to increase the profitability of a firm is to create more value. The amount of
value a firm creates is generally measured by the difference between its costs of
production and the quality that consumers perceive in its products. In general, the
more value customers place on a firm's products, the higher the price the firm can
charge for those products.
- The firm's Value Creation is measured by the difference between the value of product
to an average consumers and the cost of production per unit; a company creates
value by converting inputs that cost X into a product on which consumers place a
value of Y, then value creation is X-Y.
- The strategy, operations, and organization of the firm must all be consistent with each
other if it is to attain a competitive advantage and garner superior profitability.
- The operations of a firm can be thought of as a Value Chain composed of a series of
distinct value creation activities, including production, marketing and sales, materials
management, R&D, human resources, information systems, and the firm
infrastructure. We can categorise these value creation activities, or operations, as
primary activities and support activities.
- Primary Activities have to do with the design, creation, and delivery of the product;
its marketing; and it' support and after-sale service. The primary activities are usually
divided into four functions: research and development, production, marketing and
sales, and customer service.
- Support Activities of the value chain provide inputs that allow the primary activities
to occur. In terms of attaining a competitive advantage, support activities can be seen
as important as, if not more than, the primary activities of the firm. Consider
information systems tracking sales, managing inventory, pricing products, selling
products, dealing with customer service inquiries, and so on.
5
- Expanding globally allows firms to increase their profitability and rate of profit growth
in ways not available to purely domestic enterprises. Firms that operate internationally
are able to:
• Expand the market for their domestic product offerings by selling those products in
international markets
• Realize location economies by dispersing individual value creation activities to those
locations around the globe where they can be performed most efficiently and
effectively
• Realise greater cost economies from experience effects by serving an expanded
global market from a central location, thereby reducing the costs of value creation
• Earn a greater return by leveraging any valuable skills developed in foreign
operations and transferring them to other entities within the firm's global network of
operations
- Core Competence refers to skills within the firm that competitors cannot easily match
or imitate. These skills may exist in any of the firm's value creation activities.
- Location Economies are the economies that arise from performing a value creation
activity in the optimal location for that activity, wherever in the world that might be
(transportation costs and trade barriers permitting).
- The creation of a Global Web of value creation activities, with different stages of the
value chain being dispersed to those locations around the globe where perceived
value is maximised or where the costs of value creation are minimised.
- The Experience Curve refers to the systematic reductions n production costs that
have observed to occur over the life of a product.
- Learning Effects refer to cost savings that come from learning by doing.
- Economies of Scale refer to the reductions in unit cost achieved by producing a large
volume of a product.
6
- The strategic significance of the experience curve is clear. Moving down the
experience curve allows a firm to reduce its cost of creating value and increase its
profitability. The firm that moves down the experience curve most rapidly will have a
cost advantage vis-a-vis its competitors.
- Firms that compete in the global marketplace typically face two types of competitive
pressure that affect their ability to realize location economies an experience effects,
and to leverage products and transfer competencies and skills within the enterprise.
They face pressures for cost reductions and pressures to be local response.
- Responding to pressures for cost reduction requires a firm to try to lower the costs
of value creation. These pressures can be intense in industries producing commodity-
type products where meaningful differentiation on nonporous factors is difficult and
price is the main competitor weapon. This tends to be the case for products that
service Universal Needs - exist when the tastes and preferences of consumers in
different nations are similar if not identical.
- Pressures for local responsiveness arise from national differences in consumer
tastes and preferences, infrastructure, accepted business practices, and distribution
channels, and from host-government demands. Responding to pressures to be locally
responsive requires a firm to differentiate its products and marketing strategy from
country to country to accommodate these factors, all of which tends to raise the firm's
cost structure. Furthermore, pressures for local responsiveness imply that it may not
be possible for a firm to realize the full benefits from economies of scale, learning
effects, and location economies.
7
- Firms typically choose among four main strategic postures when competing
internationally:
- Global Standardization Strategy - focus on increasing profitability and profit growth
by reaping the cost reductions that come from economies of scale, learning effects,
and location economies; that is, there strategic goal is to pursue a low cost strategy
on a global scale.
- Localization Strategy - houses on increasing profitability by customising the firm's
goods or services so that they provide a good match to tastes and preferences in
different national markets. This is most appropriate when there are substantial
differences across nations with regard to consumer tastes and preferences, and
where cost pressures are not too intense.
- Transnational Strategy - simultaneously achieve low cost through location
economies, economies of scale, and learning effects; differentiate their product
offering across geographic markets to account for local differences; and foster a
multidirectional flow of skills between different subsidiaries in the firm's global network
of operations.
- International Strategy - taking products first produced for their domestic market and
selling them internationally with only minimal local customisation. The distinguishing
feature of these firms is that they are selling a product that serves universal needs,
but they do not face significant competitors, and thus unlike firms pursuing a global
standardization strategy, they are not confronted with pressures to reduce their costs.
8
- As competitors emerges an international and localisation strategy becomes less
viable. Hence, many industries are now so competitive that firms must adopt a
transnational strategy.
Chapter 14: The Organization of International Business
- Organizational Architecture is the totality of a firm's organization, including formal
organisational structure, control systems and incentives, processes, organisational
culture and people.
- Organizational Structure refers to three things:
1. The formal division of the organisation into subunits such as product divisions,
national operations, and functions
2. The location of decision-making responsibilities within that structure (e.g.,
centralised or decentralised)
3. The establishment of integrating mechanisms to coordinate the activities of
subunits, including cross-functional teams and pan-regional committees
- Control Systems are the metrics used to measure the performance of subunits and
make judgments about how well managers are running those subunits.
- Incentives are the devices used to reward appropriate managerial behaviour.
- Processes are the manner in which decisions are made and work is performed within
the organization.
- Organizational Culture refers to the norms and value systems that are shared
among the employees of an organisation. Just as societies have cultures so do
organisations.
- People refers to the employees of the organization and the strategy used to recruit,
compensate, and retain those individuals and the type of people that they are in terms
of their skills, values, and orientation.
9
- In all, organisational architecture can be concluded as follows:
- Organizational structure can be thought of in terms of three dimensions:
1. Vertical Differentiation - the location of decision-making responsibilities within a
structure (centralisation versus decentralisation).
2. Horizontal Differentiation - the formal divisions of the organisation into subunits
(the design of structure).
3. Integrating Mechanisms - the mechanisms for coordinating subunits.
- Forms of structures, with respect to horizontal differentiation:
• Structure of a Domestic Firms: functions reflecting the firm's value creation
activities that are controlled by top management.
• Product Divisional Structure: each division is responsible for a distinct product line
(business area).
• International Division Structure: regardless of the firm's domestic structure, the
international divisions is based on geography.
• Worldwide Area Structure: the world is divided into geographic area. An area may
be a country or a group of countries. Each area tends to be a self-contained, largely
autonomous entity with its own set of value creation activities.
• Global Matrix Structure: horizontal differentiation proceeds along two dimensions:
product division and geographic area.The philosophy is that responsibility for
operating decisions pertaining to a particular product should be shared by the product
division and the various areas of the firm.
10
- Knowledge Network is a network for transmitting information within an organization
that is based not on formal organizational structure, but on informal contacts between
managers within an enterprise and on distributed information systems.
- A major task of a firm's leadership is to control the various subunits of the firm to
ensure their actions are consistent with the firm's overall strategic and financial
objectives. Firms achieve this with various control and incentive systems.
- Four main types of Control Systems:
• Personal Control: the control achieved by personal contact with subordinates.
• Bureaucratic Control: the control achieved through a system of rules and
procedures that directs the actions of subunits.
• Output Control: setting goals for subunits to achieve and expressing those goals in
terms of relatively objective performance metrics.
• Cultural Control: when employees buy into the norms and value systems of the
firm.
- Incentives refer to the devices used to reward appropriate employee behaviour.
Many employees receive incentives in the form of annual bonus pay. As such,
incentives are usually closely tied to the performance metrics used for output control.
- The key to understanding the relationship between international strategy, control
systems, and incentive systems is the concept of performance ambiguity.
Performance Ambiguity exists when the causes of a subunit's poor performance are
not clear. This is not uncommon when a subunit's performance is partly dependent on
the performance of other subunits, that is, when there is a high degree of
interdependence between subunits within the organization.
- Processes refer to the manner in which decisions are made and work is performed
within the organization. Processes can be found at many different levels within an
organization. The core competencies or valuable skills of a firm are often embedded
in its processes. Efficient and effective processes can help lower the costs of value
creation and add additional value to a product.
- Organizational Culture refers to a system of values and norms that is shared among
employees. Values and norms express themselves as the behaviour patterns or style
of an organization that new employees are automatically encouraged to follow by their
fellow employees.
- Firms pursuing a localisation strategy focus on local responsiveness.
- Firms pursuing an international strategy attempt to create value by transferring core
competencies from home to foreign subsidiaries.
11
- Firms pursuing a global standardization strategy focus on the realisation of location
and experience curve economies.
- Firms pursuing a transnational strategy focus on the simultaneous attainment of
location and experience curve economies, local responsiveness, and global learning.
- The fit between strategy and architecture is outlined in the table below:
- Multinational firms periodically have to alter their architecture so that it conforms to the
changes in the environment in which they are competing and the strategy they are
pursuing - a phenomenon known as Organizational Change.
- Organizations are difficult to change. Within most organisations are strong Inertia
forces. These forces come from a number of sources. One source of inertia is the
existing distribution of power and influence within an organisation.
- Although all organisations suffer from inertia, the complexity and global spread of
many multinational might make it particularly difficult for them to change their strategy
and architecture to match new organizational realities.
Chapter 17: Global Production and Supply Chain Management
- Production is often refereed to as manufacturing or operations when discussed in
relation to global supply chains.
Structure and Controls
Localization Strategy
International Strategy
Global Standardization
Strategy
Transnational Strategy
Vertical Differentiation
Decentralized Core competency, more centralized; rest decentralized
Some centralization
Mixed; centralization and decentralization
Horizontal
Differentiation
Worldwide area
structure
Worldwide product
divisions
Worldwide product
divisions
Informal matrix
Need for Coordination
Low Moderate High Very high
Integrating Mechanisms
None Few Many Very many
Performance
Ambiguity
Low Moderate High Very high
Needs for Cultural Controls
Low Moderate High Very high
12
- Supply Chain Management is the integration and coordination of logistics,
purchasing, operations, and market channel activities from raw material to end-
customer.
- This chapter focuses on two value creation activities - production and supply chain
management - and attempts to clarify how they might be performed internationally to:
• Lower the costs of value creation
• Add value by better serving customer needs
- Production and supply chain management are closely linked because a firm's ability to
perform its production activities efficiently depends on a timely supply of high-quality
materials and information inputs, for which purchasing and logistics are critical
functions.
- Purchasing represents the part of the supply chain that involves worldwide buying of
raw material, component parts, and products used in manufacturing of the company's
products and services.
- Logistics is the part of the supply chain that plans, implements, and controls the
effective flows and inventory of raw material, component parts, and products used in
manufacturing.
- The production and supply chain management functions of an international firm have
a number of important strategic objectives:
• To ensure that the total cost of moving from raw materials to finished goods is as low
as possible for the value provided to the end-customer
• To increase product quality by establishing process-based quality standards, and
eliminating defective raw material, component parts, and products from the
manufacturing process and the supply chain
- Upstream Supply Chain: all of the organisations (e.g., suppliers) and resources that
are involved in the portion of the supply chain from raw materials to the production
facility.
- Downstream Supply Chain: all of the organisations (e.g., wholesaler, retailer) that
are involved in the portion of the supply chain from the production facility to the end-
customer.
- Improved quality control reduces costs by:
• Increasing productivity because time is not wasted producing poor-quality products
that cannot be sold, leading to a direct reduction in unit costs
• Lowering rework and scrap costs associated with defective products
• Reducing the warranty costs and time associated with fixing defective products
13
- The principal tool that most managers now use to increase the reliability of their
product offering is the Six Sigma quality improvement methodology. Six Sigma is a
direct descendant of the Total Quality Management (TQM) philosophy that was
widely adopted. This philosophy suggested that the quality of supervision should be
improved by allowing more time for supervisors to work with employees and by
providing them with the tools they need to do the job.
- Six Sigma, the modern successor to TQM, is a statistically based philosophy that
aims to reduce defects, boost productivity, eliminate waste, and cut costs throughout
a company.
- The EU requires that the quality of a firm's manufacturing processes and products be
certified under a quality standard known as ISO 9000 before the firm is allowed
access to the EU marketplace.
- The choice of an Optimal Production Location must consider country factors,
technological factors, and production factors.
- Country Factors include things such as political and economic systems, culture, and
relative factor costs, which all differ from country to country.
- Technological Factors - the type of technology a firm uses to perform specific
manufacturing activities can be pivotal in location decisions. Tree characteristics of a
manufacturing technology are of interest here: the level of fixed costs, the minimum
efficient scale, and the flexibility technology.
14
- The Minimum Efficient Scale is the level of output at which most plant-level scale
economies are exhausted. This is the scale of output a plant must operate to realize
all major plant-level scale economies.
- The term Flexible Manufacturing Technology (or Lean Production) covers a range
of manufacturing technologies designed to reduce setup times for complex
equipment, increase the utilisation of individual machines through better scheduling,
and improve quality control at all stages of the manufacturing process.
- Mass Customization is the ability of companies to use flexible manufacturing
technologies to reconcile two goals that were once thought to be incompatible - low
cost and product customisation.
- Flexible Machine Cells are a flexible manufacturing technology. It is a grouping of
various types of machinery, common materials handler, and a centralised cell
controller (computer). Each cell normally contains four to six machines capable of
performing a variety of operations. The typical cell is dedicated to the production of a
family of parts or products.
- Several Production Factors feature prominently into the reasons why production
facilities are located and used in a certain way worldwide. They include product factor,
locating production facilities, and strategic roles for production facilities.
- Two Product Feature affect location decisions. The first is the product's value-to-
weight ratio because of its influence on transportation. The second is whether the
product serves universal needs, needs that are the same all over the world.
15
- There are two basic strategies for Locating Production Facilities:
• Concentrating them in a centralized location and serving the world market from there
• Decentralizing them in various regional or national locations that are close to major
markets
- When making decisions, managers need to think about the Strategic Role assigned
to a foreign factoring. A major consideration here is Global Learning - the idea that
valuable knowledge does not reside just in a firm's domestic operations; it may also
be found in its foreign subsidiaries.
- Foreign factories can have one of a number of strategic roles of designations,
including:
• Offshore Factory: one that is developed and set up for producing component parts
or finished goods at a lower cost than producing them at home or in any other market.
• Source Factory: aims to drive down costs in the global supply chain, where
managers have a greater say in the strategic role of the factory.
• Server Factory: set up to overcome intangible and tangible barriers in the global
marketplace.
• Contributor Factory: competes with the global firm's home factories for testing new
ideas and products in a specific country or world region.
• Output Factory: an intelligence-gathering unit that is placed near a competitor's
headquarters or main operations, near the most demanding customers, or near key
suppliers of unique and critically important parts.
• Lead Factory: intended to create new processes, products, and technologies that
can be used throughout the global firm in all parts of the world.
- The Make-or-Buy Decision for a global firm is the strategic decision concerning
whether to produce an item in-house (make) or purchase it form an outside supplier
(buy). These decisions are made at both strategic and operational levels, with the
strategic level being focussed on the long term and the operational level being more
focused on the short term.
- In addition to global production, three additional supply chain functions need to be
developed in concert with global production. These are logistics, purchasing
(sourcing), and the company's distribution strategy (i.e., marketing channels).
- The core activities performed in Logistics are:
• Global Distribution Center Management - a Global Distribution Centre (or
warehouse) is a facility that positions and allows customisation of products for delivery
to worldwide wholesalers or retailers or directly to consumers anywhere in the world.
• Inventory Management - Global Inventory Management can be viewed as the
decision-making process regarding the raw materials, work-in-process, and finished
goods inventory for a multinational company.
16
• Packaging and Materials Handling - Packaging comes in all shapes, sizes, forms,
and uses.
• Transportation - Transportation refers to the movement of raw material, component
parts, and finished goods throughout the global supply chain. It typically represent the
largest percentage of any logistics budget and an even greater percentage for global
companies because of the distances involved.
• Reverse Logistics - Reverse Logistics is the process of planning, implementation,
and controlling the efficient, cost-effective flow of raw materials, in-process inventory,
finished goods, and related information from the point of consumption to the point of
origin for the purpose of recapturing value or proper disposal.
Outsourcing buying products or services from one of its suppliers that prices them somewhere else,
whether domestically or globally.
Insourcing deciding to stop outsourcing products or services
and instead start to produce them internally; insourcing is the opposite of outsourcing.
Offshoring buying products or services from one of its suppliers that procedures them somewhere globally (outside the MNCs home country).
Offshore Outsourcing buying products or services from one of its suppliers in a country other than the one in which
the product is manufactured or the service is developed.
Nearshoring transferring business or information technology
processes to suppliers in a nearby country, often one that shares a border with the firm's own country.
Co-sourcing using both its own employees form inside the firm and external supplier to perform certain tasks, often in concert with each other.
- With respect to Purchasing there are six strategic levels that can be undertaken by a
global company:
- Four main areas are of concern in managing a global supply chain, including the role
of just-in-time inventory, the role of information technology, coordination in global
supply chains, and interorganizational relationships in global supply chains.
- Just-in-time (JIT) inventory systems aim to economise on inventory holding costs by
having materials arrive at a manufacturing plant just in time to enter the production
process and not before.
- Web and cloud-based information systems play a crucial role in modern materials
management. By tracking component parts as they make their way across the globe
17
toward an assembly plant, information systems enable a firm to optimise its
production scheduling according to when components are expected to arrive.
- Global Supply Chain Coordination refers to shared decision-making opportunities
and operational collaboration of key global supply chain activities.
- Interorganizational Relationships have been studied and talked about in various
contexts for decades. The two keys are trust and commitment. The depth and
involvement in interorganizational relationships in global supply chains should be
based on the degree of coordination, integration, and transactional versus relationship
emphasis that the firm should adopt in partnering with other entities in the global
supply chain.
Chapter 18: Global Marketing and R&D
- The Marketing Mix is the set of choices the firm offers to its targeted markets; often
known as the 4Ps - product, place, promotion, and price.
- A Product can be viewed as a bundle of attributes. Products sell well when their
attributes match consumer needs (and when their prices are appropriate). For
instance, BMW cars sell well to people who have high needs for luxury, quality, and
performance precisely because BMW builds those attributes into its cars.
- Countries differ along a whole range of dimensions, including social structure,
language, religion, and education - these differences are known as different
organizational cultures. These differences have important implications for marketing
strategy. For instance, hamburgers do not sell well in Islamic countries, where the
consumption of ham is forbidden by Islamic law.
- Theodore Levitt argued that due to the advent of modern communications and
transport technologies, consumer tastes and preferences are becoming global, which
is creating global markets for standardised consumer products. However, this position
is regarded as extreme by many experts, who argue that substantial differences still
exist between customers from different countries and cultures.
- Market Segmentation refers to the process of identifying distinct groups of
consumers whose needs, wants, and purchasing behaviour differs from each other in
important ways. Managers in an international business need to be aware of two main
issues relating to segmentation: the extent to which there are differences between
countries in the structure of market segments and the existence of segments that
transcend national borders (i.e., intermarket segments).
18
- A critical element of a firm's marketing mix is its Distribution Strategy: the means it
chooses for delivering the product to the consumer. The way the product is delivered
is determined by the firm's entry strategy.
- A typical distribution system can be represented as follows:
- The four main differences between distribution systems worldwide are retail
concentration, channel length, channel exclusivity, and channel quality.
- In some countries the Retail System is very concentrated, but it is fragmented in
others. In a Concentrated Retail System, a few retailers supply most of the market.
A Fragmented Retail System is one in which there are many retailers, none of which
has a major share of the market. Many of the differences in concentration are rooted
in history and tradition.
- Channel Length refers to the number of intermediaries between the producer (or
manufacturer) and the consumer. If the producer sells directly to the consumer, the
channel is very short. If the producer sells through an important agent, a wholesaler,
or a retailer, a long channel exists. The choice of a short or long channel is a strategic
decision for the producing firm.
- An Exclusive Distribution Channel is one that is difficult for outsiders to access. For
instance, it is often difficult or a new firm to get access to shelf space in supermarkets.
This occurs because retailers tend to prefer to carry the products of established
manufacturers of foodstuffs with national reputations rather than gamble on the
products of unknown firms.
- Channel Quality refers to the expertise, competencies, and skills of established
retailers in a national and their ability to sell and support the products of international
businesses.
19
- A choice of distribution strategy determines which channel the firm will use to reach
potential customers. The optimal strategy is determined by the relative costs and
benefits of each alternative, which vary from country to country, depending on the four
factors: retail concentration, channel length, channel exclusivity, and channel quality.
- Another critical element in the marketing mix is communicating he attributes of the
product to prospective customers. There are several barriers to international
communications:
• Cultural Barriers - can make it difficult to communicate messages across cultures.
• Source Effects - occur when the receiver of the message evaluates the message
on the basis of status or image of the sender.
• Country of Origin Effects - the extent to which the place of manufacturing
influences product evaluations.
• Noise Levels - the number of other messages competing for a potential consumer's
attention, and this too varies across countries.
- The main decision with regard to communications strategy is the choice between a
push strategy and a pull strategy. A Push Strategy emphasises personal selling other
than mass media advertising in the promotional mix. A Pull Strategy depends more
on mass media advertising to communicate the marketing message to potential
consumers. Although some firms employ only a pull strategy and others only a push
strategy, still other firms combine direct selling with mass advertising to maximise
communication effectiveness. Factors that determine the relative attractiveness of
push and pull strategies include product type relative to consumer sophistication,
channel length, and media availability.
- Push strategies tend to be emphasised:
• For industrial products or complex new products
• When distribution channels are short
• When few print or electronic media are available
- Pull strategies tend to be emphasised:
• For consumer goods
• When distribution channels are long
• When sufficient print and electronic media are available to carry the marketing
message
- International Pricing Strategy is an important component of the overall marketing
mix. Three aspects of international pricing include price discrimination, strategic
pricing, and regulatory influences on prices.
- Price Discrimination exists whenever consumers in different countries are charged
different prices for the same product, or for slightly different variations of the product.
20
It involves charging whatever the market will bear; in a competitive market, prices may
have to be lower than in a market where the firm has a monopoly.
- Two conditions are necessary for profitable price discrimination. First, the firm must be
able to keep its national markets separate. If it cannot do this, individuals or
businesses may undercut its attempt at price discrimination by engaging in arbitrage.
The second is different price elasticities of demand in different countries (the price
elasticity of demand is a measure of the responsiveness of demand for a product to
change in price).
- Arbitrage occurs when an individual or business capitalises on a price differential for
a firm's product between two countries by purchasing the product in the country where
prices are lower and reselling it in the country where prices are higher.
- Strategic Pricing has three aspects, which we refer to as predatory pricing, multipoint
pricing, and experience curve pricing.
- Predatory Pricing is the use of price as a competitive weapon to drive weaker
competitors out of a national market. Once the competitors have left the market, the
firm can raise prices and enjoy high profits.
- Multipoint Pricing refers to the fact that a firm's pricing strategy in one market may
have an impact on its rivals' pricing strategy in another market. Aggressive pricing in
one market may elicit a competitive response from a rival in another market.
- Experience Curve Pricing refers to lowering the price worldwide in attempting to
build global sales volume as rapidly as possible, even if this means taking large
losses initially.
- The ability to engage in either price discrimination or strategic pricing may be limited
by national or international regulations. Most important, a firm's freedom to set its
own prices is constrained by antidumping regulations and competition policy.
- Dumping occurs whenever a firm sells a product for a price that is less than the cost
of producing it. Most regulations, define dumping more vaguely. Antidumping rules
set a floor under export prices and limit firms' ability to pursue strategic pricing.
- Most developed nations have regulations designed to promote competition and to
restrict monopoly practices. These regulations can be used to limit the prices a firm
can charge in a given country.
- International Market Research is the systematic collection, recording, analysis, and
interpretation of data to provide knowledge that is useful for decision making in a
global company. Compared with market research that is domestic only, international
market research involves additional issues such as translation of questionnaires and
21
reports into appropriate foreign languages and accounting for cultural and
environmental differences in data collection.
- Steps involved in international market research:
- New-product development is a high-risk, potentially high-return activity. To build a
competency in new-product development, an international business must do two
things:
• Disperse R&D activities to those countries where new products are being pioneered
• Integrate R&D with marketing and manufacturing
- Ideas for new products and stimulated by the interactions of scientific research,
demand conditions, and competitive conditions. Other things being equal, the rate of
new-product development seems to be greater in countries where:
• More money is spent on basic and applied research and development
• Underlying demand is strong
• Consumers are affluent
• Competition is intense
- Achieving tight integration among R&D, marketing, and manufacturing requires the
use of cross-functional teams.Tight cross-functional integration among R&D,
production, and marketing can help a company ensure that:
1. Product development projects are driven by customer needs
2. New products are designed for ease of manufacture
3. Development costs are kept in check
4. Time to market is minimised
Chapter 15: Entry Strategy and Strategic Alliances
- Strategic Alliances are cooperative agreements between potential or actual
competitors.
- Basic entry decisions include which markets to enter, when to enter those markets,
and on what scale.
Defining
the
research
objectives
Determinin
g the data
sources
Assessing
the costs and
benefits of
the research
Collecting
the data
Analysing
and
interpretin
g the data
Reporting
the
research
findings
22
- The attractiveness of a country as a potential market for international business
depends on balancing the benefits, costs, and risks associated with doing business in
that country.
- The most attractive foreign markets tend to be found in politically stable developed
and developing nations that have free market systems and where there is not a
dramatic upsurge in either inflation rates or private sector debt.
- Once attractive markets have been identified, it is important to consider the Timing of
Entry. Entry is early when an international business enters a foreign market before
other foreign firms and late when it enters after other international businesses have
already established themselves.
- The advantages associated with entering a market early are known as First-Mover
Advantages. For instance, one first-mover advantage is the ability to preempt rivals
and capture demand by establishing a strong brand name.
- There can also be disadvantages associated with entering foreign market before other
international businesses, known as First-Mover Disadvantages. These may give rise
to pioneering costs, costs that an early entrant has to bear that a later entrant can
avoid (effort, time, and expense to learning the rules of the game.
- Another issue that an international business needs to consider when contemplating
market entry is the scale of entry. Entering a market on a large scale involves the
commitment of significant resources and implies rapid entry. The consequences of
entering on a significant scale are associated with eh value of the resulting strategic
commitments. A strategic commitment has a long-term impact and is difficult to
reverse.
- Once a firm decides to enter a foreign market, the question arises as to the best mode
of entry. Firms can use six different modes to enter foreign markets: exporting,
turnkey projects, licensing, franchising, establishing joint ventures with a host-country
firms, or setting up a new wholly owned subsidiary in the host country.
Advantages Disadvantages
Avoids the substantial costs of establishing manufacturing operations in the host country
Exporting from the firm's home base may not be appropriate if lower-cost locations for
manufacturing the product can be found abroad
May help a firm achieve experience curve and location economies
High transport costs can make exporting uneconomical, particularly for bulk products
Tariff barriers can make exporting uneconomical
- Many manufacturing firms begin their global expansion as exporters and only later
switch to another mode for serving a foreign market. The advantages and
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disadvantages to Exporting include:
Advantages Disadvantages
The know-how required to assemble and run a
technologically complex process is a valuable asset - turnkey projects are a way of earning great economic returns from that asset
The firm that enters into a turnkey deal will have no
long-term interest in the foreign country
Less risky than conventional foreign direct investment
The firm that enters into a turnkey project with a foreign enterprise may inadvertently create a competitor
If the firm's process technology is a source of competitive advantage, then selling this technology
through a turnkey project is also selling competitive advantage to potential and/or actual competitors
- In a Turnkey Project, the contractor agree to handle every detail of the project for a
foreign client, including the training of operating personnel. At completion of the
contract, the foreign client is handed the "key" to a plant that is ready for full operation.
Advantages Disadvantages
The firm does not have to bear the development costs and risks associated with opening a foreign
market
It does not give a firm the tight control over manufacturing, marketing, and strategy that is
required for realising experience curve and location economies
Attractive to a firm when a firm is unwilling to
commit substantial financial resources to an unfamiliar or politically volatile foreign market
Competing in a global market may require a firm to
coordinate strategic moves across countries by using profits earned in one country to support competitive attacks in another
Licensing is frequently used when a firm possesses intangible property that might have business applications, but it does not want to
develop those applications itself
Most firms wish to maintain control over how their know-how is used, and a firm can quickly lose control over its technology by licensing it
- A Licensing Agreement is an arrangement whereby a licensor grants the rights to
intangible property to another entity (the licensee) for a specified period, and in return,
the licensor receives a reality fee from the licensee.
Advantages Disadvantages
The firm is relieved of many of the costs and risks
of opening a foreign market on its own. Instead, the franchisee typically assumes those costs and risks.
No reason to consider the need for coordination or
manufacturing to achieve experience curve and location economies
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Advantages Disadvantages
Build global presence quickly Quality control; the foundation of franchising arrangement is that the firm's brand name conveys a message to consumers about the quality of the
firm's product
- Franchising is basically a specialised form of licensing in which the franchisor not
only sells the intangible property to the franchisee but also insists that the franchisee
agree to abide by strict rules as to how it does business.
Advantages Disadvantages
A firm benefits from a local partner's knowledge of the host country's competitive conditions, culture, language, political systems, and business
A firm that enters into a joint venture risks giving control of its technology to its partner
When the development costs/risks of opening a foreign market are high, a firm might gain by
sharing these costs and or risks with a local partner
A joint venture does not give a firm the tight control over subsidiaries that it might need to realise
experience curve or location economies
Joint ventures with local partners face a low risk of
bearing subject to nationalisation or other forms of adverse government interference
The shared ownership arrangement can lead to
conflicts and battles for control between the investing firms if their goals and objectives change or if they take different views as to what the
strategy should be
- A Joint Venture entails establishing a firm that is jointly owned by two or more
otherwise independent firms.
Advantages Disadvantages
Reduces the risk of losing control over the technological competence
Firms doing this must bear the full capital costs and risks of setting up overseas operations
Gives a firm tight control over operations in different countries
Learning to do business in a new culture - which are less if the firm acquires an established host-country enterprise
May be required if a firm is trying to realise location and experience curve economies
- In a Wholly Owned Subsidiary, the firm owns 100 percent of the stock. Establishing
a wholly owned subsidiary in a foreign market can be done two ways. the firm either
can set up a new operation in the country (a greenfield venture), or it can acquire
and established firm in that cost nation and use that firm to promote its products.
- The optimal choice of entry mode depends on the firm's strategy:
• When technological know-how constitutes a firm's core competence, wholly owned
25
subsidiaries are preferred, since they best control technology.
• When management know-how constitutes a firm's core competence, foreign
franchises controlled by joint ventures seem to be optimal.
• When the firm is pursuing a global standardization or transnational strategy, the
need for tight control over operations to realise location and experience curve
economies suggests wholly owned subsidiaries are the best entry mode.
- Acquisitions are quick to execute, may enable a firm to preempt its global
competitors, and involve buying a known revenue and profit stream. Acquisitions may
fail when the acquiring firm overpays for the target, when the cultures of the acquiring
and acquired firms clash, when there is a high level of management attrition after the
acquisition, and when there is a failure to integrate the operations of the acquiring and
acquired firm.
- The advantage of a Greenfield Venture in a foreign country is that it gives the firm a
much greater ability to build the kind of subsidiary company that it wants. For
instance, it is much easier to build an organization culture from scratch than it is to
change the culture of an acquired unit.
- The choice between acquisitions and greenfield ventures is not easy. Both modes
have their advantages and disadvantages. In general, the choice will depend on the
circumstances confronting the firm. If the firm is seeking to enter a market where there
are already well established incumbent enterprises, and where global competitors are
also interested in establishing a presence, it may pay the firm to enter via an
acquisition. If the firm is considering entering a country where there are no incumbent
competitors to be acquired, then a greenfield venture may be the only mode.
- Strategic Alliances are cooperate agreements between actual or potential
competitors. The advantage of alliances are that they facilitate entry into foreign
markets, enable partners to share the fixed costs and risks associated with new
products and processes, facilitate the transfer of complementary skills between
companies, and help firms establish technical standards. The disadvantage is that the
firm risks giving away technological know-how to its alliance partners. The
disadvantages can be reduced if the firm selects partners carefully, paying close
attention to the firm's reputation and the structure of the alliance to avoid unintended
transfers of know-how.
- Two keys to making alliances work seem to be building trust and informal
communications networks between partners and taking proactive steps to learn from
alliance partners.
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Chapter 2: National Differences in Political, Economic, and Legal
Systems
- Political Economy refers to the political, economic, and legal systems of a country
that are interdependent; they interact with and influence each other, and in doing so,
they affect the level of economic well-being.
- Political Systems refers to the system of government in a nation. These can be
assessed according to two dimensions:
• The degree to which they emphasise collectivism as opposed to individualism
• The degree to which they are democratic or totalitarian
These dimensions are interrelated; systems that emphasis collectivism tend to lean
toward totalitarianism, whereas those that place a high value on individualism tend to
be democratic.
- Collectivism refers to a political system that stresses the primacy of collective goals
over individual goals. Here, the needs of society are generally viewed as being more
important than individual freedom.
- Modern Socialists trace their intellectual roots to Karl Marx (1818-1883). He argued
that the few benefit at the expense of the many in a capitalist society where individual
freedoms are not restricted.
- In the 20th century, the socialist ideology split into two broad camps. The
Communists believed that socialism could be achieved only through violent
revolution and totalitarian dictatorship, whereas the Social Democrats committed
themselves to achieving socialism by democratic means, turning their backs on violet
revolution and dictatorship.
- The opposite of collectivism, Individualism refers to philosophy that an individual
should have freedom in his or her economic and political pursuits. It stresses that the
interests of the individual should take precedence over the interests of the state.
- Democracy and totalitarianism are at different ends of a political dimension.
Democracy refers to a political system in which government is by the people,
exercised either directly or through elected representatives. Totalitarianism is a form
of government in which one person or political party exercises absolute control over
all spheres of human life and prohibits opposing political parties.
- The pure form of Democracy is based on a belief that citizens should be directly
involved in decision making. Most modern democratic states practice Representative
Democracy, where citizens periodically elect individuals to represent them. These
then form a government, whose function is to make decisions on behalf of the
electorate.
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- In a Totalitarian country, all the constitutional guarantees on which representative
democracies are built are denied to the citizens. Four major forms of totalitarian exist
in the world today:
• Communist Totalitarianism - simply communism (as explained above).
• Theocratic Totalitarianism - where political power is monopolised by a party,
group, or individual that governs according to religious principles.
• Tribal Totalitarianism - when a political party that represents the interest of a
particular tribe monopolises power.
• Right-wing Totalitarianism - permits some individual economic freedom but
restricts individual political freedom, frequently on the grounds that it would lead to the
rise of communism.
- There are three broad types of economic systems - a market economy, a command
economy and a mixed economy:
• Market Economy: all productive activities are privately owned, as opposed to being
owned by the state. In countries where individual goals are given primacy over
collective goals, we are more likely to find market-based economic systems.
• Command Economy - the government plans the goods and services that a country
produces, the quantity in which they are produced, and the prices at which they are
sold.
• Mixed Economy - can be found between market and command economies. In a mid
economy, certain sectors of the economy are left to private ownership and free market
mechanisms, while other sectors have significant state ownership and government
planning.
- The Legal System of a country refers to the rules, or laws, that regulative behaviour
along with the processes by which the laws are enforced and through which redress
fro grievances is obtained. This is of immense importance to international business. A
country's law regulate business practice, define the manner in which business
transactions are to be executed, and set down the rights and obligations of those
involved in business transactions.
- There are three main types of legal systems/traditions in use around the world:
common law, civil law and theocratic law.
- A Common Law System is based on tradition, precedent, and custom. This law is
case based.
- A Civil Law System is based on a detailed set of law organised into codes. This
tends to be less adversarial than a common law system because the judges rely on
detailed legal codes rather than interpretation.
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- A Theocratic Law System is one in which the law is based on religious teachings.
Islamic law is the most widely practiced theocratic legal system in the modern world.
- The differences between common law and civil law systems can be illustrated by the
approach of each to contract law. A Contract is a document that specifies the
conditions under which an exchange is to occur and details the rights and obligations
of the parties involved. Contract Law is the body of law that governs contract
enforcement. The parties to an agreement normally resort to contract law when one
party feels the other has violated either the letter or the spirit of an agreement.
- When contract disputes arise in international trade, there is always the question of
which country's laws to apply. To resolve this issue, a number of countries, including
the United States, have ratified the United Nations Convention on Contracts for
the International Sale of Goods (CISG). This establishes a uniform set of rules
governing certain aspects of the making and performance of everyday commercial
contracts between sellers and buyers who have their places of business in different
nations.
- In a legal sense, the term property refers to a resource over which an individual or
business holds a legal title, that is, a resource that it owns. Property Rights refer to
the legal rights over the use to which a resource is put and over the use made of any
income that may be derived from that resource.
- In terms of violating property rights, Private Action refers to theft, piracy, blackmail,
and the like by private individuals or groups. Public Action to violate property right
occurs when public officials, such as politicians and government bureaucrats, extort
income, resources, or the property itself from property holders.
- The Foreign Corrupt Practices Act (FCPA) makes it illegal to bribe in a foreign
government official to obtain or maintain business over which that foreign official has
authority, and it requires all publicly traded companies to keep detailed records that
would reveal whether a violation of the act has occurred.
- Intellectual Property refers to property that is the product of intellectual activity, such
as computer software, a screenplay, a songs, etc. Patents, copyrights, and
trademarks establish ownership rights over intellectual property. A Patent grants the
inventor of a new product or process exclusive rights for a defined period to the
manufacture, use, or sale of that invention. Copyrights are the exclusive legal rights
of authors, composers, playwrights, artists, and publishers to publish and disperse
their work as they see fit. Trademarks are designs and names, officially registered, by
which merchants or manufacturers designate and differentiate their products.
- The protection of intellectual property rights differs greatly from country to country.
Members of the World Intellectual Property Organization and signatures of the
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Paris Convention for the Protection of Industrial Property aim to protect
intellectual property.
- Product Safety Laws set certain safety standards to which a product must adhere.
Product Liability involves holding a firm and its officers responsible when a product
causes injury, death, or damage. It can be much greater if a product does not conform
to required safety standards.
Chapter 3: National Differences in Economic Development
- Different countries have dramatically different levels of economic development. One
common measure of economic development is a country's Gross National Income
(GNI) per head of population. GNI is regarded as a yardstick for the economy activity
of a country; it measures the total annual income received by residents of a nation.
- To account for differences in the cost of living, one can adjust GNI per capita by
purchasing power. Referred to as Purchasing Power Parity (PPP) adjustment, it
allows a more direct comparison of living standards in different countries.
- The GNI and PPP data give a static picture of development. They tell us, for example,
that China is much poorer than the United States, but they do not tell us if China is
closing the gap. To assess this, we have to look at the economic growth rates
achieved countries. To do so, we look at the Gross Domestic Product (GDP).
- The Nobel Prize-winning economist Amartya Sen has argued that development
should be assessed less by material output measures such as GNI per capita and
more by the capabilities and opportunities that people enjoy. According to her,
development should be seen as a process of expanding the real freedoms that people
experience.
- The Human Development Index (HDI) measures the quality of human life in different
nations. The HDI is based on three measures: life expectancy at births; educational
attainment; and whether average incomes are sufficient to meet the basic needs of life
in a country.
- There is substantial agreement among economists that innovation and entrepreneurial
activity are the engines of long-run economic growth. Those who make this argument
define Innovation broadly to include not just new products but also new processes,
new organisations, new management practices, and new strategies. Innovation is also
seen as the product of entrepreneurial activity. Often, Entrepreneurs first
commercialise innovative new products and processes, and entrepreneurial activity
provides much of the dynamism in an economy.
30
- The rate of economic progress in a country seems to depend on the extent to which
that country has a well-functioning market economy in which property rights are
protected.
- While a country's political and economic systems are the big engine driving its rate of
economic development, other factors are also important. One that has received
attention is geography. By virtue of favourable geography, certain societies are more
likely to engage in trade than others and thus more likely to be open to and develop
market-based systems, which in turn promotes faster growth.
- Many countries are now in a state of transition. There is a market shift away from
totalitarian governments and command or mixed economic systems and toward
democratic political institutions and free market economic systems.
- The shift toward a market-based economic system often entails a number of steps:
deregulation, privatisation, and creation of a legal system to safeguard property rights.
- Deregulation involves removing legal restrictions to the free play of markets, the
establishment of private enterprises, and the manner in which private enterprises
operate.
- Privitization transfers the ownership of state property into the hand of private
individuals, frequently by the sale of state assets through an auction.
- Without a legal system that protects property rights, and without the machinery to
enforce that system, the incentive to engage in economic activity can be reduced
substantially by private and public entities that expropriate the profits generate by the
efforts of private-sector entrepreneurs.
- First-mover Advantages are the advantages that accrue to early entrants into a
market. Whereas, the Late-mover Disadvantages are the handicaps that late
entrants might suffer.
- The risks of doing business in a country are determined by political, economic, and
legal risks. Political Risks include the likelihood that political forces will cause drastic
changes in a country's business environment that adversely affect the profit and other
goals of a business enterprise. Economic Risks include the likelihood that economic
mismanagement will cause drastic changes in a country's business environment that
hurt the profit and other goals of a particular business enterprise. A Legal Risk can be
defined as the likelihood that a trading partner will opportunistically break a contract or
expropriate property rights.
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- To summarise a countries' overall attractiveness can be examined as follows:
