Global Business Environment

1. Strategy and structure of International
Business
Course: MBA
Subject: GLOBAL BUSINESS ENVIRONMENT
Unit: 4

3. The Firm as a Value Chain
• Primary Activities:
– Those activities having to do with creating, marketing
and delivering the product to customers and
providing support and after-sales service.
• Support Activities:
– Provide inputs that allow primary activities to occur.
• An Efficient Infrastructure:
– helps create value and reduce the cost of creating
value.

4. The Firm as a Value Chain
Organizational infrastructure
Information systems
Human resources
Research and development
Materials management
Manufacturing Marketing
Primary activities
Support
activities
The Firm as a Value Chain

5. The Role of Strategy
• Strategy:
– Actions managers take to attain the goals of the
firm.
– Need to identify and take action that lowers the
cost of value creation and/or differentiates the
firm’s product through superior design, quality,
service, or functionality.

6. Profiting from Global Expansion
• International firms can:
– Earn a greater return from distinctive
skills or core competencies.
– Realize location economies by dispersing value
creation activities to locations where they can be
performed most efficiently.
– Realize greater experience curve economies, which
reduces the cost of value creation.

7. Parts
Parts
Parts
Assembly
Advertising Design
Sales
Location Economies
Pontiac LeMans

8. caution
• When making location decisions:
– Consider trade barriers and transportation
costs.
– Assess political and economic
risks.

9. Experience Curve Economies
• Learning Effects:
– Labor productivity increases over time as individuals
learn the most efficient ways to perform particular tasks.
• Economies of Scale:
– Reductions in unit cost achieved by producing a large
volume of a product.
• Strategic Significance:
– Moving down the experience curve allows a firm to
reduce its cost of creating value.

10. Firms Face Two Conflicting
Concepts (Pressures) Overseas
• Reduce costs.
• Be responsive to local
needs.

11. Cost Reduction
• Desire to reduce costs by:
– Mass production
– Product standardization.
– Optimal location production.
• Hard to do with commodity-type products.
– products serving universal needs.
• Also hard where competition is in low cost
producing location.
• Finally, int’l competition creates price pressures.
$

12. Local Responsiveness
• Different consumer tastes and
preferences.
• Different infrastructure and practice.
• Differences in distribution channels.
• Government demands.

13. McDonalds
• McDonald’s overseas experience.
• Detailed planning
• Export of management skills.
• Foreign partners.
• Adaptation/Adopting ideas.

14. Strategic Choice
• Four basic strategies:
– International strategy.
– Multidomestic strategy.
– Global strategy.
– Transnational strategy.

15. International Strategy
• Go where locals don’t have your skills.
• Little adaptation. Products developed at home
(centralization).
• Manufacturing and marketing in each location.
• Makes sense where low skills, competition,
and costs exist.

16. Multi-domestic Strategy
• Maximize local responsiveness.
– Customize the product and marketing strategy
to national demands.
• Skill and product transfer.
• Transfer all value-creation activities
• Good for high local responsiveness and low
cost reduction pressures.

17. Global Strategy
• Best use of the experience curve and
location economies.
• This is the low cost strategy.
• Utilize product standardization.
• Not good where local responsiveness
demand is high.

18. Transnational Strategy
• Core competencies can develop in any of the
firm’s worldwide operations.
• Flow of skills and product offerings occurs
throughout the firm - not only from home firm
to foreign subsidiary (global learning).
• Makes sense where there is pressure for both
cost reduction and local responsiveness.

19. The Advantages and Disadvantages of
the
Four Strategies
Strategy Advantages Disadvantages
Global Exploit experience curve
effects
Exploit location
economies
Lack of local
responsiveness
International
Transfer distinctive
competencies to
Foreign Markets
Lack of
local responsiveness
Inability to realize
location economies
Failure to exploit
experience curve
effects

20. The Advantages and Disadvantages of the Four
Strategies
Strategy Advantages Disadvantages
Multi-domestic Customize product offerings
and marketing in accordance
with local responsiveness
Inability to realize location
economies
Failure to exploit
experience curve effects
Failure to transfer
distinctive competencies
to foreign markets
Transnational Exploit experience curve
effects
Exploit location economies
Customize product offerings
and marketing in accordance
with local responsiveness
Reap benefits of global learning
Difficult to implement due
to organizational
problems

21. Cost Pressures and Pressures for Local
Responsiveness Facing Caterpillar
CaterpillarCaterpillar
TractorTractor
High
Cost
pressures
Low
Low High
Pressures for local responsiveness

22. Which Foreign market entry mode?

23. EXPORTING
• The commercial
activity of selling and
shipping goods to a
foreign country
• The most common
overseas entry
approach for small
firms

24. EXPORTING
• Exporting can be either
– direct or indirect
– In direct exporting the
company sells to a
customer in another
country
– In contrast, indirect
exporting usually means
that the company sells to
a buyer (importer or
distributor) in the home
country who in turn exports
the product

25. EXPORTING
• The Internet is becoming
increasingly important as a
foreign market entry method
• Initially, Internet marketing
focused on domestic sales,
however, a surprisingly large
number of companies started
receiving orders from
customers in other countries,
resulting in the concept of:
– international Internet
marketing (IIM).

26. CONTRACTUAL AGREEMENTS
• Contractual agreements are long-term, non-
equity associations between a company and
another in a foreign market
• Approaches:
– Licensing
– Franchising
– Contract manufacturing
– Management contracting
– Turnkey projects

27. LICENSING
• An arrangement whereby a licensor grants the
rights to intangible property to another entity
for a specified period and in return, the
licensor receives a royalty fee from the
licensee.
• Offers know-how, shares technology, and
shares brand name with licensee; licensee
pays royalties; lower-risk entry mode; permits
access to markets

28. FRANCHISING
• Franchising is a specialized
form of licensing in which
the franchisor not only
sells intangible property to
the franchisee, but also
insists that the franchisee
agree to abide by strict
rules as to how it does
business
• Longer-term commitments

29. TURNKEY PROJECTS
• A product or service which
can be implemented or
utilized with no additional
work required by the buyer
(just by 'turning the key')".
• The contractor agrees to
handle every detail of the
project for a foreign client,
including the training of
operating personnel

30. Contract manufacturing
• Contract
manufacturing is a
process that establish
a working agreement
between two
companies.
• As part of the
agreement, one
company will custom
produce parts or
other materials on
behalf of their client.

31. Management contracting
• A management contract
is an arrangement under
which operational
control of an enterprise
is vested by contract in a
separate enterprise
which performs the
necessary managerial
functions in return for a
fee.

32. Management contracting
• Management contracts involve not just selling
a method of doing things (as with franchising
or licensing) but involves actually doing them.
• A management contract can involve a wide
range of functions, such as technical operation
of a production facility, management of
personnel, accounting, marketing services and
training.

33. STRATEGIC ALLIANCE
• Cooperative agreements between potential or
actual competitors
• A strategic international alliance (SIA) is a
business relationship established by two or more
companies to cooperate out of mutual need and
to share risk in achieving a common objective
• SIAs are sought as a way to shore up weaknesses
and increase competitive strengths.
• Licensing, Joint venture, consortia etc

34. Strategic alliances
• Firms enter SIAs for several reasons:
– Opportunities for rapid expansion into new
markets
– Access to new technology
– More efficient production and innovation
– Reduced marketing costs
– Strategic competitive moves
– Access to additional sources of products and
capital

35. Strategic alliances- JOINT VENTURES
• A JV entails
establishing a firm that
is jointly owned by two
or more otherwise
independent firms.

36. JOINT VENTURE
• Four Characteristics define joint ventures:
– JVs are established, separate, legal entities
– The acknowledged intent by the partners to share
in the management of the JV
– There are partnerships between legally
incorporated entities such as companies,
chartered organizations, or governments, and not
between individuals
– Equity positions are held by each of the partners

37. Strategic alliances- Consortia
• Consortia are similar to joint ventures and could be
classified as such except for two unique
characteristics:
– They typically involve a large number of participants
– They frequently operate in a country or market in which
none of the participants is currently active.
• Consortia are developed
to pool financial and
managerial resources and
to lessen risks.

38. Global Production,
Outsourcing, and Logistics

39. Introduction
• In today’s global economy, firms must decide
– where to locate productive activities
– what the long-term strategic role of foreign production
sites should be
– whether to own foreign production activities or outsource
those activities
– how to manage a globally dispersed supply chain and what
the role of Internet-based information technology should
be in the management of global logistics
– whether to manage global logistics or outsource

40. Strategy, Production, and Logistics
Question: How can production and logistics be conducted
internationally to
1. lower the costs of value creation
2. add value by better serving customer needs?
• Production refers to activities involved in creating a product
• Logistics refers to the procurement and physical
transmission of material through the supply chain, from
suppliers to customers

41. Strategy, Production, and Logistics
• The strategic objectives of the production and
logistics function are
– to lower costs
– to increase product quality by eliminating
defective products from both the supply chain and
the manufacturing process
• These two objectives are interrelated

42. Strategy, Production, and Logistics
• Better quality control helps firms reduce costs
because
– time is not wasted manufacturing poor quality
products that cannot be sold
– re-work and scrap costs are lower
– warranty costs and the time used too fix defective
products are lower

43. Strategy, Production, and Logistics
Question: What management tool is used to increase the
reliability of product offerings?
• The Six Sigma quality improvement program aims to reduce
defects, boost productivity, eliminate waste, and cut costs
throughout a company
• Six Sigma is a direct descendant of total quality management
(TQM)
• In addition, some countries have also promoted specific
quality guidelines like the European Union’s ISO 9000
standards

44. Where to Produce
Question: Where should production activities be
located?
• When deciding where to locate production facilities,
firms must consider
– country factors
– technological factors
– product factors

45. Strategy, Production, and Logistics
• Two other objectives are important for
international companies
1. production and logistics functions must be able to
accommodate demands for local responsiveness
2. production and logistics must be able to respond
quickly to shifts in customer demand

46. Country Factors
• Firms should locate manufacturing activities where
economic, political, and cultural conditions, including
relative factor costs, are most conducive to the
performance of that activity
• Regulations affecting FDI and trade can significantly
affect the appropriateness of specific countries, as
can expectations about future exchange rate
changes

47. Technological Factors
• The type of technology a firm uses in its manufacturing can
affect location decisions
• Firms should consider
1. The level of fixed costs involved
• If the fixed costs of setting up a manufacturing plant are very
high, it could make sense for the firm to serve the world
market from a single location or from a very few locations
2. The minimum efficient scale of the technology
• The larger the minimum efficient scale (the level of output at
which most plant-level scale economies are exhausted) of a
plant, the more likely centralized production makes sense

48. Technological Factors
3. The flexibility of the technology
• The term flexible manufacturing technology or lean
production covers a range of manufacturing technologies that
are designed to:
– reduce set up times for complex equipment
– increase the utilization of individual machines through
better scheduling
– improve quality control at all stages of the manufacturing
process

49. Product Factors
• Two product factors impact location decisions
1. The product's value-to-weight ratio
– If the value-to-weight ratio is high, it is practical to
produce the product in a single location and export it
– If the value-to-weight ratio is low, there is greater
pressure to manufacture the product in multiple locations
across the world
2. Whether the product serves universal needs
– The need for local responsiveness is reduced for products
that do, which increases the attractiveness of
concentrated manufacturing

50. Locating Production Facilities
• There are two basic strategies for locating
manufacturing facilities
1. Concentrating them in the optimal location and
serving the world market from there
2. Decentralizing them in various regional or
national locations that are close to major
markets

51. The Strategic Role
of Foreign Factories
Question: Does the rationale for establishing a foreign
production facility change?
• The strategic role of foreign factories and the strategic
advantage of a particular location can change over time
• A factory initially established to make a standard product to
serve a local market, or to take advantage of low cost inputs,
can evolve into a facility with advanced design capabilities
• As governmental regulations change and/or countries
upgrade their factors of production the strategic advantage of
a particular location can change

52. The Strategic Role
of Foreign Factories
• As the strategic role of a factory is upgraded and a firm
develops centers of excellence in different locations
worldwide, it supports the development of a transnational
strategy
• A focus of a transnational strategy 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)
• So, managers should promote the idea that factories are
potential centers of excellence with strategic importance to
the firm

53. Outsourcing Production:
Make-or-Buy Decisions
Question: Should an international business make the
component parts to go into their final product or
outsource them?
• Make-or-buy decisions (decisions about whether to
perform a certain value creation activity in-house or
outsource it to another firm) are important to a
firm’s manufacturing strategy

54. The Advantages of Make
• Making component parts in-house (vertical
integration) is attractive because it
1. is associated with lower costs
2. facilitates investments in highly specialized
assets
3. protects proprietary technology
4. facilitates the scheduling of adjacent processes

55. The Advantages of Make
1. Lowering Costs
• A firm should consider manufacturing a part in-
house if the firm is more efficient at that a
production activity than any other enterprise
2. Facilitating Specialized Investments
• In-house production makes sense when substantial
investments in specialized assets (assets whose
value is contingent upon a particular relationship
persisting) are required to manufacture a
component

56. The Advantages of Make
3. Protecting Proprietary Technology
• When proprietary technology is involved, in-house
production can make sense to maintain control
over the technology
4. Improving Scheduling
• In some cases, in-house production can make
planning, coordination, and scheduling of adjacent
processes easier

57. The Advantages of Buy
• Buying component parts from independent
suppliers (outsourcing) is attractive because it
1. gives the firm greater flexibility
2. helps drive down the firm's cost structure
3. helps the firm to capture orders from
international customers

58. The Advantages of Buy
1. Strategic Flexibility
• Outsourcing provides the firm with the flexibility to
switching orders between suppliers as
circumstances dictate
• This ability is particularly important when changes
in exchange rates and trade barriers the
attractiveness of supply sources

59. The Advantages of Buy
2. Lower Costs
• Firms that outsource can avoid
– the challenges involved with coordinating and
controlling additional subunits
– the lack of incentive associated with internal suppliers
– the difficulties with setting appropriate transfer prices
3. Offsets
• Outsourcing can help firms capture more orders from
suppliers’ countries

60. Trade-Offs
• The benefits of manufacturing components in-house
are greatest when
– highly specialized assets are involved
– when vertical integration is necessary for
protecting proprietary technology
– when the firm is more efficient than external
suppliers at performing a particular activity

61. Procter & Gamble in Japan

62. Globalization and Markets
• “Globalization seems to be the exception
rather than the rule in many consumer
goods markets and industrial markets;
and,
• Procter and Gamble …still customizes the
final product offering and market strategy
to the conditions that pertain in individual
national markets.” - Charles W. Hill -

63. Market Segmentation
• Identifying distinct groups of consumers
whose purchasing behavior differs
from others in important ways.
• Segmented markets:
– Sex, age, income, race, education.
– Social-cultural factors.
– Psychological factors.

64. Product Attributes
• Cultural differences.
• Economic differences.
• Product and technical
standards.

65. Cultural Differences
• Most important - the impact of tradition.
• Impact is greatest in foodstuffs and beverages.
• Scent preferences differ from country to country.
• Some tastes and preferences becoming
international:
• Coffee (Japan).
• American-style frozen dinners
(Europe).

66. Economic Differences
• Consumer behavior is influenced by
economic development.
– Consumers in highly developed countries tend
to have extra performance attributes in their
products.
– Consumers in less developed countries tend
not to demand these extra performance
attributes.
• Cars: no air-conditioning, power steering, power
windows, radios and cassette players.
• Product reliability is more important.

67. Product and Technical Standards
• Government standards can prevent the
introduction of global products.
• Different technical standards impede global
markets, as well.
– Come from distinctive decisions made long
ago.
• Different television signal frequencies.

68. Distribution Strategy
• Three different distribution systems:
– Retail consideration.
– Channel length.
– Channel exclusivity.
• Choice of channel:
– Cost/benefit of each alternative
vary from country to country.
Concentrated
Fragmented
Short
Long Channel
No Outsiders

69. Communications Strategy
• Effectiveness of international
communications can be impacted by:
– Cultural barriers.
• Need to develop cross-cultural literacy.
– Source effects.
• Emphasize/De-emphasize foreign origin.
– Noise levels.
• Developed countries - high.
• Less developed countries - low.

70. Global Advertising
• Standardized:
– Significant economic advantages.
– Scarce creative talent.
– Many global brand names.
• Non-standardized:
– Messages in one country may fail in another.
– Advertising regulations can be a restriction.

71. Pricing Strategy
• Price discrimination:
– Must keep national markets separate.
– Different price elasticities
• Arbitrage:Charging different prices in different
countries for same product.
– Doesn’t always work.
• Ford in Germany and Belgium
– Sometimes it does.
• Ford in UK and Belgium
Using
Arbitrage

72. The Location of R&D
• New product development is greater
where:
– More money spent on R&D.
– Underlying demand is strong.
– Consumers are affluent.
– Competition is intense.

73. Configuring the Marketing Mix
Culture
Econom
y
Competition
Standards
Distribution
Gov’t Regs
Product
Attributes
Distribution
Strategy
Com
m
unications
Strategy
PricingStrategy
Differences
Here
Requires
Variation
Here

74. The Need to Integrate R&D,
Marketing and Production
• High failure rate ratio between new products
development and profit goals.
• Reasons for failure:
– Limited product demand.
– Failure to adequately commercialize product.
– Inability to manufacture product cost-effectively.

75. Cross-Functional Integration
• Integrating R&D, production and marketing
ensures:
– Project development is driven by customer
need.
– New products are designed for ease of
manufacture.
– Development costs are kept in check.
– Time to market is minimized.
• Use cross-functional development teams.

76. GLOBAL H.R.M IN
INTERNATIONAL BUSINESS

77. How different is Global HRM?
Several key factors make Global HRM different
from domestic management:
i. Different labour markets
ii. Mobility problems: legal, economic, cultural
barriers
iii. Different management styles
iv. Varied compensation practices
v. Labour laws.

78. I. Staffing Policy
Staffing policy is concerned with the selection of
employees for particular jobs.
i. Selecting individuals who have the skill to do
a particular job.
ii. Tool for developing and promoting the
desired corporate culture (norms & value
system) of the firm.

79. II. Training and Management
Development
 After selection, the next step is training the manager to do
the specific job.
 MDP is a broader concept, it is intended to develop a
manager’s skills over her career in the firm, e.g., sending
managers on various foreign postings over years to build her
cross cultural sensitivity and experience.
 To enhance management and leadership skills of executives.
 MDP have a strategic purpose, and helps reinforce desired
culture of the firm by creating an informal network.

80. III. Performance Appraisal
 These are the systems used to evaluate the performance of managers
against some criteria, that the firm judges to be important for the
implementation of strategy and attainment of competitive advantage.
 Important elements of control system.
 2 groups evaluate the performance of Expatriates, - Host country
managers and home country managers.
 Biasness by cultural frame of reference and expectations
 Unfair evaluation
 Due to proximity, onsite manager should evaluate soft variables of
expatriate’s performance.
 Consultation of home country manager to balance out.

81. IV. Compensation
 National differences in compensation
 Payments according to global standards or
country specific standards.
 Issues in compensation practices:
i. How compensation should be adjusted to
reflect national differences in economic
circumstances and practices?
ii. How should the expatriate managers be paid?

82. Expatriate Pay
Acc. To “Balance Sheet Approach”, it equalizes
purchasing power across countries so employees can
enjoy the same living standard in their foreign
posting, as the enjoyed at home.
 It also provides financial incentives to offset
qualitative differences between assignment
locations.

83. Financial Management in
International Business
• For Detail refer Unit 3

84. Sources:-
http://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&sqi=2
&ved=0CBwQFjAA&url=http%3A%2F%2Fwww.unm.edu%2F~rauldg%2Fmgt728%2FChap12.ppt&ei=FZKz
http://www.slideshare.net/geeta_123/foreign-market-entry-strategies
http://www.google.co.in/url?
sa=t&rct=j&q=&esrc=s&source=web&cd=3&cad=rja&uact=8&ved=0CCgQFjAC&url=http%3A%2F
%2Fwww.drluisortiz.com%2FPPT
%2FChap014GBT.ppt&ei=gKazVMO8M5GRuATg6oGICQ&usg=AFQjCNHaZHZVuj1Kcj8mpFONt
83qA3maBQ&sig2=9_ebDG0k_wXEFkaeb4ghpQ&bvm=bv.83339334,d.c2E
http://www.google.co.in/url?
sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CBwQFjAA&url=http%3A%2F
%2Fwww.unm.edu%2F~rauldg
%2Fmgt728%2FChap17.ppt&ei=HqmzVP28BoyiuQTk0oDIDQ&usg=AFQjCNGunnuFxJjij96bzpja
o9bmbQZ35g&sig2=_l0LpcnE9kLoCyiBh_FVrA&bvm=bv.83339334,d.c2E
http://www.slideshare.net/jatinmaims/global-human-resource-
management