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Gbe unit 4
The document discusses various strategies and concepts related to international business. It covers: 1. The value chain framework which categorizes a firm's activities into primary and support activities. 2. Different strategies firms can take when expanding globally including international, multi-domestic, global, and transnational strategies. 3. Factors firms consider when making location decisions including trade barriers, transportation costs, and political/economic risks. 4. Various foreign market entry modes such as exporting, contractual agreements like licensing and franchising, and equity-based entries like joint ventures. So in summary, the document provides an overview of strategic frameworks, concepts, and considerations for firms operating internationally across different value chain
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Gbe unit 4
- 1. Strategy and structureof International Business Course: MBA Subject: GLOBAL BUSINESS ENVIRONMENT Unit: 4
- 3. The Firm asa 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 asa 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 ofStrategy • 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 GlobalExpansion • 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.
- 8. caution • When makinglocation 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 TwoConflicting Concepts (Pressures) Overseas • Reduce costs. • Be responsive to local needs.
- 11. Cost Reduction • Desireto 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 • Differentconsumer tastes and preferences. • Different infrastructure and practice. • Differences in distribution channels. • Government demands.
- 13. McDonalds • McDonald’s overseasexperience. • Detailed planning • Export of management skills. • Foreign partners. • Adaptation/Adopting ideas.
- 14. Strategic Choice • Fourbasic strategies: – International strategy. – Multidomestic strategy. – Global strategy. – Transnational strategy.
- 15. International Strategy • Gowhere 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 • Maximizelocal 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 • Bestuse 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 • Corecompetencies 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 andDisadvantages 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 andDisadvantages 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 andPressures for Local Responsiveness Facing Caterpillar CaterpillarCaterpillar TractorTractor High Cost pressures Low Low High Pressures for local responsiveness
- 22. Which Foreign marketentry mode?
- 23. EXPORTING • The commercial activityof selling and shipping goods to a foreign country • The most common overseas entry approach for small firms
- 24. EXPORTING • Exporting canbe 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 Internetis 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 • Contractualagreements 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 arrangementwhereby 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 isa 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 • Aproduct 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 manufacturingis 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 • Amanagement 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 • Managementcontracts 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 • Cooperativeagreements 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 • Firmsenter 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- JOINTVENTURES • A JV entails establishing a firm that is jointly owned by two or more otherwise independent firms.
- 36. JOINT VENTURE • FourCharacteristics 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, andLogistics
- 39. Introduction • In today’sglobal 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, andLogistics 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, andLogistics • 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, andLogistics • 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, andLogistics 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, andLogistics • 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 • Firmsshould 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 • Thetype 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. Theflexibility 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 • Twoproduct 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 ofForeign 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 ofForeign 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 ofMake • 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 ofMake 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 ofMake 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 ofBuy • 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 ofBuy 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 ofBuy 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 benefitsof 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 & Gamblein 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 • Identifyingdistinct 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 • Culturaldifferences. • Economic differences. • Product and technical standards.
- 65. Cultural Differences • Mostimportant - 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 • Consumerbehavior 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 TechnicalStandards • 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 • Threedifferent 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 • Effectivenessof 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 • Pricediscrimination: – 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 ofR&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 MarketingMix 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 toIntegrate 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 • IntegratingR&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 INTERNATIONALBUSINESS
- 77. How different isGlobal 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 Staffingpolicy 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 andManagement 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 Nationaldifferences 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 InternationalBusiness • For Detail refer Unit 3
- 84.
Editor's Notes
- #30 Turnkey project is exporting the process technology to other country . It is most common in pharmaceutical, petroleum refining and material refining industries.
- #45 Internet Extra: The World Factbook offers very detailed guides on countries and is a great starting place to explore the relative merits of different countries as investment destinations. Create a fictitious product and market. Then go to the site {https://www.cia.gov/cia/publications/factbook/index.html}. Click on the countries you are interested in exploring. Then identify various relevant factors such as government or transportation. Develop a ranking system to help you identify the best location to produce your product.
- #47 Management Focus: Philips in China Summary This feature describes Philips NV’s operations in China. Philips, the Dutch consumer electronics, lighting, semiconductor, and medical equipment conglomerate, has been operating factories in China since 1985. By the mid 2000s, the company had invested more than $2.5 billion in China and operated 25 factories there. Initially, Philips believed that it would sell a large portion of its output to the local Chinese market. However, the company quickly discovered that the low wages that make China such an attractive production location also meant that the market for its products was smaller than anticipated. Philips’ solution was to export most of its output to the United States and elsewhere. Discussion of the feature can revolve around the following questions: Suggested Discussion Questions 1. What makes China such an attractive production location for Philips? Are there other locations that share the same characteristics? Discussion Points: Several factors make China an attractive production location for Phillips. Perhaps the most important factor is the country’s cheap wages. In addition, the Chinese workforce is well educated, the economy is strong, and many of the company’s suppliers are doing business there. Most students will argue that at least at the moment, China is the only country that offers these particular qualities. While other countries like Mexico and India also have low cost workforces, they do not have the industrial base that is present in China. 2. Philips wants to eventually turn China into a global supply base from which its products will be exported around the world. Consider the advantages and disadvantages of this strategy. Discussion Points: Students should recognize that using China as a global supply base from which to serve the world offers several advantages to Phillips. By having a single production location, the company can capitalize on costs savings that come from economies of scale as well as the low wages in China. However, if economic, political, or other types of problems arise in the country, Phillips could be in serious trouble if it has no alternate locations to fill production gaps. Teaching Tip: Students can explore the company in more depth by going to {http://www.philips.com/global/index.page}. Lecture Note: To extend the discussion of this feature, consider {http://www.businessweek.com/globalbiz/content/sep2007/gb20070910_101622.htm?chan=search}. Video Note: In recent years, many companies have turned to China as a location for low cost production. However, in the light news of various tainted products produced being in China, some managers are questioning that strategy. The iGlobe Probe Sheds Light on Working Conditions in China explores working conditions in China and the potential for production problems.
- #54 Management Focus: Hewlett Packard in Singapore Summary This feature explores the strategic decision making involved in establishing Hewlett Packard’s Singapore plant. The company initially used the plant as a low cost location to manufacture electronic components. Later, entire products were produced in Singapore. Still later, the Singapore plant was involved not only in production but also product design. Today, the plant is an important part of Hewlett Packard’s global network and is responsible for manufacturing and also product development and design. The following questions can provide the basis for the discussion of this feature: Suggested Discussion Questions 1) What factors were important in Hewlett Packard’s initial decision to open a plant in Singapore? How did these factors contribute to the decision to increase responsibilities at the Singapore plant? Discussion Points: Hewlett-Packard initially selected Singapore as a production location because the country offered a lower cost, well-educated workforce that spoke English. In addition, the country was economically stable, and had a good infrastructure. The lower cost, well-educated workforce enabled Hewlett-Packard to reduce its manufacturing and product development costs when the company decided to assign the responsibility for redesigning its handheld calculator to its Singapore facility. The success of this assignment was such that the company has continued to ask the facility to redesign other products. 2) Today, the Singapore plant is considered to be a “lead plant” for Hewlett Packard. How can the company help the plant continue to be a key component in Hewlett Packard’s global network? Discussion Points: Many students will suggest that communication will be central to ensuring that the Singapore facility remains a lead plant for Hewlett-Packard. Already, the company has made the commitment to ensuring the Singapore facility is on the same page as the headquarters location by transferring engineers from Singapore to the United States, and back. Students will probably suggest that continuing to establish cross-border relationships and teams will be important as the company goes forward. Teaching Tip: To further explore Hewlett-Packard’s international operations, go to {http://www.hp.com/}. Lecture Note: To extend the discussion of this feature, consider {http://www.businessweek.com/technology/content/jun2008/tc2008068_225711.htm?chan=search }.