--- Content provided by FirstRanker.com ---
International Management ? An Introduction
--- Content provided by FirstRanker.com ---
Objectives:After studying this lesson you should be able to:
To appreciate the need of Multinational Corporation
--- Content provided by FirstRanker.com ---
To take note of trends which will change the landscape of businessTo know the process of overseas expansion by international companies
--- Content provided by FirstRanker.com ---
Structure1.1 Introduction
1.2 Evolution of Multinational Corporation
--- Content provided by FirstRanker.com ---
1.3 Trends effecting Corporate World:
1.4 The Process of Overseas Expansion
--- Content provided by FirstRanker.com ---
1.5 Summary1.6 Glossary
1.7 Self Assessment Questions
--- Content provided by FirstRanker.com ---
1.8 Further Readings
--- Content provided by FirstRanker.com ---
1.1 Introduction:Globalization is the single most significant development changing business
dynamics in this century. The reality of global markets and global competition is
--- Content provided by FirstRanker.com ---
pervasive. The forces that are driving the world toward greater globalization are
greater than the forces that restrain this move. With the improvements in
--- Content provided by FirstRanker.com ---
transportation and communication technologies there is a sea change in the waythe companies are run. International trade leads to international marketing,
which in turn leads to growth in international business. The phenomenal growth
--- Content provided by FirstRanker.com ---
in international business brought about number of new concepts in internationalmanagement. The old theories of international trade focused upon natural
resources and crude measures of factor endowments. Newer models focus upon
--- Content provided by FirstRanker.com ---
the actual sources of competitive advantage of companies in industries.
Ultimately, competitive advantage is based upon understanding what customers
--- Content provided by FirstRanker.com ---
need and want and on knowing how to deliver these needs and wants with acompetitive advantage. The formula that guides this task is V=B/P: value =
benefits divided by price. The greater the benefits and the lower the price, the
--- Content provided by FirstRanker.com ---
greater the value. The task of the global company is to deliver value to
customers located in global markets. The ability of corporations of all sizes to
--- Content provided by FirstRanker.com ---
use globally available factors of production is an important factor ininternational competitiveness. A single Barbie doll is made in more than ten
countries- designed in the United States, with parts and clothing from Japan,
--- Content provided by FirstRanker.com ---
Korea, Italy, and Taiwan, assembled in Mexico and sold in different countries.
1.2 Evolution of Multinational Corporation:
--- Content provided by FirstRanker.com ---
The dynamics of international business created a great need for the evolution ofMultinational corporation. The multinational corporation is a company engaged
in producing and selling goods or services in more than one country. It normally
--- Content provided by FirstRanker.com ---
consists of a parent company located in the home country and few or more
foreign subsidiaries. Some MNCs have more than 100 foreign subsidiaries
--- Content provided by FirstRanker.com ---
scattered around the world. It is the globally coordinated allocation of resourcesby a single centralized management that differentiates the multinational
enterprise from other firms engaged in international business.
--- Content provided by FirstRanker.com ---
MNCs make decisions about market-entry strategy; ownership of foreign
operations; and production, marketing, and financial activities with an eye to
--- Content provided by FirstRanker.com ---
what is best for the corporation as a whole. The true multinational corporationemphasizes group performance rather than the performance of its individual
parts. There are different types of multinational companies, such as;
--- Content provided by FirstRanker.com ---
a) Raw-Material Seekers: Raw-material seekers were the earliestmultinationals and their aim was to exploit the raw materials that could be
found overseas. The modern-day counterparts of these firms, the
--- Content provided by FirstRanker.com ---
multinational oil and mining companies such as British Petroleum, Exxon
Mobil, International Nickel, etc.,
--- Content provided by FirstRanker.com ---
b) Market Seekers: The market seeker is the archetype of the modernmultinational firm that goes overseas to produce and sell in foreign markets.
Examples include IBM, Toyota, Unilever, Coca-cola.
--- Content provided by FirstRanker.com ---
c) Cost Minimizers: Cost minimizers are a fairly recent category of firms
doing business internationally. These firms seek out and invest in lower-cost
--- Content provided by FirstRanker.com ---
production sites overseas (for example, Hong Kong, Malaysia, Taiwan, andIndia) to remain cost competitive both at home and abroad.
--- Content provided by FirstRanker.com ---
MNCs have to follow the changes in macroeconomic factors, environmental and
social issues, and business and industry developments. These factors will all
--- Content provided by FirstRanker.com ---
profoundly shape the corporate landscape in the coming years. The followingsection deals with these trends.
1.3 Trends effecting Corporate World:
--- Content provided by FirstRanker.com ---
Those who say that business success is all about execution are wrong. The right
--- Content provided by FirstRanker.com ---
product markets, technology, and geography are critical components of long-term economic performance. Bad industries usually trump good management,
however: in sectors such as banking, telecommunications, and technology,
--- Content provided by FirstRanker.com ---
almost two-thirds of the organic growth of listed Western companies can be
attributed to being in the right markets and geographies. Companies that ride the
--- Content provided by FirstRanker.com ---
currents succeed; those that swim against them usually struggle. Identifyingthese currents and developing strategies to navigate them are vital to corporate
success. What are the currents that will make the world of 2015 a very different
--- Content provided by FirstRanker.com ---
place to do business from the world of today? Predicting short-term changes orshocks is often a fool's errand. But forecasting long-term directional change is
possible by identifying trends through an analysis of deep history rather than of
--- Content provided by FirstRanker.com ---
the shallow past. Even the Internet took more than 30 years to become an
overnight phenomenon. Let us take note of the ten trends that will change the
--- Content provided by FirstRanker.com ---
business landscape. We have divided them under three broad categories:a) Macroeconomic trends;
b) Social and environmental trends;
--- Content provided by FirstRanker.com ---
c) Business and industry trends;
1.3.1. Macroeconomic trends: First, we have identified three macroeconomic
--- Content provided by FirstRanker.com ---
trends that will deeply transform the underlying global economy.1. New Centers of Economic Activity: Centers of economic activity will shift
profoundly, not just globally, but also regionally. As a consequence of economic
--- Content provided by FirstRanker.com ---
liberalization, technological advances, capital market developments, and
demographic shifts, the world has embarked on a massive realignment of
--- Content provided by FirstRanker.com ---
economic activity. Although there will undoubtedly be shocks and setbacks, thisrealignment will persist. Today, Asia (excluding Japan) accounts for 13 percent
of world GDP, while Western Europe accounts for more than 30 percent. Within
--- Content provided by FirstRanker.com ---
the next 20 years the two will nearly converge. Some industries and functions--
manufacturing and IT services, for example--will shift even more dramatically.
--- Content provided by FirstRanker.com ---
The story is not simply the march to Asia. Shifts within regions are assignificant as those occurring across regions. The United States will still account
for the largest share of absolute economic growth in the next two decades.
--- Content provided by FirstRanker.com ---
2. Role of Public sector: Public-sector activities will balloon, making
productivity gains essential. The unprecedented aging of populations across the
--- Content provided by FirstRanker.com ---
developed world will call for new levels of efficiency and creativity from thepublic sector. Without clear productivity gains, the pension and health care
burden will drive taxes to stifling proportions. Nor is the problem confined to
--- Content provided by FirstRanker.com ---
the developed economies. Many emerging-market governments will have todecide what level of social services to provide to citizens who increasingly
demand state-provided protections such as health care and retirement security.
--- Content provided by FirstRanker.com ---
The adoption of proven private-sector approaches will likely become pervasive
in the provision of social services in both the developed and the developing
--- Content provided by FirstRanker.com ---
worlds.3. Changing global marketplace: The consumer landscape will change and
expand significantly. Almost a billion new consumers will enter the global
--- Content provided by FirstRanker.com ---
marketplace in the next decade as economic growth in emerging markets pushes
them beyond the threshold level of $5,000 in annual household income--a point
--- Content provided by FirstRanker.com ---
when people generally begin to spend on discretionary goods. From now to2015, the consumer's spending power in emerging economies will increase from
$4 trillion to more than $9 trillion--nearly the current spending power of
--- Content provided by FirstRanker.com ---
Western Europe. Shifts within consumer segments in developed economies will
also be profound. Populations are not only aging, of course, but changing in
--- Content provided by FirstRanker.com ---
other ways too: for example, by 2015 the Hispanic population in the UnitedStates will have spending power equivalent to that of 60 percent of all Chinese
consumers. And consumers, wherever they live, will increasingly have
--- Content provided by FirstRanker.com ---
information about and access to the same products and brands.
1.3.2. Social and environmental trends:
--- Content provided by FirstRanker.com ---
Next, we have identified four social and environmental trends. Although theyare less predictable and their impact on the business world is less certain, they
will fundamentally change how we live and work.
--- Content provided by FirstRanker.com ---
4. Communication Technology: Technological connectivity will transform the
way people live and interact. The technology revolution has been just that. Yet
--- Content provided by FirstRanker.com ---
we are at the early, not mature, stage of this revolution. Individuals, publicsectors, and businesses are learning how to make the best use of IT in designing
processes and in developing and accessing knowledge. New developments in
--- Content provided by FirstRanker.com ---
fields such as biotechnology, laser technology, and nanotechnology are movingwell beyond the realm of products and services. More transformational than
technology itself is the shift in behavior that it enables. We work not just
--- Content provided by FirstRanker.com ---
globally but also instantaneously. We are forming communities and
relationships in new ways (indeed, 12 percent of US newlyweds in 2005 met
--- Content provided by FirstRanker.com ---
online). More than two billion people now use cell phones. We send nine trillione-mails a year. We do a billion Google searches a day, more than half in
languages other than English. For perhaps the first time in history, geography is
--- Content provided by FirstRanker.com ---
not the primary constraint on the limits of social and economic organization.
5. The battlefield for talent will shift. Ongoing shifts in labor and talent will be
--- Content provided by FirstRanker.com ---
far more profound than the widely observed migration of jobs to low-wagecountries. The shift to knowledge-intensive industries highlights the importance
and scarcity of well-trained talent. The increasing integration of global labor
--- Content provided by FirstRanker.com ---
markets, however, is opening up vast new talent sources. The 33 million
university-educated young professionals in developing countries is more than
--- Content provided by FirstRanker.com ---
double the number in developed ones. For many companies and governments,global labor and talent strategies will become as important as global sourcing
and manufacturing strategies.
--- Content provided by FirstRanker.com ---
6. Corporate Accountability: The role and behavior of big business will come
under increasingly sharp scrutiny. As businesses expand their global reach, and
--- Content provided by FirstRanker.com ---
as the economic demands on the environment intensify, the level of societalsuspicion about big business is likely to increase. The tenets of current global
business ideology--for example, shareholder value, free trade, intellectual-
--- Content provided by FirstRanker.com ---
property rights, and profit repatriation--are not understood, let alone accepted,
in many parts of the world. Scandals and environmental mishaps seem as
--- Content provided by FirstRanker.com ---
inevitable as the likelihood that these incidents will be subsequently blown outof proportion, thereby fueling resentment and creating a political and regulatory
backlash. This trend is not just of the past 5 years but of the past 250 years. The
--- Content provided by FirstRanker.com ---
increasing pace and extent of global business, and the emergence of truly giantglobal corporations, will exacerbate the pressures over the next 10 years.
Business, particularly big business, will never be loved. It can, however, be
--- Content provided by FirstRanker.com ---
more appreciated. Business leaders need to argue and demonstrate more
forcefully the intellectual, social, and economic case for business in society and
--- Content provided by FirstRanker.com ---
the massive contributions business makes to social welfare.7. Natural Resources: Demand for natural resources will grow, as will the
strain on the environment. As economic growth accelerates--particularly in
--- Content provided by FirstRanker.com ---
emerging markets--we are using natural resources at unprecedented rates. Oil
demand is projected to grow by 50 percent in the next two decades, and without
--- Content provided by FirstRanker.com ---
large new discoveries or radical innovations supply is unlikely to keep up. Weare seeing similar surges in demand across a broad range of commodities. In
China, for example, demand for copper, steel, and aluminum has nearly tripled
--- Content provided by FirstRanker.com ---
in the past decade. The world's resources are increasingly constrained. Water
shortages will be the key constraint to growth in many countries. And one of our
--- Content provided by FirstRanker.com ---
scarcest natural resources--the atmosphere--will require dramatic shifts inhuman behavior to keep it from being depleted further. Innovation in
technology, regulation, and the use of resources will be central to creating a
--- Content provided by FirstRanker.com ---
world that can both drive robust economic growth and sustain environmental
demands.
--- Content provided by FirstRanker.com ---
1.3.3. Business and industry trendsFinally, we have identified a third set of trends: business and industry trends,
which are driving change at the company level.
--- Content provided by FirstRanker.com ---
8. New global industry structures are emerging. In response to changing
market regulation and the advent of new technologies, nontraditional business
--- Content provided by FirstRanker.com ---
models are flourishing, often coexisting in the same market and sector space. Inmany industries, a barbell-like structure is appearing, with a few giants on top, a
narrow middle, and then a flourish of smaller, fast-moving players on the
--- Content provided by FirstRanker.com ---
bottom. Similarly, corporate borders are becoming blurrier as interlinked"ecosystems" of suppliers, producers, and customers emerge. Even basic
structural assumptions are being upended: for example, the emergence of robust
--- Content provided by FirstRanker.com ---
private equity financing is changing corporate ownership, life cycles, and
performance expectations. Winning companies, using efficiencies gained by
--- Content provided by FirstRanker.com ---
new structural possibilities, will capitalize on these transformations.9. Management will go from art to science. Bigger, more complex companies
demand new tools to run and manage them. Indeed, improved technology and
--- Content provided by FirstRanker.com ---
statistical-control tools have given rise to new management approaches that
make even mega-institutions viable. Long gone is the day of the "gut instinct"
--- Content provided by FirstRanker.com ---
management style. Today's business leaders are adopting algorithmic decision-making techniques and using highly sophisticated software to run their
organizations. Scientific management is moving from a skill that creates
--- Content provided by FirstRanker.com ---
competitive advantage to an ante that gives companies the right to play the
game.
--- Content provided by FirstRanker.com ---
10. Ubiquitous access to information is changing the economics ofknowledge. Knowledge is increasingly available and, at the same time,
increasingly specialized. The most obvious manifestation of this trend is the rise
--- Content provided by FirstRanker.com ---
of search engines (such as Google), which make an almost infinite amount of
information available instantaneously. Access to knowledge has become almost
--- Content provided by FirstRanker.com ---
universal. Yet the transformation is much more profound than simply broadaccess. New models of knowledge production, access, distribution, and
ownership are emerging. We are seeing the rise of open-source approaches to
--- Content provided by FirstRanker.com ---
knowledge development as communities, not individuals, become responsible
for innovations. Knowledge production itself is growing: worldwide patent
--- Content provided by FirstRanker.com ---
applications, for example, rose from 1990 to 2004 at a rate of 20 percentannually. Companies will need to learn how to leverage this new knowledge
universe--or risk drowning in a flood of too much information.
--- Content provided by FirstRanker.com ---
1.5. THE PROCESS OF OVERSEAS EXPANSIONStudies of corporate expansion overseas indicate that firms become
multinational by degree, with foreign direct investment being a late step in a
--- Content provided by FirstRanker.com ---
process that begins with exports. For most companies, the globalization process
does not occur through conscious design, at least in the early stages. It is the
--- Content provided by FirstRanker.com ---
unplanned result of a series of corporate responses to a variety of threats andopportunities appearing at random abroad. From a broader perspective,
however, the globalization of firms is the inevitable outcome of the competitive
--- Content provided by FirstRanker.com ---
strivings of members of oligopolistic industries. Each member tries to both
create and exploit monopolistic product and factor advantages internationally
--- Content provided by FirstRanker.com ---
while simultaneously attempting to reduce the competitive threats posed byother industry members.
To meet these challenges, companies gradually increase their commitment to
--- Content provided by FirstRanker.com ---
international business, developing strategies that are progressively more
elaborate and sophisticated. The sequence normally involves exporting, setting
--- Content provided by FirstRanker.com ---
up a foreign sales subsidiary, securing licensing agreements, and eventuallyestablishing foreign production. This evolutionary approach to overseas
expansion is a risk-minimizing response to operating in a highly uncertain
--- Content provided by FirstRanker.com ---
foreign environment. By internationalizing in phases, a firm can gradually
move from a relatively low risk-low return, export-oriented strategy to a higher
--- Content provided by FirstRanker.com ---
risk-higher return strategy emphasizing international production. In effect, thefirm is investing in information, learning enough at each stage to significantly
improve its chances for success at the next stage. Exhibit 1.1 depicts the usual
--- Content provided by FirstRanker.com ---
sequence of overseas expansion.
1.5.1.Exporting
--- Content provided by FirstRanker.com ---
Firms facing highly uncertain demand abroad will typically begin by exportingto a foreign market. The advantages of exporting are significant: Capital
requirements and start-up costs are minimal, risk is low, and profits are
--- Content provided by FirstRanker.com ---
immediate. Furthermore, this initial step provides the opportunity to learn aboutpresent and future supply and demand conditions, competition, channels of
distribution, payment conventions, financial
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
Exhibit 1.1
--- Content provided by FirstRanker.com ---
Typical Foreign Expansion Sequence--- Content provided by FirstRanker.com ---
Licensing
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
ExportingSales
Service
--- Content provided by FirstRanker.com ---
Distribution
Production
--- Content provided by FirstRanker.com ---
SubsidiaryFacilities
System
--- Content provided by FirstRanker.com ---
Overseas
--- Content provided by FirstRanker.com ---
institutions, and financial techniques. Building on prior successes, companies
then expand their marketing organizations abroad, switching from using export
--- Content provided by FirstRanker.com ---
agents and other intermediaries to dealing directly with foreign agents and
distributors. As increased communication with customers reduces uncertainty,
--- Content provided by FirstRanker.com ---
the firm might set up its own sales subsidiary and new service facilities, such asa warehouse, with these marketing activities culminating in the control of its
own distribution system.
--- Content provided by FirstRanker.com ---
1.5.2.Overseas Production
There is a major drawback to exporting an inability to realize the full sales
--- Content provided by FirstRanker.com ---
potential of a product. By manufacturing abroad, a company can more easilykeep abreast of market developments, adapt its products and production
schedules to changing local tastes and conditions, fill orders faster, and provide
--- Content provided by FirstRanker.com ---
more comprehensive after-sales service. Many companies also set up R & D
facilities with their foreign operations; they aim to pick the best brains, wherever
they are. The results help companies to keep track of competition and to design
--- Content provided by FirstRanker.com ---
new products. For example, the Japanese subsidiary of Loctite, a U.S. maker of
engineering adhesives, came up with several new applications for sealants in the
--- Content provided by FirstRanker.com ---
electronics industry.Setting up local production facilities also shows a greater commitment to the
local market, which typically brings added sales, and provides increased
--- Content provided by FirstRanker.com ---
assurance of supply stability. Certainty of supply is particularly important for
firms that produce intermediate goods for sale to other companies. A case in
--- Content provided by FirstRanker.com ---
point is SKF, the Swedish ball bearing manufacturer. SKF was forced tomanufacture in the United States to guarantee that its product, a crucial
component in military equipment, would be available when needed. The
--- Content provided by FirstRanker.com ---
Pentagon would not permit its suppliers of military hardware to be dependent on
imported ball bearings, because imports could be halted in wartime and are
--- Content provided by FirstRanker.com ---
always subject to the vagaries of ocean shipping.Thus, most firms selling in foreign markets eventually find themselves forced to
manufacture abroad. Foreign production covers a wide spectrum of activities
--- Content provided by FirstRanker.com ---
from repairing, packaging, and finishing to processing, assembly, and full
manufacture. Firms typically begin with the simpler stages ? for example,
--- Content provided by FirstRanker.com ---
packaging and assembly ? and progressively integrate their manufacturingactivities backward ? for example, production of components and
subassemblies.
--- Content provided by FirstRanker.com ---
Because the optimal entry strategy can change over time, a firm must
continually monitor and evaluate the factors that bear on the effectiveness of its
--- Content provided by FirstRanker.com ---
current entry strategy. New information and market perceptions change the risk-return trade-off for a given entry strategy, leading to a sequence of preferred
entry modes, each adapted on the basis of prior experience to sustain and
--- Content provided by FirstRanker.com ---
strengthen the firm`s market position over time.
Associated with a firm`s decision to produce abroad is the question of whether
to create its own affiliates or acquire going concerns. A major advantage of an
--- Content provided by FirstRanker.com ---
acquisition is the capacity to effect a speedy transfer overseas of highly
developed but underutilized parent skills, such as a novel production technology.
--- Content provided by FirstRanker.com ---
Often the local firm also provides a ready-made marketing network. This isespecially important if the parent is a late entrant to the market. Many firms
have used the acquisition approach to gain knowledge about the local market or
--- Content provided by FirstRanker.com ---
a particular technology. The disadvantage, of course, is the cost of buying an
ongoing company. In general, the larger and more experienced a firm becomes
--- Content provided by FirstRanker.com ---
the less frequently it uses acquisitions to expand overseas. Smaller andrelatively less experienced firms often turn to acquisitions.
Regardless of its preferences, a firm interested in expanding overseas may not
--- Content provided by FirstRanker.com ---
have the option of acquiring a local operation. Michelin, the French
manufacturer of radical tires, set up its own facilities in the United States
--- Content provided by FirstRanker.com ---
because its tires are built on specially designed equipment; taking over anexisting operation would have been out of the question. Similarly, companies
moving into developing countries often find they are forced to begin from the
--- Content provided by FirstRanker.com ---
ground up because their line of business has no local counterpart.
1.5.3.Licensing
--- Content provided by FirstRanker.com ---
An alternative, and at times a precursor, to setting up production facilitiesabroad is to license a local firm to manufacture the company`s products in return
for royalties and other forms of payment. The principal advantages of licensing
--- Content provided by FirstRanker.com ---
are the minimal investment required, faster market-entry time, and fewer
financial and legal risks involved. But the corresponding cash flow is also
--- Content provided by FirstRanker.com ---
relatively low, and there may be problems in maintaining product qualitystandards. The licensor may also face difficulty controlling exports by the
foreign licensee, particularly when, as in Japan, the host government refuses to
--- Content provided by FirstRanker.com ---
sanction restrictive clauses on sales to foreign markets. Thus, a licensing
agreement may lead to the establishment of a competitor in third-country
markets, with a consequent loss of future revenues to the licensing firm. The
--- Content provided by FirstRanker.com ---
foreign licensee may also become such a strong competitor that the licensing
firm will have difficulty entering the market when the agreement expires,
--- Content provided by FirstRanker.com ---
leading to a further loss of potential profits. For some firms, licensing alone isthe preferred method of penetrating foreign markets. Other firms with
diversified innovative product lines follow a strategy of trading technology for
--- Content provided by FirstRanker.com ---
both equity in foreign joint ventures and royalty payments.
1.6 Summary
--- Content provided by FirstRanker.com ---
The remarkable growth of the global economy over the past 50 years hasoccurred because the balance of driving and restraining forces has shifted
significantly in favor of the driving forces. It is useful to identify these forces to
--- Content provided by FirstRanker.com ---
gain an insight into the foundations of the international economy and
international markets as they exist today and as they can be expected to develop
--- Content provided by FirstRanker.com ---
in the decade ahead. Macroeconomic factors, environmental and social issues,and business and industry developments will all profoundly shape the corporate
landscape in the coming years. Traditional trade theories such as comparative
--- Content provided by FirstRanker.com ---
advantage, absolute advantage based on factor endowment models have give
way for new competitive advantage models. There is a remarkable growth in the
--- Content provided by FirstRanker.com ---
number of MNCs in recent past. To manage these international companiesrequire understanding of newer concepts of international management.
1.7 Glossary
--- Content provided by FirstRanker.com ---
Corporation: A corporation is a legal person which, while being composed of
natural persons, exists completely separately from them. This separation gives
--- Content provided by FirstRanker.com ---
the corporation unique powers which other legal entities lack. The extent andscope of its status and capacity is determined by the law of the place of
incorporation. Investors and entrepreneurs often form joint stock companies and
--- Content provided by FirstRanker.com ---
incorporate them to facilitate a business; as this form of business is now
extremely prevalent, the term corporation is often used to refer specifically to
such business corporations. Corporations may also be formed for political,
--- Content provided by FirstRanker.com ---
religious or charitable purposes (not-for-profit corporations), or as government
or quasi-governmental entities (public corporations).
--- Content provided by FirstRanker.com ---
Globalization: is an umbrella term for a complex series of economic, social,technological and political changes that have been identified since the 1980s.
These changes and processes are seen as increasing interdependence and
--- Content provided by FirstRanker.com ---
interaction between people and companies in disparate locations. Globalization
is the source of much debate and controversy about its nature and its merits.
--- Content provided by FirstRanker.com ---
Those over its nature question globalization's pervasiveness and extent, andwhether it is a process that occurs from 'above' (through government and state
actions) or 'below' (through civil society actions). Those over its merits consider
--- Content provided by FirstRanker.com ---
whether globalization helps improve quality of life, or destroy it; they also
question the role and existence of local culture in a 'globalizing world'. Such
--- Content provided by FirstRanker.com ---
debates have been fierce, with its supporters seeing globalization as an economicsaviour for the world's poor and as helping improve quality of life; its opponents
consider it to be oppressing the developing world, destroying local culture and
--- Content provided by FirstRanker.com ---
contributing to global warming.
1.8 Self Assessment Questions
--- Content provided by FirstRanker.com ---
1. Define Multinational Corporation. Explain the need for emergence ofMNCs.
2. What are the major trends that are changing the landscape of business?
--- Content provided by FirstRanker.com ---
3. Explain the normal process of overseas expansion of a business
organization.
--- Content provided by FirstRanker.com ---
1.9. Further Readings:1. Manab Adhikary, Global Business Management In an International
Economic Environment (2001), Macmillan India Limited, New Delhi.
--- Content provided by FirstRanker.com ---
2. Sak Onkvisist., John J.Shaw., International Marketing Analysis and Strategy(1997), Prentice-Hall of India, New Delhi.
3. Warren J.Keegan, Global Marketing Management (1995), Prentice-Hall of
--- Content provided by FirstRanker.com ---
India, New Delhi.
4. Alan C Shapiro, Multinational Financial Management (2002), Prentice-Hall
--- Content provided by FirstRanker.com ---
of India, New Delhi.5. Anant R.Negandhi, International Management (1987) Prentice-Hall of India,
New Delhi.
--- Content provided by FirstRanker.com ---
Lesson 2:
--- Content provided by FirstRanker.com ---
International Management ? Trends
--- Content provided by FirstRanker.com ---
Objectives:
--- Content provided by FirstRanker.com ---
After studying this lesson you should be able to:To understand the concepts of international management
To understand the composition of Global Fortune 500 corporations
To know the trends in international business
--- Content provided by FirstRanker.com ---
To understand how companies from rapidly developing economies emergeas strong global contenders
Structure
--- Content provided by FirstRanker.com ---
1.9 Introduction
1.10 Composition of Global Fortune 500 Companies
--- Content provided by FirstRanker.com ---
1.11 Emergence of Global Companies From Rapidly Developing Economies:1.12 Summary
1.13 Glossary
--- Content provided by FirstRanker.com ---
1.14 Self Assessment Questions
1.7 Further Readings
--- Content provided by FirstRanker.com ---
1.1 Introduction:
--- Content provided by FirstRanker.com ---
A multinational corporation (MNC) or multinational enterprise (MNE) ortransnational corporation (TNC) or multinational organization (MNO) is a
corporation /enterprise that manages production establishments or delivers
--- Content provided by FirstRanker.com ---
services in at least two countries. Multinational corporations (MNC) are often
divided into three broad groups:
--- Content provided by FirstRanker.com ---
Horizontally integrated multinational corporations manage productionestablishments located in different countries to produce the same or similar
products.
--- Content provided by FirstRanker.com ---
Vertically integrated multinational corporations manage production
establishment in certain country/countries to produce products that serve as
--- Content provided by FirstRanker.com ---
input to its production establishments in other country/countries.Diversified multinational corporations manage production establishments
located in different countries that are neither horizontally nor vertically
--- Content provided by FirstRanker.com ---
integrated.
Very large multinationals have budgets that exceed those of many countries. Of
--- Content provided by FirstRanker.com ---
the 100 largest economies in the world, 51 are multinational corporations. Theycan have a powerful influence in international relations, given their large
economic influence in politicians` representative districts, as well as their
--- Content provided by FirstRanker.com ---
extensive financial resources available for public relations and political
lobbying. Multinationals have played an important role in globalization. Given
--- Content provided by FirstRanker.com ---
their international reach and mobility, prospective countries, and sometimesregions within countries, must compete with each other to have MNCs locate
their facilities (and subsequent tax revenue, employment, and economic activity)
--- Content provided by FirstRanker.com ---
within. To compete, countries and regional political districts offer incentives to
MNCs such as tax breaks, pledges of governmental assistance or improved
--- Content provided by FirstRanker.com ---
infrastructure, or lax environmental and labour standards. This process ofbecoming more attractive to foreign investment can be characterized as a race to
the bottom. There is a dispute as to which was the first MNC. Some have argued
--- Content provided by FirstRanker.com ---
that the Knights Templar, founded in 1118, became a multinational when itstumbled into banking in 1135. However, others claim that the Dutch East India
Company (Dutch: Vereenigde Oostindische Compagnie) was, which first
--- Content provided by FirstRanker.com ---
appeared in 1602. In the following section an attempt has been made to
understand the composition of Global Fortune 500 companies.
--- Content provided by FirstRanker.com ---
1.2 Composition of Global Fortune 500 Companies:Fortune magazine every year compiles data about world`s leading companies in
terms of revenues, profits, biggest employers, biggest increase in revenues,
--- Content provided by FirstRanker.com ---
Fastest -growing profits, etc. The analysis is comprehensive in nature. Table 2.1
gives the top hundred companies in terms of revenues in the Fortune 500 Global
--- Content provided by FirstRanker.com ---
List of 2006. One look at the largest corporations in the world and immediateconclusion one can jumps out is natural resources are driving the global
economy as never before. Five of the top ten companies on Fortune's 2006
--- Content provided by FirstRanker.com ---
Global 500 are oil companies, one more than last year. Another four are
automakers, whose customers pump plenty of gasoline. Big Oil's domination is
--- Content provided by FirstRanker.com ---
the product of a decade of industry consolidation combined with sky-high crudeprices and a surge in global demand. Exxon's 2005 revenues jumped 26%, and
its profits hit $36 billion - the biggest payday in the history of the Global 500.
--- Content provided by FirstRanker.com ---
Oil companies aren't the only ones prospering; 2005 was a banner year for most
Global 500 companies. It took $13.7 billion in revenue just to make this year's
--- Content provided by FirstRanker.com ---
list - up from $12.4 billion last year. And profits for the 500 companies jumped30%. Total revenues for the Global 500 in 2006 add up to $18.9 trillion, a third
of the world's GDP. Companies of the old economy - commodities and oil -
--- Content provided by FirstRanker.com ---
racked up the biggest gains. The mining and crude-oil sector, which excludes
major oil companies that have large refining segments, enjoyed a 77% increase
--- Content provided by FirstRanker.com ---
in profits. Add refiners to that group, and it accounted for $2.8 trillion incombined revenue, up 27% over the previous year.
Emerging markets jump on
--- Content provided by FirstRanker.com ---
China's banking boom points to that country's fasten-your-seatbelts growthtrajectory. Four new Chinese companies - China Railway Engineering, Shanghai
Automotive Industry Corp., China Railway Construction, and China State
--- Content provided by FirstRanker.com ---
Construction - made it onto the Global 500 this year, more additions than any
other country, bringing China's total to 20.
--- Content provided by FirstRanker.com ---
Table 2.1--- Content provided by FirstRanker.com ---
Top Hundred Fortune Global 500 Companies
Revenues
--- Content provided by FirstRanker.com ---
ProfitsRank Company
($ millions) ($ millions)
--- Content provided by FirstRanker.com ---
1
Exxon Mobil
--- Content provided by FirstRanker.com ---
339,938.036,130.0
2
--- Content provided by FirstRanker.com ---
Wal-Mart Stores
315,654.0
--- Content provided by FirstRanker.com ---
11,231.03
Royal Dutch Shell
--- Content provided by FirstRanker.com ---
306,731.0
25,311.0
--- Content provided by FirstRanker.com ---
4BP
267,600.0
--- Content provided by FirstRanker.com ---
22,341.0
5
--- Content provided by FirstRanker.com ---
General Motors192,604.0
-10,567.0
--- Content provided by FirstRanker.com ---
6
Chevron
--- Content provided by FirstRanker.com ---
189,481.014,099.0
7
--- Content provided by FirstRanker.com ---
DaimlerChrysler
186,106.3
--- Content provided by FirstRanker.com ---
3,536.38
Toyota Motor
--- Content provided by FirstRanker.com ---
185,805.0
12,119.6
--- Content provided by FirstRanker.com ---
9Ford Motor
177,210.0
--- Content provided by FirstRanker.com ---
2,024.0
10
--- Content provided by FirstRanker.com ---
Conoco Phillips166,683.0
13,529.0
--- Content provided by FirstRanker.com ---
11
General Electric
--- Content provided by FirstRanker.com ---
157,153.016,353.0
12
--- Content provided by FirstRanker.com ---
Total
152,360.7
--- Content provided by FirstRanker.com ---
15,250.013
ING Group
--- Content provided by FirstRanker.com ---
138,235.3
8,958.9
--- Content provided by FirstRanker.com ---
14Citigroup
131,045.0
--- Content provided by FirstRanker.com ---
24,589.0
15
--- Content provided by FirstRanker.com ---
AXA129,839.2
5,186.5
--- Content provided by FirstRanker.com ---
16
Allianz
--- Content provided by FirstRanker.com ---
121,406.05,442.4
17
--- Content provided by FirstRanker.com ---
Volkswagen
118,376.6
--- Content provided by FirstRanker.com ---
1,391.718
Fortis
--- Content provided by FirstRanker.com ---
112,351.4
4,896.3
19
--- Content provided by FirstRanker.com ---
Cr?dit Agricole
110,764.6
--- Content provided by FirstRanker.com ---
7,434.320
American Intl. Group
--- Content provided by FirstRanker.com ---
108,905.0
10,477.0
--- Content provided by FirstRanker.com ---
21Assicurazioni Generali
101,403.8
--- Content provided by FirstRanker.com ---
2,384.0
22
--- Content provided by FirstRanker.com ---
Siemens100,098.7
2,854.9
--- Content provided by FirstRanker.com ---
23
Sinopec
--- Content provided by FirstRanker.com ---
98,784.92,668.4
24
--- Content provided by FirstRanker.com ---
Nippon Telegraph & Telephone
94,869.3
--- Content provided by FirstRanker.com ---
4,404.625
Carrefour
--- Content provided by FirstRanker.com ---
94,454.5
1,784.3
--- Content provided by FirstRanker.com ---
26HSBC Holdings
93,494.0
--- Content provided by FirstRanker.com ---
15,873.0
27
--- Content provided by FirstRanker.com ---
ENI92,603.3
10,919.7
--- Content provided by FirstRanker.com ---
28
Aviva
--- Content provided by FirstRanker.com ---
92,579.43,211.4
29
--- Content provided by FirstRanker.com ---
Intl. Business Machines
91,134.0
--- Content provided by FirstRanker.com ---
7,934.030
McKesson
--- Content provided by FirstRanker.com ---
88,050.0
751.0
--- Content provided by FirstRanker.com ---
31Honda Motor
87,510.7
--- Content provided by FirstRanker.com ---
5,273.2
32
--- Content provided by FirstRanker.com ---
State Grid86,984.3
1,073.5
--- Content provided by FirstRanker.com ---
33
Hewlett-Packard
--- Content provided by FirstRanker.com ---
86,696.02,398.0
34
--- Content provided by FirstRanker.com ---
BNP Paribas
85,687.2
--- Content provided by FirstRanker.com ---
7,271.535
PDVSA
--- Content provided by FirstRanker.com ---
85,618.0
4,661.0
--- Content provided by FirstRanker.com ---
36UBS
84,707.6
--- Content provided by FirstRanker.com ---
11,257.5
37
--- Content provided by FirstRanker.com ---
Bank of America Corp.83,980.0
16,465.0
--- Content provided by FirstRanker.com ---
38
Hitachi
--- Content provided by FirstRanker.com ---
83,596.3329.6
39
--- Content provided by FirstRanker.com ---
China National Petroleum
83,556.5
--- Content provided by FirstRanker.com ---
12,950.040
Pemex
--- Content provided by FirstRanker.com ---
83,381.7
-7,001.7
--- Content provided by FirstRanker.com ---
41Nissan Motor
83,273.8
--- Content provided by FirstRanker.com ---
4,575.6
42
--- Content provided by FirstRanker.com ---
Berkshire Hathaway81,663.0
8,528.0
--- Content provided by FirstRanker.com ---
43
Home Depot
--- Content provided by FirstRanker.com ---
81,511.05,838.0
44
--- Content provided by FirstRanker.com ---
Valero Energy
81,362.0
--- Content provided by FirstRanker.com ---
3,590.045
J.P. Morgan Chase & Co.
--- Content provided by FirstRanker.com ---
79,902.0
8,483.0
--- Content provided by FirstRanker.com ---
46Samsung Electronics
78,716.6
--- Content provided by FirstRanker.com ---
7,458.8
47
Matsushita Electric Industrial
--- Content provided by FirstRanker.com ---
78,557.7
1,363.8
--- Content provided by FirstRanker.com ---
48Deutsche Bank
76,227.6
--- Content provided by FirstRanker.com ---
4,385.0
49
--- Content provided by FirstRanker.com ---
HBOS75,798.8
5,870.4
--- Content provided by FirstRanker.com ---
50
Verizon Communications
--- Content provided by FirstRanker.com ---
75,111.97,397.0
51
--- Content provided by FirstRanker.com ---
Cardinal Health
74,915.1
--- Content provided by FirstRanker.com ---
1,050.752
Prudential
--- Content provided by FirstRanker.com ---
74,744.7
1,359.5
--- Content provided by FirstRanker.com ---
53Nestl?
74,658.6
--- Content provided by FirstRanker.com ---
6,415.5
54
--- Content provided by FirstRanker.com ---
Deutsche Telekom74,061.8
6,938.5
--- Content provided by FirstRanker.com ---
55
Dexia Group
--- Content provided by FirstRanker.com ---
72,814.32,532.3
55
--- Content provided by FirstRanker.com ---
Metro
72,814.3
--- Content provided by FirstRanker.com ---
659.857
Credit Suisse
--- Content provided by FirstRanker.com ---
72,193.5
4,694.3
--- Content provided by FirstRanker.com ---
58Royal Bank of Scotland
71,164.3
--- Content provided by FirstRanker.com ---
9,997.8
59
--- Content provided by FirstRanker.com ---
Tesco71,127.6
2,820.8
--- Content provided by FirstRanker.com ---
60
Peugeot
--- Content provided by FirstRanker.com ---
69,915.41,278.6
61
--- Content provided by FirstRanker.com ---
U.S. Postal Service
69,907.0
--- Content provided by FirstRanker.com ---
1,445.062
Altria Group
--- Content provided by FirstRanker.com ---
69,148.0
10,435.0
--- Content provided by FirstRanker.com ---
63Zurich Financial Services
67,186.0
--- Content provided by FirstRanker.com ---
3,214.0
64
--- Content provided by FirstRanker.com ---
E.ON66,313.2
9,203.7
--- Content provided by FirstRanker.com ---
65
Sony
--- Content provided by FirstRanker.com ---
66,025.61,091.8
66
--- Content provided by FirstRanker.com ---
Vodafone
65,314.2
--- Content provided by FirstRanker.com ---
-39,092.967
Soci?t? G?n?rale
--- Content provided by FirstRanker.com ---
64,441.9
5,524.4
--- Content provided by FirstRanker.com ---
68?lectricit? De France
63,434.1
--- Content provided by FirstRanker.com ---
4,028.4
69
--- Content provided by FirstRanker.com ---
Nippon Life Insurance61,158.3
1,812.5
--- Content provided by FirstRanker.com ---
70
Statoil
--- Content provided by FirstRanker.com ---
61,032.74,768.7
71
--- Content provided by FirstRanker.com ---
France T?l?com
60,932.9
--- Content provided by FirstRanker.com ---
7,093.872
LG
--- Content provided by FirstRanker.com ---
60,574.1
587.5
--- Content provided by FirstRanker.com ---
73Kroger
60,552.9
--- Content provided by FirstRanker.com ---
958.0
74
--- Content provided by FirstRanker.com ---
Munich Re Group60,255.7
3,318.9
--- Content provided by FirstRanker.com ---
75Deutsche Post
59,989.8
--- Content provided by FirstRanker.com ---
2,777.1
76
--- Content provided by FirstRanker.com ---
State Farm Insurance Cos59,223.9
3,241.8
--- Content provided by FirstRanker.com ---
77
Marathon Oil
--- Content provided by FirstRanker.com ---
58,958.03,032.0
78
--- Content provided by FirstRanker.com ---
BMW
57,973.1
--- Content provided by FirstRanker.com ---
2,782.179
Fiat
--- Content provided by FirstRanker.com ---
57,833.9
1,653.9
--- Content provided by FirstRanker.com ---
80Hyundai Motor
57,434.9
--- Content provided by FirstRanker.com ---
2,268.7
81
--- Content provided by FirstRanker.com ---
Procter & Gamble56,741.0
7,257.0
--- Content provided by FirstRanker.com ---
82
ABN AMRO Holding
--- Content provided by FirstRanker.com ---
56,614.95,444.9
83
--- Content provided by FirstRanker.com ---
Royal Ahold
56,427.3
--- Content provided by FirstRanker.com ---
165.384
Repsol YPF
--- Content provided by FirstRanker.com ---
56,423.6
3,876.8
--- Content provided by FirstRanker.com ---
85Legal & General Group
56,384.8
--- Content provided by FirstRanker.com ---
1,715.7
86
--- Content provided by FirstRanker.com ---
Petrobr?s56,324.0
10,344.0
--- Content provided by FirstRanker.com ---
87
Toshiba
--- Content provided by FirstRanker.com ---
56,028.0690.6
88
--- Content provided by FirstRanker.com ---
Dell
55,908.0
--- Content provided by FirstRanker.com ---
3,572.089
Lloyds TSB Group
--- Content provided by FirstRanker.com ---
55,407.0
4,530.9
--- Content provided by FirstRanker.com ---
90ThyssenKrupp
55,260.7
--- Content provided by FirstRanker.com ---
1,294.1
91
--- Content provided by FirstRanker.com ---
Boeing54,848.0
2,572.0
--- Content provided by FirstRanker.com ---
92
AmerisourceBergen
--- Content provided by FirstRanker.com ---
54,589.6264.6
93
--- Content provided by FirstRanker.com ---
Santander Central Hispano Group
53,848.8
--- Content provided by FirstRanker.com ---
7,728.994
BASF
--- Content provided by FirstRanker.com ---
53,113.3
3,736.0
--- Content provided by FirstRanker.com ---
95Costco Wholesale
52,935.2
--- Content provided by FirstRanker.com ---
1,063.1
96
--- Content provided by FirstRanker.com ---
Suez52,742.9
3,122.2
--- Content provided by FirstRanker.com ---
97
Target
--- Content provided by FirstRanker.com ---
52,620.02,408.0
98
--- Content provided by FirstRanker.com ---
Morgan Stanley
52,498.0
--- Content provided by FirstRanker.com ---
4,939.099
Robert Bosch
--- Content provided by FirstRanker.com ---
52,207.6
2,918.8
--- Content provided by FirstRanker.com ---
100Renault
51,365.1
--- Content provided by FirstRanker.com ---
4,183.7
--- Content provided by FirstRanker.com ---
Source: www.money.cnn.com, From the July 24, 2006 issueNote: Self-learners are advised to visit the website for complete list
--- Content provided by FirstRanker.com ---
Mexico added three companies: Am?rica Telecom and two that have been on thelist before, Carso Global Telecom and CEMEX. Producing cement from the
Persian Gulf to Central America, CEMEX acquired Britain's RMC Group last
--- Content provided by FirstRanker.com ---
year and posted a 60% gain in profits, to just over $2 billion. And Austria joined
the Global 500 for the first time with oil producer OMV hitting the list at No.
--- Content provided by FirstRanker.com ---
334.Out of companies in 50-odd industries representing 32 countries, a few other
shuffles warrant mention. Japan lost 11 companies, including Yamaha Motor
--- Content provided by FirstRanker.com ---
and Central Japan Railway. Heineken Holding fell off the list, as did American
companies OfficeMax, American Electric Power, and Texas Instruments.
--- Content provided by FirstRanker.com ---
Notable additions include U.S. homebuilder D.R. Horton and, at No. 500, Nike.And in a comeback, Apple Computer (No. 492) has returned to the Global 500
this year after a nine-year hiatus, with profits up 384%, to $1.3 billion. Whether
--- Content provided by FirstRanker.com ---
consumer goods companies like Apple maintain their momentum this year,
though, remains a question. The world's voracious appetite for energy is
--- Content provided by FirstRanker.com ---
threatening to ignite inflation around the globe. How ironic that the very factorsthat helped produce outsized profits in 2005 may be the ones that squeeze
growth in 2006
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
Table 2.2
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
Biggest Employers ? Top Companies500 revenues
2005 Number of
--- Content provided by FirstRanker.com ---
Rank
Company
--- Content provided by FirstRanker.com ---
rankEmployees
1
--- Content provided by FirstRanker.com ---
Wal-Mart Stores
2
--- Content provided by FirstRanker.com ---
1,800,0002
China National Petroleum
--- Content provided by FirstRanker.com ---
39
1,090,232
--- Content provided by FirstRanker.com ---
3State Grid
32
--- Content provided by FirstRanker.com ---
844,031
4
--- Content provided by FirstRanker.com ---
U.S. Postal Service61
803,000
--- Content provided by FirstRanker.com ---
5Sinopec
23
--- Content provided by FirstRanker.com ---
730,800
6
--- Content provided by FirstRanker.com ---
Deutsche Post75
502,545
--- Content provided by FirstRanker.com ---
7
Agricultural Bank of China
--- Content provided by FirstRanker.com ---
377478,895
8
--- Content provided by FirstRanker.com ---
UES of Russia
213
--- Content provided by FirstRanker.com ---
461,2009
Siemens
--- Content provided by FirstRanker.com ---
22
461,000
--- Content provided by FirstRanker.com ---
10McDonald's
318
--- Content provided by FirstRanker.com ---
447,000
--- Content provided by FirstRanker.com ---
Table 2.2 provides information about the ten largest employers in the Fortune500 Global list. Wal-Mart the biggest retailer in the world employs eighteen
lakh people. Next biggest employer is China Petroleum, which employs more
--- Content provided by FirstRanker.com ---
than a million people. Retailers, service organizations top the list. The
particulars given here are of direct employment and indirectly these
--- Content provided by FirstRanker.com ---
organizations are generating lot of employment.--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
Table 2.3
Top Cites
--- Content provided by FirstRanker.com ---
No. of
--- Content provided by FirstRanker.com ---
RanGlobal 500 revenues
City
--- Content provided by FirstRanker.com ---
Country
Global 500
--- Content provided by FirstRanker.com ---
k($ millions)
companies
--- Content provided by FirstRanker.com ---
1
Tokyo
--- Content provided by FirstRanker.com ---
Japan52
1,662,496
--- Content provided by FirstRanker.com ---
2
Paris
--- Content provided by FirstRanker.com ---
France27
1,188,819
--- Content provided by FirstRanker.com ---
3
New York U.S.
--- Content provided by FirstRanker.com ---
241,040,959
4
--- Content provided by FirstRanker.com ---
London
Britain
--- Content provided by FirstRanker.com ---
231,054,734
5
--- Content provided by FirstRanker.com ---
Beijing
China
--- Content provided by FirstRanker.com ---
15520,490
6
--- Content provided by FirstRanker.com ---
Seoul
South Korea
--- Content provided by FirstRanker.com ---
9344,894
7
--- Content provided by FirstRanker.com ---
Toronto
Canada
--- Content provided by FirstRanker.com ---
8154,836
8
--- Content provided by FirstRanker.com ---
Madrid
Spain
--- Content provided by FirstRanker.com ---
7232,714
8
--- Content provided by FirstRanker.com ---
Z?rich
Switzerland
--- Content provided by FirstRanker.com ---
7308,466
9
--- Content provided by FirstRanker.com ---
HoustonU.S.
6
--- Content provided by FirstRanker.com ---
326,700
9
--- Content provided by FirstRanker.com ---
OsakaJapan
6
--- Content provided by FirstRanker.com ---
180,588
9
--- Content provided by FirstRanker.com ---
MunichGermany
6
--- Content provided by FirstRanker.com ---
375,860
9
--- Content provided by FirstRanker.com ---
AtlantaU.S.
6
--- Content provided by FirstRanker.com ---
202,706
10 Rome
--- Content provided by FirstRanker.com ---
Italy5
210,303
--- Content provided by FirstRanker.com ---
10 D?sseldorf Germany
5
--- Content provided by FirstRanker.com ---
225,803Source: Fortune 500 Global, From the July 24, 2006 issue
Table 2.3 presents the list of top cities in the world, which are having
--- Content provided by FirstRanker.com ---
headquarters of most number of Fortune 500 companies. Tokyo from Japan
ranks top with 52 of Global 500 companies having head offices from that city.
--- Content provided by FirstRanker.com ---
Next place goes to Paris from France hosts 27 companies. Followed by NewYork and London. Which are hosting 24 and 23 companies. Majority of the
cities are from G7 nations (Group of seven nations which are industrially
--- Content provided by FirstRanker.com ---
developed). Only Beijing from emerging markets hosting 15 companies.
--- Content provided by FirstRanker.com ---
Table 2.4How the companies stack up
--- Content provided by FirstRanker.com ---
Country
--- Content provided by FirstRanker.com ---
No. of Fortune Global 500companies
--- Content provided by FirstRanker.com ---
US
170
--- Content provided by FirstRanker.com ---
Japan70
Britain & France (tied)
--- Content provided by FirstRanker.com ---
38
Germany
--- Content provided by FirstRanker.com ---
35China
20
--- Content provided by FirstRanker.com ---
Canada
14
--- Content provided by FirstRanker.com ---
South Korea12
Switzerland
--- Content provided by FirstRanker.com ---
12
India
6
--- Content provided by FirstRanker.com ---
Table 2.4 gives the information about number of companies and their country of
--- Content provided by FirstRanker.com ---
origin. US lead the pack with 170 companies originated from that country. Thisis about 34 per cent of the Global Fortune 500 companies. Japan is in the second
place with 70 global leading companies operates from that country. Britain and
--- Content provided by FirstRanker.com ---
France tied at the third spot. Five countries accounts more than three hundred
leading companies, shows how dominant they are in business world.
--- Content provided by FirstRanker.com ---
Table 2.5Most Profitable Global Companies
Rank
--- Content provided by FirstRanker.com ---
Company
2005 Profits
--- Content provided by FirstRanker.com ---
($ millions)1
Exxon Mobil
--- Content provided by FirstRanker.com ---
36130.0
2
--- Content provided by FirstRanker.com ---
Royal Dutch / Shell Group25311.0
3
--- Content provided by FirstRanker.com ---
Citi Group
24589.0
--- Content provided by FirstRanker.com ---
4BP
22341.0
--- Content provided by FirstRanker.com ---
5
Bank of America Corp.
--- Content provided by FirstRanker.com ---
16465.06
General Electric
--- Content provided by FirstRanker.com ---
16353.0
7
--- Content provided by FirstRanker.com ---
HSBC Holdings15873.0
8
--- Content provided by FirstRanker.com ---
Total
15250.0
--- Content provided by FirstRanker.com ---
9Gazprom
14865.2
--- Content provided by FirstRanker.com ---
10
Chevron
--- Content provided by FirstRanker.com ---
14099.0Table 2.5 gives the top ten profitable companies according to the 2005 profits.
--- Content provided by FirstRanker.com ---
Exxon is the leading company in Fortune 500 Global companies list both in
revenues and profits. As mentioned earlier Exxon`s 2005 revenues jumped 26%,
--- Content provided by FirstRanker.com ---
and its profits hit $36 billion. Royal Dutch/ Shell Group records profits over $25billion. Major oil companies records highest growth in terms of profits in the
2006 list.
--- Content provided by FirstRanker.com ---
Table 2.6Top 5 in Asia
Company
--- Content provided by FirstRanker.com ---
2005 Revenues
--- Content provided by FirstRanker.com ---
(($ millions)Toyota Motors
185805
--- Content provided by FirstRanker.com ---
Sinopec
98784
--- Content provided by FirstRanker.com ---
Nippon Telegraph & Telephone94869
Honda Motor
--- Content provided by FirstRanker.com ---
87510
State Grid
--- Content provided by FirstRanker.com ---
86984Table 2.6 presents the top five companies from Asia. Toyota Motors is the
--- Content provided by FirstRanker.com ---
leading company form Asia. This company also features in top ten companies in
the world. Asia is emerging as the fastest growing region in the world. Naturally
--- Content provided by FirstRanker.com ---
more and more Asian companies finds place in Fortune 500 list in the comingyears. China and India are having highest GDP growth rates and the countries
attracting the attention of leading MNCs of the world. With liberalized business
--- Content provided by FirstRanker.com ---
environment majority of the companies from these two countries finding place
in Fortune 500 list. China with 20 and India with 6 companies (SBI got entry in
--- Content provided by FirstRanker.com ---
2006 Fortune`s list) are fast becoming growth engines of the world.Table 2.7
Indian Companies in Global Fortune 500 List
--- Content provided by FirstRanker.com ---
Country
--- Content provided by FirstRanker.com ---
CompanyRank
Revenues
--- Content provided by FirstRanker.com ---
City
Rank
--- Content provided by FirstRanker.com ---
($ millions)1
IOCL
--- Content provided by FirstRanker.com ---
153
36537.0 New Delhi
--- Content provided by FirstRanker.com ---
2Reliance Industries
342
--- Content provided by FirstRanker.com ---
18773.3 Mumbai
3
Bharat Petroleum
--- Content provided by FirstRanker.com ---
368
17613.8 Mumbai
--- Content provided by FirstRanker.com ---
4Hindustan Petroleum
378
--- Content provided by FirstRanker.com ---
17106.4 Mumbai
5
--- Content provided by FirstRanker.com ---
Oil & Natural Gas402
16609.2 New Delhi
--- Content provided by FirstRanker.com ---
6
State Bank of India
--- Content provided by FirstRanker.com ---
49813755.8 Mumbai
Table 2.7 presents the list of six Indian companies finding place in Fortune 2006
--- Content provided by FirstRanker.com ---
list. State Bank of India a public sector giant finds place in latest list. Other five
companies basically belong to oil and gas sectors, known as hydro carbon
--- Content provided by FirstRanker.com ---
sector. India is one of the main oil importing country and consumption rates areincreasing day by day. Except Reliance other companies in the list are from
public sector. In future, one may hope that more and more Indian companies
--- Content provided by FirstRanker.com ---
find place in Fortune 500.
1.3. Emergence of Global Companies from Rapidly Developing Economies:
--- Content provided by FirstRanker.com ---
As we have observed from previous section that the composition of GlobalFortune 500 companies is changing. More and more companies from rapidly
developing economies are finding place. There are six Indian companies at
--- Content provided by FirstRanker.com ---
present in the list. Recently global management consultancy, the Boston
Consulting Group prepared a report titled, The New Global Challengers: How
--- Content provided by FirstRanker.com ---
100 top companies from rapidly developing economies are going global -- andchanging the world, based on observing 3,000 companies from 12 rapidly
developing economies (RDEs).
--- Content provided by FirstRanker.com ---
Table 2.8
The Indian 21
--- Content provided by FirstRanker.com ---
SectorCompany
Automotive
--- Content provided by FirstRanker.com ---
Bajaj Auto
Tata Motors
--- Content provided by FirstRanker.com ---
Mahindra & MahindraTVS Motors
Bharat Forge
--- Content provided by FirstRanker.com ---
IT/BPOInfosys
Satyam
--- Content provided by FirstRanker.com ---
Tata
Consultancy
--- Content provided by FirstRanker.com ---
Services(TCS)
Wipro
--- Content provided by FirstRanker.com ---
Engineering and Construction
Larsen & Toubro
--- Content provided by FirstRanker.com ---
Health/PharmaceuticalRanbaxy
Cipla
--- Content provided by FirstRanker.com ---
Dr Reddy`s Laboratories
Steel and industrial goods
--- Content provided by FirstRanker.com ---
HindalcoTata Steel
Crompton Greaves
--- Content provided by FirstRanker.com ---
Other sectors
ONGC
--- Content provided by FirstRanker.com ---
Reliance IndustriesVideocon
VSNL
--- Content provided by FirstRanker.com ---
Tata Tea
Source: Business Standard, 4 July 10, 2006
--- Content provided by FirstRanker.com ---
When the top 100 list was published in May 2006, twenty one Indian companiesmade it to the elite list. Asian companies formed 70 per cent of that list. And
how? These companies were selected on the basis of being truly based out of
--- Content provided by FirstRanker.com ---
developing economies. For instance, foreign JVs and RDE subsidiaries of
multinational corporations were left out. Only companies with a turnover of
--- Content provided by FirstRanker.com ---
more than $1 billion as of 2004 were considered -- that`s the threshold requiredto drive serious globalisation campaigns. If the international presence was less
than 10 per cent of revenue, the companies were struck out -- with exceptions.
--- Content provided by FirstRanker.com ---
Companies which were close to hitting the 10 per cent mark and whose
international business activity had grown swiftly in the recent past were
considered. There was more to pass the test. International presence indicated by
--- Content provided by FirstRanker.com ---
owned and operated subsidiaries, sales networks, manufacturing presence, R&D
facilities and international investments, including M&As, were considered.
--- Content provided by FirstRanker.com ---
Equally important were the company`s access to capital for internationalexpansion, the breadth and depth of its technologies, intellectual property
portfolio, the international appeal for its existing offerings and value
--- Content provided by FirstRanker.com ---
propositions. The chosen companies belonged to a diverse set of industries (see
Table:2.8 The Indian 21). As the findings below indicate, each company follows
--- Content provided by FirstRanker.com ---
its own way, implementing a number of different strategies. But certain patternsseem to emerge which fall under six primary models of globalisation.
Model one: Taking RDE brands global:
--- Content provided by FirstRanker.com ---
28 of the RDE 100 are growing internationally by taking their established home-
market product lines and brands to global markets. Take the case of China`s
--- Content provided by FirstRanker.com ---
Hisense, a $3.3 billion consumer electronics group. The company is one of thelargest manufacturers of television sets, air conditioners, PCs and telecom
equipment. In addition to manufacturing in China, Hisense has production sites
--- Content provided by FirstRanker.com ---
in Algeria, Hungary, Iran, Pakistan and South Africa. The company has
expanded mainly through organic growth and sells 10 million television sets and
--- Content provided by FirstRanker.com ---
3 million air conditioners every year in more than 40 countries. Internationalsales account for more than 15 per cent of revenue (it`s the best-seller of flat-
panel TV sets in France). Hisense`s success formula: stylish consumer products
--- Content provided by FirstRanker.com ---
at an affordable price and a continuous stream of innovations. Its R&D facility is
located in its home-market, China, which is a huge market and a demanding one
--- Content provided by FirstRanker.com ---
too. This gives Hisense a super scale and low-cost manufacturing base. India`sautomobile maker, Mahindra & Mahindra follows this model of taking its brand
global. How does M&M do it can be understood from reading the Insight.1
--- Content provided by FirstRanker.com ---
Insight.1: MAHINDRA's GLOBAL RALLY
--- Content provided by FirstRanker.com ---
Does utility vehicle and tractor manufacturer, Mahindra & Mahindra`s (M&M)
global strategy compare with Chinese consumer electronics manufacturer,
--- Content provided by FirstRanker.com ---
Hisense? In a sense, yes. For instance, if Hisense took its television sets toEuropean markets, M&M tractors rode to developed countries like the US.
There was a strong rationale. India was among the top two tractor markets in the
--- Content provided by FirstRanker.com ---
world. So the other big market, the US was the next frontier. We went global as
we felt this is one field where an Indian company can be a world leader, says V
--- Content provided by FirstRanker.com ---
S Parthasarathy, executive vice president -- international operations, farmequipment sector, Mahindra & Mahindra. There was also the fear of competition
increasing on the home turf with foreign brands entering India. So M&M started
--- Content provided by FirstRanker.com ---
looking at markets that matched their product profile (20-80 horse power
engines) and markets that delivered large volumes. But markets like western
--- Content provided by FirstRanker.com ---
Europe which uses 150 horse power engines were ruled out. Apart from the US,M&M also tapped markets like China -- it has set up manufacturing facilities in
China and sold 3,000 units in its first year. M&M also entered Australia last
--- Content provided by FirstRanker.com ---
year. So how does M&M venture into foreign markets? We are trying not only
to leverage cost, but we are also trying to give value and build a brand. Doing it
--- Content provided by FirstRanker.com ---
alone requires more financial investment, but we are using more than onemodel, says Parthasarathy. For instance, in the bigger markets like the US,
M&M rides alone. In smaller markets like Sri Lanka or Serbia it uses
--- Content provided by FirstRanker.com ---
distributors. In China, which requires a far greater local knowledge in terms of
the market and the legal framework, M&M has a joint venture where it holds 80
--- Content provided by FirstRanker.com ---
per cent. For utility vehicles and pick-ups, the company has entered SouthAfrica. The company also has a fool-proof checklist for global forays. This
ranges from guidelines on prioritising global markets according to the size and
--- Content provided by FirstRanker.com ---
attractiveness of market opportunities, to the micro issues of taking the brand
abroad. For instance, did an M&M manager establish contact with the foreign
country`s consulate in India? Did an M&M manager visit the Indian consulate in
--- Content provided by FirstRanker.com ---
that country? The company has certainly learnt from bitter lessons in the past.
A key distributor in the US went bankrupt, the local partner in Greece stopped
--- Content provided by FirstRanker.com ---
paying the company, a diamond merchant who offered to sell M&M jeeps inSouth Africa did not have the right intentions. Now M&M executives speak a
different language. To reduce risk you must do your homework, says
--- Content provided by FirstRanker.com ---
Parthasarathy. The company claims to have spent about a year before starting
alone in the US, nearly six-eight months researching China before they entered
--- Content provided by FirstRanker.com ---
that market and so on. For selling its utility vehicles too, M&M plays the valuegame. Our approach is to provide value for money products that meet the
aspirations of the people in these countries, says Pravin N Shah, executive vice
--- Content provided by FirstRanker.com ---
president, overseas operations, automotive sector, M&M. According to him, this
approach is more flexible and well-rounded. In foreign markets, you need to be
--- Content provided by FirstRanker.com ---
seen as someone who is really committed, he says. Hence, M&M set upMahindra South Africa as a separate venture. While the current approach may
require more investments, it will help in competing with global companies,
--- Content provided by FirstRanker.com ---
believe M&M executives.
Model two: Turning RDE engineering into global innovation:
Twenty-two of the RDE 100 companies are pushing their international clout by
--- Content provided by FirstRanker.com ---
marketing innovative technology-based solutions to leverage their strengths in
engineering and research. An example is Wipro, the Indian IT services group.
--- Content provided by FirstRanker.com ---
Wipro has expanded rapidly by providing software coding support. It was a$545 million company in 2000. By 2004, it became a $1.8 billion company. At
present, Wipro is taking innovation to the next level by building extensive
--- Content provided by FirstRanker.com ---
engineering capabilities, thus making R&D services the next battleground. The
company already claims to be the world`s largest third party provider of R&D
--- Content provided by FirstRanker.com ---
services. Its 12,000 strong product engineering services (PES) group offersR&D services from product strategy to hardware design and quality consulting
for clients who sell electronics-based products. Growing at 36 per cent per year
--- Content provided by FirstRanker.com ---
for the last three years, this business group accounts for 36 per cent of Wipro`s
revenue.
--- Content provided by FirstRanker.com ---
Model three: Assuming global category leadershipOnly 12 companies from the list are growing by establishing themselves as
specialists and global leaders in one specific, relatively narrow, product
--- Content provided by FirstRanker.com ---
category. For instance, Hong Kong`s Johnson Electric had $1.1 billion revenue
in 2004 -- 67 per cent of that came from outside of Asia. The company is the
--- Content provided by FirstRanker.com ---
global market leader in small electric motors for automotive, consumer andvarious commercial applications. The company can produce 3 million motors
every day in China alone. This is complemented with other manufacturing sites
--- Content provided by FirstRanker.com ---
in Latin America, US, western Europe and R&D centres in Israel, Italy, Japan
and the US. While putting a strong emphasis on aggressive organic growth, the
--- Content provided by FirstRanker.com ---
company has also pursued multiple overseas acquisitions in the US of its tier-one suppliers. In parallel, the company is also using acquisitions to broaden its
capability base and move into more specialised product lines such as precision
--- Content provided by FirstRanker.com ---
piezoceramic motors (it bought Israel`s Nanomotion) and digital camera motors
(it acquired Japan`s Nihon Mini Motor). Then Johnson has the other China
advantages -- superscale, high volumes and low global unit costs. In India,
--- Content provided by FirstRanker.com ---
companies like Bharat Forge and Crompton Greaves principally follow the
engineering-led innovation approach (like Wipro too), they have managed to
--- Content provided by FirstRanker.com ---
establish strong positions in their categories. Take the example of Bharat Forge,which is the second largest forging company in the world.
Model four: Monetising RDE natural resources globally
--- Content provided by FirstRanker.com ---
Thirteen of the RDE 100 companies adopt this approach. They leverage their
home country`s natural resource advantages. Prime examples are Brazilian food
--- Content provided by FirstRanker.com ---
processors Sadia and Perdigao, with annual revenue of $2.2 billion and $1.8billion respectively. Half of their turnover comes from more than 100 countries.
Both companies hold 30-50 per cent shares of the Brazilian market in their main
--- Content provided by FirstRanker.com ---
product lines. Both operate along the entire value chain from farming to
marketing chilled and frozen foods and high value added products like ready-to-
--- Content provided by FirstRanker.com ---
eat meals. Both the companies` expansion models focus on growing theirdomestic production capacity, while investing in overseas supply chain
management capabilities. Their key competitive advantage lies in abundant
--- Content provided by FirstRanker.com ---
production resources for pork, poultry and grain which is complemented by
ideal growing conditions for animal feed and by low labour costs. Both have
--- Content provided by FirstRanker.com ---
hatcheries that are among the most productive in the world, achieve lowproduction costs and high yields with highest quality standards. In India,
Hindalco and Tata Steel follow this model. The $2.5-billion Hindalco is Asia`s
--- Content provided by FirstRanker.com ---
largest producer of finished aluminium and alumina. It`s also India`s largest
integrated copper producer. With India having the fifth largest reserves of
--- Content provided by FirstRanker.com ---
bauxite in the world -- reserves that could last for more than 20 years --Hindalco has an inherent competitive advantage. Similarly, in steel making,
India has access to some of the richest supplies of iron ore, which gives Tata
--- Content provided by FirstRanker.com ---
Steel a competitive edge.
Model five: Rolling out new business models to multiple markets
These 13 companies are building regional or global portfolios in their respective
--- Content provided by FirstRanker.com ---
businesses by rolling out business models that were pioneered in their home
markets. Cemex, the $15.3-billion Mexican cement conglomerate is an example.
--- Content provided by FirstRanker.com ---
One of the largest ready-mix concrete companies in the world, Cemex isvertically integrated and generates 79 per cent of its revenue abroad. It has built
a global presence with acquisitions in the Americas, Asia-Pacific, west Asia and
--- Content provided by FirstRanker.com ---
Europe. The key to Cemex`s success is in its rigorous approach to integrating
and running acquisitions in a way that it covers every aspect of the business.
--- Content provided by FirstRanker.com ---
Integral to this approach is a seasoned M&A and integration team that executesserial acquisitions. A number of companies which follow this model are still in
the early stages of globalisation. Indian companies adopting this approach
--- Content provided by FirstRanker.com ---
include VSNL and Reliance.
Model six: Acquiring natural resources
--- Content provided by FirstRanker.com ---
In contrast to others, the 12 companies in this category are expanding overseasto acquire vital raw materials for their home markets. Companies in this
category are active either in fossil fuels or metal and mining products. Nine of
--- Content provided by FirstRanker.com ---
the 12 companies who follow this strategy are Chinese. A good example is
Shanghai Baosteel Group Corporation, China`s biggest steel maker. The
--- Content provided by FirstRanker.com ---
company has a production capacity of 20 million tonnes of crude steel a year(half of Arcelor`s capacity). But more than 98 per cent of its revenue comes
from China. To secure stable supplies, Baosteel acquired a 50 per cent stake in
--- Content provided by FirstRanker.com ---
Brazilian CVRD`s Agua Limpa iron mining complex in 2001. A year later it
invested in a joint venture with Hamersley Iron, an Australian subsidiary of Rio
--- Content provided by FirstRanker.com ---
Tinto group. In India, ONGC follows this model. It has expanded globally toaccess oil resources and has committed investments of $4.3 billion in overseas
exploration projects.
--- Content provided by FirstRanker.com ---
Companies from the rapidly developing economies may broadly fit into one of
the six strategies. But there is a rider: while these strategies are distinct in
--- Content provided by FirstRanker.com ---
principle, they often overlap in practice. For instance, while Tata Steel
monetises natural resources of its home country, it is also rolling out business
--- Content provided by FirstRanker.com ---
models that are perfected in its home country in its acquired businesses abroad.The RDE 100 also have some features in common. First, all of they build on
positions of low cost -- a key competitive advantage of rapidly developing
--- Content provided by FirstRanker.com ---
economies. Virtually all the companies are adept at learning and adapting. This
is what enables them to learn the lessons of established companies. Moving
--- Content provided by FirstRanker.com ---
forward, that might be their biggest strengthEMERGING PROFILE
The RDE 100 companies grew at 24 per cent year-on-year from 2000-04 while
--- Content provided by FirstRanker.com ---
the India 21 grew even faster -- 30 per cent. The RDE companies also earned
operating margins of 20 per cent over sales, compared to 16 per cent for US
--- Content provided by FirstRanker.com ---
S&P 500 companies and 10 per cent for Japan`s Nikkei companies. The India 21beat the crowd again with operating margins of 25 per cent. Still, these emerging
challengers have their strengths and weaknesses.
--- Content provided by FirstRanker.com ---
STRENGTHS
They operate in rapidly growing markets and become quite large on their home
--- Content provided by FirstRanker.com ---
turf before venturing abroad Working in a difficult operating environment athome creates high capabilities while going abroad. Most RDEs are key markets
for MNCs. They become training grounds for competing with global
--- Content provided by FirstRanker.com ---
incumbents. Low cost in labour, property, equipment, raw materials and capital.
WEAKNESSES
--- Content provided by FirstRanker.com ---
Low on innovation. Between 1999-2003, 100 RDE companies were grantedonly 3,900 US patents. Japanese companies alone got 166,000 patents in the
same period. Supply chain. Added costs can wipe out manufacturing cost
--- Content provided by FirstRanker.com ---
savings. Establishing a foothold in a new highly developed market is not veryeasy. Shortage of managers with international experience
1.4 Summary
--- Content provided by FirstRanker.com ---
Each company`s path of development is unique. Companies that decide to
expand beyond their home country change. Development of a company from
--- Content provided by FirstRanker.com ---
domestic to transnational involves lot of action. Different companies followdifferent route. Some companies achieve this through organic growth. That is
growing on its own systematically. Some follow inorganic route by acquiring
--- Content provided by FirstRanker.com ---
other companies or brands. Companies are not pure types: actual companies are
almost always a mixture of the different stages of development. Some have
--- Content provided by FirstRanker.com ---
moved through all of the stages in an orderly progression and others haveleapfrogged to develop as global or transnational companies.
The benefits of international operations are considerable. Trade moderates
--- Content provided by FirstRanker.com ---
inflation, and improves both employment and standard of living, while
providing better understanding of business process at home and abroad. For
--- Content provided by FirstRanker.com ---
many companies, survival or the ability to diversify depends on the growth,sales, and profits from abroad. The more commitment a company makes to
overseas markets in terms of personnel, sales, and resources, the more likely it
--- Content provided by FirstRanker.com ---
will become a multinational corporation (MNC). There is a growing trend that
more and more corporations from rapidly developing economies challenging the
--- Content provided by FirstRanker.com ---
supremacy of corporations from advanced economies.1.5 Glossary
Lobbying is the professional practice of public affairs advocacy, with the goal
--- Content provided by FirstRanker.com ---
of influencing a governing body by promoting a point of view. A lobbyist is a
person who is paid (or volunteers) to influence legislation as well as public
--- Content provided by FirstRanker.com ---
opinion. Most major corporations and political interest groups hire professionallobbyists to promote their interests as intermediaries; others maintain in-house
government relations or public affairs departments. Think tanks aim to lobby
--- Content provided by FirstRanker.com ---
through regular releases of detailed reports and supporting research to the mediafor dissemination .
Environmental law is a body of law, which is a system of complex and
--- Content provided by FirstRanker.com ---
interlocking statutes, common law, treaties, conventions, regulations and
policies which seeks to protect the natural environment which may be affected,
--- Content provided by FirstRanker.com ---
impacted or endangered by human activities. Some environmental laws regulatethe quantity and nature of impacts of human activities: for example, setting
allowable levels of pollution. Other environmental laws are preventive in nature
--- Content provided by FirstRanker.com ---
and seek to assess the possible impacts before the human activities can occur.
Labour law or employment law is the body of laws, administrative rulings, and
--- Content provided by FirstRanker.com ---
precedents which addresses the legal rights of, and restrictions on, workers andtheir organisations. As such, it mediates many aspects of the relationship
between trade unions, employers and employees. In some countries (such as
--- Content provided by FirstRanker.com ---
Canada), employment laws related to unionised workplaces are differentiated
from those relating to particular individuals. In most countries however, no such
--- Content provided by FirstRanker.com ---
distinction is made. The labour movement, heavily influenced by socialism, hasbeen instrumental in the enacting of laws protecting labour rights in the 19th and
20th centuries.
--- Content provided by FirstRanker.com ---
Race to bottom
In government regulation, a race to the bottom a phenomenon that is said to
--- Content provided by FirstRanker.com ---
occur when competition between nations or states (over investment capital, forexample) leads to the progressive dismantling of regulatory standards. It may be
used also in a more general sense of evolutionary trends gravitating to the lowest
--- Content provided by FirstRanker.com ---
common denominator.
1.6 Self Assessment Questions:
--- Content provided by FirstRanker.com ---
1. Define Multi National Corporation and explain major types of MNCs.2. Highlight the importance of MNCs in world of business. Describe the
composition of MNCs, which featured in Fortune 500 Global list.
--- Content provided by FirstRanker.com ---
3. How companies from Rapidly Developing Economies challenging thesupremacy of companies from developed economies?
4. Pick an Indian Corporation with which you are familiar and analyze the
--- Content provided by FirstRanker.com ---
reasons why it might be motivated to expand its internationalism.
1.7 Further Readings:
--- Content provided by FirstRanker.com ---
Financial Dailies:1. The Economic Times
2. Business Standard
--- Content provided by FirstRanker.com ---
3. Business Line
4. The Financial Express
--- Content provided by FirstRanker.com ---
Business Magazines:5. Business World
6. Business India
--- Content provided by FirstRanker.com ---
7. Business Today
8. Outlook Money
--- Content provided by FirstRanker.com ---
Lesson 3:
--- Content provided by FirstRanker.com ---
International Management ? Challenges and Opportunities
--- Content provided by FirstRanker.com ---
Objectives:After studying this lesson you should be able to:
--- Content provided by FirstRanker.com ---
To understand the challenges and opportunities of international management
To observe the trends that influence the management of global company
Structure
--- Content provided by FirstRanker.com ---
1.15 Introduction
1.16 Challenges and opportunities
--- Content provided by FirstRanker.com ---
1.17 Trends1.18 Summary
1.19 Glossary
--- Content provided by FirstRanker.com ---
1.20 Self Assessment Questions1.21 Further Readings
1.1 Introduction:
--- Content provided by FirstRanker.com ---
As renowned management thinker the late Peter Drucker once wrote, they wish
to create the future, not just predict it. This he mentioned regarding how
--- Content provided by FirstRanker.com ---
organizations need to create their own future. It was widely accepted that majortrends have to be predicted and required modifications to be made from time to
time. Predicting the future is the easy part. What really matters is the ability to
--- Content provided by FirstRanker.com ---
harness waves of change and use them to achieve high performance.
In the following section we discussed about ten crucial trends and the actions
--- Content provided by FirstRanker.com ---
organizations need to take to create their own future. On Wall Street, they liketo say that "the trend is your friend." Accenture a global consultancy firm
recently completed a comprehensive analysis covering the most important
--- Content provided by FirstRanker.com ---
global trends--business, social and technological--it also links those trends to
specific actions organizations should be considering right now if, they wish to
--- Content provided by FirstRanker.com ---
create the future, not just predict it. According to the analysis high performersdetect the implications of trends for the distinctiveness of their capabilities, the
strength of their market focus and position, and the vigor of their performance
--- Content provided by FirstRanker.com ---
anatomy. They then take action to shape their own futures while their
competitors are preoccupied with imitating the high performers` current
--- Content provided by FirstRanker.com ---
successes. Changing business trends constantly create windows of opportunitiesand throws daunting challenges.
1.2 Challenges and Opportunities:
--- Content provided by FirstRanker.com ---
A profound, but silent, transformation of our society is happening. Our corporate
system is generating more goods and services than at any point in history,
--- Content provided by FirstRanker.com ---
delivered through an ever-growing number of channels. Product variety isoverwhelming to consumers. Propagation of cell phones, web sites, and media
channels increased access to more information, at greater speed and lower cost,
--- Content provided by FirstRanker.com ---
than ever before. However, product variety has not necessarily resulted in betterconsumer experiences. At the same time, competition is increasing and profit
margins are shrinking to companies. Managers can no longer focus solely on
--- Content provided by FirstRanker.com ---
costs, product and process quality, speed, and efficiency. For profitable growth,
managers must also strive for new sources of innovation and creativity.
--- Content provided by FirstRanker.com ---
Thus the paradox of the twenty-first-century economy: Consumers have morechoices that yield less satisfaction. Top management has more strategic options
that yield less value. Managers are under intense pressure to create value. But
--- Content provided by FirstRanker.com ---
value creation by improving operational efficiency ? through such initiatives as
outsourcing, business process reengineering, and work force reduction - has
--- Content provided by FirstRanker.com ---
natural limits in terms of morale potential. Firms must couple such efficiencieswith innovation and new business development. The following section
discusses the trends, which influence business and how organizations are
--- Content provided by FirstRanker.com ---
meeting the challenges and opportunities in resulting environment.
1.3 Trends:
--- Content provided by FirstRanker.com ---
Trend 1: Permanent, Increasingly Pervasive Information ConnectivityInformation technology is extending not only its horizontal reach but also its
vertical reach --delving deeper into patterns of behavior or into operational
--- Content provided by FirstRanker.com ---
information, enabling richer knowledge about companies, products and
customers. Companies know more about their customers, but customers also
--- Content provided by FirstRanker.com ---
know more about companies' products and services. As customers becomeincreasingly comfortable shopping online, they learn how easy it is to compare
market prices, inventories and even production costs. As a result, pricing and
--- Content provided by FirstRanker.com ---
discounting have been upended, with the average retail discount in the United
States rising from 10 percent to 30 percent between 1967 and 1997. Of course,
--- Content provided by FirstRanker.com ---
companies that generally come out on top in a comparative search will welcomeprice transparency. Organizations have to maintain competitive advantage by
counteracting pricing transparency.
--- Content provided by FirstRanker.com ---
Toyota Motor Corporation, for example, even provides a link from its website tothe comparative pricing at www.edmunds.com, thus using pricing transparency
to its advantage. But most companies will be vulnerable. One way companies
--- Content provided by FirstRanker.com ---
are responding to the threat is by using the same IT trend to create a slew of
enhanced pricing and revenue optimization capabilities, including ones for
--- Content provided by FirstRanker.com ---
revenue management, markdown management, dynamic pricing, promotionoptimization and customized pricing. Beyond this approach, however,
companies must learn ways to bundle products and services to create new kinds
--- Content provided by FirstRanker.com ---
of value in the eyes of customers, so it becomes more difficult for them to make
simplistic comparisons. Companies will also find value in enabling customers to
--- Content provided by FirstRanker.com ---
reduce information overload, helping them overcome the "decision paralysis"that can result from an overabundance of purchase information.
Increasingly sophisticated software and tools will enable companies to use
--- Content provided by FirstRanker.com ---
analytics not only for better decision making but as a competitive weapon as
well. The ability to derive real-time insight from predictive analytics can help a
--- Content provided by FirstRanker.com ---
high performer dominate the game, or even change the game entirely.Amazon.com uses analytics to predict what products will be successful and to
optimize the efficiency of its supply chain. Supply chain analytics also help
--- Content provided by FirstRanker.com ---
companies such as Dell and Wal-Mart to reduce inventory and stock-outs. These
initiatives help companies to create real-time business and market insights to
--- Content provided by FirstRanker.com ---
change the competitive game in their favour.Permanent information connectivity is fundamentally changing the way
employees, teams and businesses communicate, collaborate and interact with
--- Content provided by FirstRanker.com ---
one another. Organizations must be proactive about designing work tasks and
flows to increase productivity and to enhance the kinds of collaboration that
--- Content provided by FirstRanker.com ---
more frequently result in innovations. For example, investment bank DresdnerKleinwort Wasserstein uses "wiki software," which enables workers to
collaborate on Web pages, to encourage teamwork among its traders and
--- Content provided by FirstRanker.com ---
bankers; the technology has also replaced e-mail and conference calls for taskslike pricing international bond offerings.
Trend 2: The Ascendancy of Major Emerging Economies:
--- Content provided by FirstRanker.com ---
Competitive advantage across industries in the coming years will be determined
in large part by the manner in which companies anticipate both the opportunities
--- Content provided by FirstRanker.com ---
and the threats of four vital emerging economies: Brazil, Russia, India and,especially, China popularly known as BRIC countries.
One imperative need for MNCs is to prepare to compete in the Chinese industry
--- Content provided by FirstRanker.com ---
segments that are right for their businesses. China already is one of the largest
global consumer markets. The Chinese, for example, buy 16 percent of the
--- Content provided by FirstRanker.com ---
world's refrigerators and 33 percent of the world's air conditioners. Moreover,China's large domestic market is creating strong local companies that are
expanding beyond the country's borders and vying for spots as leading global
--- Content provided by FirstRanker.com ---
players. Haier Group, for example, has in just 22 years grown into a global
brand and the world's fourth-largest whitegoods maker. The key to proactive
--- Content provided by FirstRanker.com ---
entry strategies in China and the other emerging economies is selecting the rightsegments, based on specific industry dynamics, and then managing risk
accordingly. The Chinese marketplace is anything but monolithic; the country
--- Content provided by FirstRanker.com ---
has more than 20 provinces and multiple languages and dialects.
Trend 3: The Accelerating Pace of Globalization:
--- Content provided by FirstRanker.com ---
The pace of globalization and its effects have increased dramatically because ofubiquitous information connectivity. When major business functions, from
production to sales, can be performed almost anywhere, it presents companies
--- Content provided by FirstRanker.com ---
with unprecedented opportunities for both cost optimization and brand
extension. Organizations have to create best-of-breed global solutions for
--- Content provided by FirstRanker.com ---
operating businesses with the best capabilities at the lowest possible cost.Optimizing cost in a global labour market is about more than moving jobs to
low-wage countries. Increasingly, it is about creating a global network in which
--- Content provided by FirstRanker.com ---
every location is put to its best use, independent of its labour costs or even if thecompany sells or produces in the country.
Consider American appliance maker Whirlpool Corporation, which makes its
--- Content provided by FirstRanker.com ---
microwave ovens in southern China and its washing machines in Germany.
Despite Germany's relatively high labour costs, it has the necessary technology,
--- Content provided by FirstRanker.com ---
as well as a trained workforce and a factory already tooled to the company'sneeds. If Whirlpool had focused its strategy only on labour costs, it would have
missed the nuances of the global sourcing strategy by which it was ultimately
--- Content provided by FirstRanker.com ---
able to expand its capacity at a very incremental investment.
The globalization of work and the removal of global sourcing barriers will create
--- Content provided by FirstRanker.com ---
much more flexibility in an organization's value chain, and outsourcing modelswill actually become a strategic means by which to fine-tune that value chain.
With the new discipline of "capability sourcing," more and more of that value
--- Content provided by FirstRanker.com ---
chain will be outsourced.
One noteworthy example is Toshiba Corporation's hiring of logistics provider
--- Content provided by FirstRanker.com ---
UPS to administer its customer PC repair processes. Companies will continue tomore easily mix off-the-shelf and customized solutions to quickly gain new
benefits from outsourcing activities, which range from application and business
--- Content provided by FirstRanker.com ---
process outsourcing, through vertical outsourcing, to partnering to offshore
owned and shared assets. Such a strategy is already in place at a number of
--- Content provided by FirstRanker.com ---
companies, including Procter & Gamble, which has pursued outsourcingsolutions in the United States and Europe for a range of corporate functions such
as human resources and IT.
--- Content provided by FirstRanker.com ---
Enable a brand strategy that is simultaneously global and local. Yes, a brand
must have global appeal. But global marketing must be accompanied by greater
--- Content provided by FirstRanker.com ---
product and marketing differentiation, with brands adapted to local markets. Forexample, although McDonald's has adopted uniform brand packaging
throughout the world, during 2006 the company is including nutritional value
--- Content provided by FirstRanker.com ---
charts on the product packaging that are designed to be visually appealing tolocal markets. Procter & Gamble adjusts its branding strategy depending on
regional perceptions. For example, it prominently displays the company name
--- Content provided by FirstRanker.com ---
on its packaging in Asia, but in the United States and Europe it focuses instead
on its product brand names and images.
--- Content provided by FirstRanker.com ---
Trend 4: Rapidly Changing Demographics:In both industrialized nations and emerging economies, a large percentage of the
workforce will soon retire, resulting in the loss of critical knowledge and skills.
--- Content provided by FirstRanker.com ---
Because of declining fertility rates in many developed nations, retiring workers
are not being replaced fast enough, which raises the specter of global shortages
--- Content provided by FirstRanker.com ---
of highly skilled labor. The situation is particularly troublesome in the publicsector. Meanwhile, huge areas within both rich and poor nations are being
hollowed out by the mass movement of populations to urban zones.
--- Content provided by FirstRanker.com ---
Organizations have to support workforce performance to raise the productivity
of every employee. As the number of skilled workers declines in some
--- Content provided by FirstRanker.com ---
industries, companies must focus on getting the most out of those who remain,on developing strength in what we call an organization's performance
anatomy--the integration of elements such as leadership and strategy, people
--- Content provided by FirstRanker.com ---
development and performance management. By taking a more comprehensive
approach to talent management, companies must become effective "talent
--- Content provided by FirstRanker.com ---
multipliers," able to increase the productivity and impact of each employee.Companies such as Yahoo are already becoming more sophisticated at
developing a "talent organization"--a holistic approach to managing talent that
--- Content provided by FirstRanker.com ---
attracts, hires, develops and retains the workers needed to achieve high
performance.
--- Content provided by FirstRanker.com ---
Successfully managing human capital is becoming increasingly challenging in a
world where more workers are temporary; where they want to carry their
--- Content provided by FirstRanker.com ---
learning, performance history, health care records and more between employers;and where generational differences--between Gen X and Gen Y as well as with
Baby Boomers--lead to misunderstanding and resentment in the workplace.
--- Content provided by FirstRanker.com ---
Companies must therefore create new employment value propositions, which, in
turn, require different people capabilities and tools.
--- Content provided by FirstRanker.com ---
In addition, to counteract the effects of skills shortages, companies must bothretain their best workers and ensure that each worker is supported by the
organization's best knowledge and experience. For a start, companies are
--- Content provided by FirstRanker.com ---
increasingly tailoring benefits--for example, allowing employees to choose not
only individualized retirement and medical plans but also more wide-ranging
--- Content provided by FirstRanker.com ---
and important components of their jobs, such as work hours, location andvacation days. The result is increased employee satisfaction, engagement and
retention. Companies are also modifying everything from leadership styles to
--- Content provided by FirstRanker.com ---
levels of social activism to be more fully responsive to these changes. Treat
employees like a "workforce of one."
--- Content provided by FirstRanker.com ---
In terms of supporting individual performance, role-based knowledge portals, or"performance workspaces," are now supporting specific performance needs of
workers. BT Retail's performance workspace for its call center employees, for
--- Content provided by FirstRanker.com ---
example, has increased employees' confidence in their ability to perform well by
23 percent, and also produced call handling efficiencies that generated $6
--- Content provided by FirstRanker.com ---
million in savings. Focus on offerings that leverage or address the effects ofurban congestion. The percentage of the world's population living in cities is
expected to grow to 61 percent by the year 2030, up from just 30 percent in
--- Content provided by FirstRanker.com ---
1950 and 48 percent in 2003. Denser urban environments create many business
opportunities for those companies that can think creatively outside their existing
business models. One example is the development of "small box" formats by
--- Content provided by FirstRanker.com ---
retailers such as Wal-Mart and The Home Depot.
Another recent phenomenon is the "lifestyle center," a roofless retail center in an
--- Content provided by FirstRanker.com ---
urban setting that features primarily upscale retail stores meant to attract higher-income shoppers. The appeal is not only the quality of the merchandise but also
the experience of the "good old days," when small, downtown shopping centers
--- Content provided by FirstRanker.com ---
provided comfort and a sense of community, as well as easy access and the
ability to make quick purchases.
--- Content provided by FirstRanker.com ---
Public-sector entities are also responding to these demographic trends withinnovative thinking of their own. Several local governments in the United States
have moved to implement "congestion pricing"--higher tolls on the busiest
--- Content provided by FirstRanker.com ---
highways or during high-traffic hours, for example. They also have begun to
partner with the private sector. The state of California has been an early adopter
--- Content provided by FirstRanker.com ---
of highway privatization, and the state of Indiana recently leased one of itsmajor highways to a Spanish-Australian consortium for several billion dollars.
Trend 5: An Increasingly Complex and Fragile Business Environment
--- Content provided by FirstRanker.com ---
As business solutions and services become more elegant and complex, they also
become more fragile and susceptible to business failure and security risks. With
--- Content provided by FirstRanker.com ---
ever-larger infrastructures with more components, more things can go wrong.High mobility and extended customer reach increase the possible points of
attack for those seeking to breach both information and physical security.
--- Content provided by FirstRanker.com ---
Security is one of the salient concerns for the 21st century, as businesses and
governments look for solutions not only to protect both information and physical
--- Content provided by FirstRanker.com ---
assets in real time but also to recover in the event of disasters. One financialservices group, for example, had responded to some information security
concerns during the 1991 Gulf War by developing "mirror sites" (redundant
--- Content provided by FirstRanker.com ---
backups) for its most critical information systems. Consequently, within an hour
of the 2001 terrorist attacks on the World Trade Center in New York, a mirror
site in another city had already taken control of the company's mission-critical
--- Content provided by FirstRanker.com ---
systems. Security will also become a revenue generator for companies that
develop innovative products and services to protect businesses and consumers
--- Content provided by FirstRanker.com ---
from the effects of fraud, identity theft, computer viruses and other kinds ofprivacy or security violations. Products or services with embedded security
features will grow in importance. Secure the business and create security-based
--- Content provided by FirstRanker.com ---
value-added offerings.
Trend 6: Shorter Time Frames for Decision Making
--- Content provided by FirstRanker.com ---
The increasing pace and complexity of business today means managing almostmoment to moment, with an eye on both cost optimization and the quality of
business performance. But many managers find themselves either unable to
--- Content provided by FirstRanker.com ---
access the data needed to inform their decisions fast enough through their legacy
IT systems, or overwhelmed by the amount of data available to them.
--- Content provided by FirstRanker.com ---
Recent research has clearly shown that effective enterprise performancemanagement capabilities are critical to achieving high performance, and can
increase a company's ability to create value. A Harvard Business Review study
--- Content provided by FirstRanker.com ---
shows that companies with best-in-class performance management processes
achieved nearly 3 percent higher return on assets and just over 5 percent higher
--- Content provided by FirstRanker.com ---
returns on equity than their competitors. Imperative need is to develop thecapability to comprehensively view and act on business performance in real
time.
--- Content provided by FirstRanker.com ---
Trend 7. Shrinking Windows of Profitability
The global information network and the transparency of business operations
--- Content provided by FirstRanker.com ---
have resulted in less opportunity for an innovative or first-mover product tomaintain market dominance. The competition can more rapidly imitate or even
leapfrog over products originally seen as innovative. Intellectual property rights
--- Content provided by FirstRanker.com ---
are not protected for as long, or are violated more easily. Meanwhile, brand
loyalty is declining.
--- Content provided by FirstRanker.com ---
Market dominance cannot be maintained without the continuous use of
innovation to extend the value of existing products or to develop new ones. To
--- Content provided by FirstRanker.com ---
increase revenue from new products, companies must develop the capability tointroduce highly differentiated products in targeted markets more rapidly.
Consider, for example, Apple Computer's aggressive rollout of new variants of
--- Content provided by FirstRanker.com ---
iPod products, a strategy reminiscent of how pharmaceuticals companies extend
the value of a blockbuster drug, even as it goes off patent, by rapidly releasing
--- Content provided by FirstRanker.com ---
enhanced versions while dropping the price of older varieties. Just as importantis establishing an "ideas infrastructure"--a formalized process by which ideas
can be captured, analyzed and transformed into innovations. For example,
--- Content provided by FirstRanker.com ---
Kaiser Permanente encourages more innovative attitudes, making employees
feel they can effect change that will lead to improved care, member loyalty and
--- Content provided by FirstRanker.com ---
affordability. The health care company has developed what it calls InnovationSupport Teams, which are charged with focusing on innovations and are also
connected to operations to assist in making the innovations a reality. Finally,
--- Content provided by FirstRanker.com ---
bottlenecks to innovation must be removed more quickly, through a constant
review of new ideas and the conscientious application of solutions to remove
--- Content provided by FirstRanker.com ---
any barriers to such new thinking. Innovate rapidly or die is the mantra.Trend 8. Rapidly Changing Industry and Market Boundaries
Falling trade barriers are redefining markets globally, while technology
--- Content provided by FirstRanker.com ---
advances and other factors are blurring lines between industries like
entertainment and telecommunications. Competing in evolving global markets at
--- Content provided by FirstRanker.com ---
today's pace of innovation requires making rapid adjustments to capabilities andscale.
Companies must continue to shorten the time between a merger or acquisition
--- Content provided by FirstRanker.com ---
and when that move begins generating value. Today, most companies' approach
to inorganic growth reflects the cottage industries of the 19th century. Just as
new product development and R&D have been industrialized in companies in
--- Content provided by FirstRanker.com ---
the past 25 years, the same must now occur for M&A and related capabilities.
This type of approach will no longer be reserved for companies like Cisco
--- Content provided by FirstRanker.com ---
Systems, BP and Novartis; instead, it will extend out to all companies.Accelerate value through rapid acquisitions and divestitures.
Trend 9: A Growing Public Demand for More Corporate Transparency
--- Content provided by FirstRanker.com ---
and Better Governance and Accountability
Calls for stricter accounting and reporting standards and more transparency are
--- Content provided by FirstRanker.com ---
coming not just from regulators but from employees and shareholders as well.Shareholders are also now routinely pressing companies about their
environmental records, hiring and firing practices, fair trade policies and
--- Content provided by FirstRanker.com ---
charitable contributions. A number of online business practices have come under
public scrutiny as well. Even companies less vulnerable to these possible actions
--- Content provided by FirstRanker.com ---
will face an increasing need to conduct themselves in accordance with emergingnational and global standards. It is better to transform the governance mindset
from compliance to value creation.
--- Content provided by FirstRanker.com ---
High performers will increasingly be those that see governance not merely as a
set of operating restrictions but also as a means to create value. Consider Brazil,
--- Content provided by FirstRanker.com ---
Latin America's biggest economy. In 2000, the Brazilian stock market wassuffering from slow growth in new listings. Institutional investors met with
Brazilian officials to help them explore how new approaches to corporate
--- Content provided by FirstRanker.com ---
governance could stimulate the economy by raising investor confidence levels.
BOVESPA, the S?o Paolo stock exchange, responded by creating a new listing
--- Content provided by FirstRanker.com ---
segment, in which participating companies would have to meet more stringentstandards of corporate governance.
--- Content provided by FirstRanker.com ---
Trend 10: An Explosion of the Life Sciences EconomyRecent discoveries, including the sequencing of the human genome, advances in
information technology, and demographic trends such as aging populations
--- Content provided by FirstRanker.com ---
throughout the industrialized world, are stimulating health spending and growth
in the life sciences economy, or "bioeconomy." Driving the leading edge of the
--- Content provided by FirstRanker.com ---
health care industry, and health care spending, in the next few years will beconsumer demand for "personalized medicine." As a consequence, one of the
biggest trends in life sciences is "pharmacogenomics"--treatments tailored not
--- Content provided by FirstRanker.com ---
just to individual need or disease but also to individual genetic makeup. Drugs
are already available for groups of people sharing a genetic profile.
--- Content provided by FirstRanker.com ---
Herceptin, for example, is a breast cancer drug designed for the approximately25 percent of breast cancer sufferers who overproduce one particular gene.
Another drug, Gleevec, is for the roughly 5,000 patients in the United States
--- Content provided by FirstRanker.com ---
diagnosed each year with chronic myeloid leukemia, which means they have a
genetic variation that causes an overproduction of white blood cells.
--- Content provided by FirstRanker.com ---
But it won't be simply the obvious players--pharmaceuticals companies andhealth care providers--that leverage opportunities of the bio-economy going
forward. Implications extend to many industries, including insurance,
--- Content provided by FirstRanker.com ---
agribusiness, food and consumer products. Each will find opportunity in the
demand for better health and fitness that comes with the growing affluence of
--- Content provided by FirstRanker.com ---
populations. Even telecommunications providers can benefit from this trend.Too far-fetched? With the advent of television programming delivered using
Internet technologies--also called IPTV--telemedicine solutions will grow in
--- Content provided by FirstRanker.com ---
importance. Such solutions would enable, for example, a physician to make an
interactive virtual house call to consult directly with the homebound elderly.
--- Content provided by FirstRanker.com ---
The imperatives and action steps listed here can be, are daunting when taken inone dose. Yet most businesses will not feel the effects of all of these trends
immediately or simultaneously. By mobilizing the appropriate executives and,
--- Content provided by FirstRanker.com ---
most important, the best-suited program managers and change agents to addresseach imperative individually, companies will successfully begin the journey of
evolving both their vision and their business strategy. High performers know
--- Content provided by FirstRanker.com ---
that the future does not come all at once. With vision, but also with rigorous
planning, successful companies will embody the observation of the late historian
--- Content provided by FirstRanker.com ---
Will Durant--that the future never just happens; it is created.1.4 Summary:
Globalization affects all sizes and types of organizations. Workforce diversity
--- Content provided by FirstRanker.com ---
requires managers to recongnize and acknowledge employee differences.
Entrepreneurship is important to societies around the world and all types and
--- Content provided by FirstRanker.com ---
sizes of organizations will need to be entrepreneurial to be successful.Managers need to recognize the realities of an e-world, whether as an e-business
enhanced, e-business enabled, or total e-business organization. Successful
--- Content provided by FirstRanker.com ---
organizations will need to be innovative and flexible, and managers will need to
encourage innovation and flexibility. Managers who emphasize quality
--- Content provided by FirstRanker.com ---
management processes are committed to continuous improvement of workactivities. Managers will need to foster the development of learning
organizations and cultivate a knowledge management culture. Finally,
--- Content provided by FirstRanker.com ---
managers will have to recognize the importance of maintaining work-life
balance.
--- Content provided by FirstRanker.com ---
1.5 Glossary:Internet:
The Internet (also known simply as the Net) can be briefly understood as "a
--- Content provided by FirstRanker.com ---
network of networks". Specifically, it is the worldwide, publicly accessible
network of interconnected computer networks that transmit data. It consists of
--- Content provided by FirstRanker.com ---
millions of smaller domestic, academic, business, and governmental networks,which together carry various information and services, such as electronic mail,
online chat, file transfer, and the interlinked web pages and other documents of
--- Content provided by FirstRanker.com ---
the world wide web.Demographics:
Demographics is a shorthand term for 'population characteristics'. Demographics
--- Content provided by FirstRanker.com ---
include race, age, income, mobility (in terms of travel time to work or number of
vehicles available), educational attainment, home ownership, employment
--- Content provided by FirstRanker.com ---
status, and even location. Distributions of values within a demographic variable,and across households, are both of interest, as well as trends over time.
Demographics are primarily used in economic and marketing research.
--- Content provided by FirstRanker.com ---
Innovation:
The classic definitions of innovation include:
--- Content provided by FirstRanker.com ---
1. the process of making changes to something established by introducingsomething new
2. the act of introducing something new: something newly introduced (The
--- Content provided by FirstRanker.com ---
American Heritage Dictionary).
3. the introduction of something new. (Merriam-Webster Online)
--- Content provided by FirstRanker.com ---
4. a new idea, method or device. (Merriam-Webster Online)5. the successful exploitation of new ideas (Dept of Trade and Industry,
UK).
--- Content provided by FirstRanker.com ---
6. change that creates a new dimension of performance Peter Drucker
(Hesselbein, 2002)
--- Content provided by FirstRanker.com ---
In the organisational context, innovation may be linked to performance and
growth through improvements in efficiency, productivity, quality, competitive
--- Content provided by FirstRanker.com ---
positioning, market share, etc. All organisations can innovate, including for
example hospitals, universities, and local governments.
--- Content provided by FirstRanker.com ---
While innovation typically adds value, innovation may also have a negative ordestructive effect as new developments clear away or change old organizational
forms and practices. Organisations that do not innovate effectively may be
--- Content provided by FirstRanker.com ---
destroyed by those that do.Telemedicine:
The term Telemedicine is the delivery of medicine at a distance. The term is
--- Content provided by FirstRanker.com ---
composed of the Greek word (tele) meaning 'far', and medicine.
Telemedicine may be as simple as two health professionals discussing a case
--- Content provided by FirstRanker.com ---
over the telephone, or as complex as using satellite technology and video-conferencing equipment to conduct a real-time consultation between medical
specialists in two different countries. It can also involve the use of an unmanned
--- Content provided by FirstRanker.com ---
robot. Telemedicine generally refers to the use of communications and
information technologies for the delivery of clinical care.
--- Content provided by FirstRanker.com ---
Wiki software:Wiki software is a type of collaborative software that runs a Wiki system. This
typically allows web pages to be created and edited using a common web
--- Content provided by FirstRanker.com ---
browser. It is usually implemented as a server-side script that runs on one or
more web servers, with the content generally stored in a relational database
--- Content provided by FirstRanker.com ---
management system, although some implementations use the server's fileinstead.
1.6 Self Assessment Questions
--- Content provided by FirstRanker.com ---
1. Organizations at least have to follow trends if not create them Comment.
2. Explain various trends that may affect business organizations worldwide.
--- Content provided by FirstRanker.com ---
3. Discuss the challenges and opportunities that are existed for the globalbusiness organizations.
1.22 Further Readings
--- Content provided by FirstRanker.com ---
Financial Dailies:
9. The Economic Times
--- Content provided by FirstRanker.com ---
10. Business Standard11. Business Line
12. The Financial Express
--- Content provided by FirstRanker.com ---
Business Magazines:13. Business World
14. Business India
--- Content provided by FirstRanker.com ---
15. Business Today
16. Outlook Money
--- Content provided by FirstRanker.com ---
17. Business & EconomyLesson 4:
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
International Management ? Ideas and Insights
--- Content provided by FirstRanker.com ---
Objectives:
After studying this lesson you should be able to:
--- Content provided by FirstRanker.com ---
To provide basic ideas and insights about the international business practicesTo observe the trends that influence the management of global company
To understand how Indian companies internationalizing their operations
through examples
--- Content provided by FirstRanker.com ---
Structure
1.23 Introduction
--- Content provided by FirstRanker.com ---
1.24 Executive take on the top business trends1.25 Response of Corporations
1.26 Summary
--- Content provided by FirstRanker.com ---
1.27 Glossary
1.28 Self Assessment Questions
--- Content provided by FirstRanker.com ---
1.29 Further ReadingsIntroduction:
The prime objective of this lesson is to provide basic ideas and insights of
--- Content provided by FirstRanker.com ---
international business practices to the self-learner. What are the top trendsinfluencing business organizations and how managers of global companies are
responding to them forms the core of this lesson. We also see how companies
--- Content provided by FirstRanker.com ---
adapting to the new situation with examples from Indian and foreign
perspective.
--- Content provided by FirstRanker.com ---
1.2. Executives take on the top business trends:Consulting firm McKinsey conducted a global survey with executives of MNCs
regarding top business trends. Executives report an accelerating pace of change
--- Content provided by FirstRanker.com ---
in an increasingly competitive business environment, driven by knowledge and
information trends and the forces of globalization. In brief the findings of the
--- Content provided by FirstRanker.com ---
survey are as follows;Executives see innovation and the free flow of information as the primary
drivers of ever-faster change in the business world.
--- Content provided by FirstRanker.com ---
Eighty-five percent describe their own business environment as more
competitive than it was five years ago, largely because of the improved
--- Content provided by FirstRanker.com ---
capabilities of their competitors and growth in the number of low-costcompetitors.
Executives predict that future profitability will depend most on knowledge
--- Content provided by FirstRanker.com ---
and information trends and the forces of globalization.
Executives say that their companies are better prepared to cope with core
--- Content provided by FirstRanker.com ---
risks in their own industries than with general threats such as a pandemic ornatural disaster.
The following sub sections describe the findings of the survey in detail.
--- Content provided by FirstRanker.com ---
1.2.1. Forces shaping the business environment:
Executives around the world see innovation and the free flow of information as
--- Content provided by FirstRanker.com ---
the primary drivers of an accelerating pace of change in the global businessenvironment. At the same time, executives continue to confront familiar and
powerful forces that bear the unmistakable signature of an emerging global
--- Content provided by FirstRanker.com ---
market--plentiful, cheap, and mobile capital; expanded access to talent andlabor pools; and a reduction in trade barriers. The survey findings paint a picture
of an increasingly competitive business world, characterized by great
--- Content provided by FirstRanker.com ---
opportunity and risk. But while executives appear to have opportunities at the
front of their minds, they may be underrating some of the equally great risks
--- Content provided by FirstRanker.com ---
involved. The respondents cited a broad range of factors that they see ascontributing most to the accelerating pace of change. Of these, innovation in
products, services, and business models as well as the greater ease of obtaining
--- Content provided by FirstRanker.com ---
information and developing knowledge figure most prominently, with 41
percent of the responses.
--- Content provided by FirstRanker.com ---
Against the backdrop of accelerating change, 85 percent of respondents describethe business environment in which their companies operate as "more
competitive" (45 percent) or "much more competitive" (40 percent) than it was
--- Content provided by FirstRanker.com ---
five years ago. The intensity is increasing for small as well as big companies,
and in all industries. Executives report notable differences, however. Judging by
--- Content provided by FirstRanker.com ---
the responses, telecommunications is the toughest industry: more than six in tenof its representatives see it as much more competitive. At the other end of the
scale is the business services industry: just over three in ten of its representatives
--- Content provided by FirstRanker.com ---
say their industry is much more competitive, and marginally less than half view
it as more competitive. While the executives clearly agree that competitive
--- Content provided by FirstRanker.com ---
intensity is increasing within their industries, they have differing takes on whichfactor contributes most to this development. Close to 25 percent single out the
improved capabilities of their competitors--as measured by knowledge and
--- Content provided by FirstRanker.com ---
talented employees, for instance--and almost as many note a growing number
of low-cost competitors. Opinions about the competitive challenges differ by
--- Content provided by FirstRanker.com ---
industry. More than one-third of heavy-industry representatives, as opposed tojust one in ten in financial services, single out low-cost competitors as the most
important factor. Telecom executives are almost twice as likely as respondents
--- Content provided by FirstRanker.com ---
from other industries to be concerned about innovative market entrants.Managers in health care view regulatory changes as the most important factor
behind growing competition in their industry
--- Content provided by FirstRanker.com ---
1.2.2. Trends to watch:
To a large degree, the global business landscape is shaped by macroeconomic,
--- Content provided by FirstRanker.com ---
social and environmental, and business trends. Correctly anticipating their futureimpact on global business and on the profitability of individual companies can
enable companies to succeed by riding the currents rather than swimming
--- Content provided by FirstRanker.com ---
against them. Respondents rate two macroeconomic trends namely the growing
number of consumers in emerging economies and the shift of economic activity
--- Content provided by FirstRanker.com ---
between and within regions and the business trend of greater ease of obtaininginformation and developing knowledge will be most important for global
business during the next five years. However, when assessing the impact on the
--- Content provided by FirstRanker.com ---
profitability of their own company, they place this business trend first and rate a
related social development (the increasing communication and interaction in
--- Content provided by FirstRanker.com ---
business and social realms due to technological innovation) almost as highly asthe two macroeconomic trends. The result appears to reinforce this survey's
findings about the growing role of information and knowledge in driving the
--- Content provided by FirstRanker.com ---
pace of change and shaping the global business environment. A significant
finding about another important trend--increasingly global labor and talent
--- Content provided by FirstRanker.com ---
markets--is that it ranks somewhat higher than average in India and NorthAmerica as well as in the IT and business services industries. Notably,
executives expect most of the ten trends to be substantially more important to
--- Content provided by FirstRanker.com ---
global business overall than to the profitability of individual companies. A
significant exception is the application of scientific techniques and approaches
--- Content provided by FirstRanker.com ---
to business management.1.2.3. Preparing for risk:
Managing risks will be one of the keys to corporate success in a fast-moving,
--- Content provided by FirstRanker.com ---
increasingly competitive, and global economy. Yet only three respondents in tenreport that their companies have taken active steps to prepare for any one of the
following scenarios that could harm virtually any company: a pandemic, a
--- Content provided by FirstRanker.com ---
natural disaster, or increased geopolitical instability, such as terrorism. The state
of preparedness is significantly higher for what appear to be core risks in
--- Content provided by FirstRanker.com ---
individual industries. Around 70 percent of executives in health care, financialservices, and telecommunications say that their company has taken active steps
to prepare for major regulatory changes. More than half of the respondents in the
--- Content provided by FirstRanker.com ---
health care industry report preparations for pandemics (for example, avian flu or
SARS). In heavy industry, 65 percent of executives say their company is
--- Content provided by FirstRanker.com ---
prepared for significant shortages or steep increases in the price of rawmaterials. Generally speaking, bigger companies are better prepared than
smaller companies. At companies with annual revenues of less than $1 billion,
--- Content provided by FirstRanker.com ---
more than 20 percent of respondents report that their company has not prepared
for any such risks. At companies with annual revenues of more than $1 billion,
--- Content provided by FirstRanker.com ---
less than 5 percent were equally unprepared.1.2.4. Planning ahead
A long-term strategic-planning process can be a powerful tool for identifying
--- Content provided by FirstRanker.com ---
growth opportunities and external risks. Asked how their strategic planning is
organized, executives revealed significant differences between small and big
--- Content provided by FirstRanker.com ---
companies. Those at companies with annual revenues of more than $1 billionhave a process that takes place at more levels of the organization and has a
longer time horizon. When executives are probed about what strategic planning
--- Content provided by FirstRanker.com ---
achieves at their companies, an interesting divergence emerges. C-level
executives are more confident than their lower-ranking counterparts that the
--- Content provided by FirstRanker.com ---
process results in concrete measures. Top executives also emphasize theeffectiveness of their company's strategic planning in identifying new
opportunities for growth. Others, in turn, underline its role in the annual
--- Content provided by FirstRanker.com ---
budgeting process.1.3 Response of Corporations:
In the following sub sections we have given the responses of Indian and global
--- Content provided by FirstRanker.com ---
organizations the way they are responding to the changes through examples.
1.3.1. MNC fast food chains go `local':
--- Content provided by FirstRanker.com ---
After almost a decade in the our country, transnational fast food retail chainslike KFC, McDonald`s, Domino`s, Pizza Hut and others are re-learning
marketing lessons and segmenting their product portfolio to capture Indian
--- Content provided by FirstRanker.com ---
consumers across diverse income levels and lifestyles. The strategy is an attempt
by top food retailers to tone up profit margins with a multi-layered product
--- Content provided by FirstRanker.com ---
portfolio that addresses the aspirational need of consumers willing to splurgewhile meeting the basic requirement at the bottom end. Retailers have
intensified the localisation of products to cater to the Indian demand of your
--- Content provided by FirstRanker.com ---
kind of place but our kind of food` and wooing consumers to shift from the
unorganised to organised outlets. Globally too, profit worries have led to food
--- Content provided by FirstRanker.com ---
retailers moving away from a pure volume-focused strategy.We have learnt that while Indian consumers like our ambience, the food has to
meet their local tastes. A consumer in an urban setting is as value-seeking as a
--- Content provided by FirstRanker.com ---
consumer in a non-urban market like Ludhiana is willing to splurge. We have
therefore adopted a multi-layered marketing strategy. The attempt is to have a
--- Content provided by FirstRanker.com ---
multi-dimensional approach of meeting the needs of a Karol Bagh shopkeeper, aTamilian diner or a Gujarati businessman while meeting the demands of a globe
traveller, said Mr.Arvind Mediratta, chief marketing officer (Indian
--- Content provided by FirstRanker.com ---
subcontinent) of Yum! Restaurants International, which owns KFC, Pizza Hut,
Taco Bell and other food chains. Companies are learning that local needs and
--- Content provided by FirstRanker.com ---
global brand images do not necessarily function on mutually exclusive terms.KFC has introduced a range that offers a complete meal to value-seeking Indian
consumers on regular days. The company tweaks its basket to launch
--- Content provided by FirstRanker.com ---
aspirational food products, combining it with entertainment to attract, duringweekends, consumers who are willing to splurge. Pizza Hut, for instance, has
beefed up its delivery model by customising offerings to replace home meals
--- Content provided by FirstRanker.com ---
and offering international, Indian fusion and value-meal products to target
various consumer requirements.
--- Content provided by FirstRanker.com ---
Similarly, in line with global trends, McDonald`s is addressing the need to toneup profit margins by moving away from focusing only on the value-meal
segment and offering products to health-conscious consumers. The outlet today
--- Content provided by FirstRanker.com ---
offers Indianised products like the paneer salsa wrap or a McAloo Tikki. The
focus is on having a high margin portfolio, at the same time, chasing volumes
--- Content provided by FirstRanker.com ---
with another range of products.Company officials said it was crucial that the brand addressed various consumer
needs and is not seen merely as a children`s brand. Apart from offering the
--- Content provided by FirstRanker.com ---
Happy Meal for children, the brand is changing strategies to accommodate wider
consumer requirements. McDonald`s low prices and taste factors have been its
--- Content provided by FirstRanker.com ---
main attractions while KFC`s unique selling proposition (USP) has been itsspecialty chicken fare. Food retailers say they protect the brand`s global ethos
by ensuring that 60% of the offerings are international while 40% is tweaked to
--- Content provided by FirstRanker.com ---
meet local tastes.
--- Content provided by FirstRanker.com ---
1.3.2. Godrej Consumer buys Rapidol's South Africa unitGodrej Consumer Products has entered into an agreement for the acquisition of
the South African hair color business of the UK-based Rapidol, as well as its
--- Content provided by FirstRanker.com ---
subsidiary Rapidol international which had as combined turnover of 52 million
South African Rand (Rs 33 crore), for an undisclosed amount. The company
--- Content provided by FirstRanker.com ---
proposes to facilitate the acquisition through a 100 per cent cash deal, subject toregulatory approvals. Acquisition gives company entry into large ethnic hair
colour markets
--- Content provided by FirstRanker.com ---
Godrej Consumer Products, in a release to the Bombay Stock Exchange, statedthat the acquisition gives the company an entry into a large ethnic hair color
market through a profit making company. The South African deal will not only
--- Content provided by FirstRanker.com ---
augment its top line and bottom line, which in turn will enhance stakeholder
value, but also provides the company an opportunity to acquire the Inecto and
--- Content provided by FirstRanker.com ---
Sofelene trademarks that would allow the company much larger territorial rightsover the brand equities and the combined entity will be in a position to create
value at a faster pace. It will also provide a springboard for the introduction of
--- Content provided by FirstRanker.com ---
the company`s products in South Africa and other African countries, the
company said in the release.
--- Content provided by FirstRanker.com ---
Rapidol South Africa owns Inecto that is an internationally known brand, whichenjoys a reputation of being a safe and affordable hair colourant with consumers
across South Africa and the African continent. Inecto is distributed across
--- Content provided by FirstRanker.com ---
Angola, Zambia, Mozambique, Tanzania, The Democratic Republic of Congo,
Swaziland, Ghana, Gabon, Botswana, Namibia, Lesotho, Zimbabwe, Mauritius,
--- Content provided by FirstRanker.com ---
Seychelles and Madagascar mainly through the cash and carry route.Additionally, Godrej also proposes to introduce some of its products such as hair
colors, FairGlow and Evita, viewed to enjoy a significant potential, in the
--- Content provided by FirstRanker.com ---
African market. The company proposes to drive further value from the
transaction by leveraging its high-quality low-cost manufacturing skills to
--- Content provided by FirstRanker.com ---
considerably improve the South African offering.Adi Godrej, chairman and managing director said; This transaction is
consistent with our endeavour to build a strong personal and household care
--- Content provided by FirstRanker.com ---
business both in India and across the globe, especially in Hair Colors. Rapidol
South Africa is a profit making company that manufactures and markets
--- Content provided by FirstRanker.com ---
premium hair colourants in the African market. Godrej added that the brandswould widen its portfolio of hair colourant and hair care offerings and give the
company access to the large and growing African market. We also propose to
--- Content provided by FirstRanker.com ---
introduce some of our own products there, via Rapidol`s established distributionnetwork. This is our second international acquisition in less than a year and
reflects our aggressive growth focus. We will continue to pursue value
--- Content provided by FirstRanker.com ---
enhancing inorganic and organic growth opportunities both in India and
overseas, he said. The South African acquisition comes on the back of Godrej
--- Content provided by FirstRanker.com ---
Consumer`s acquisition of UK-based Keyline Brands in October 2005, whichwas the first international acquisition by Godrej Consumer. Currently, the group
is also looking at expanding its presence to other countries in the East
--- Content provided by FirstRanker.com ---
particularly China.
1.3.3. In India, it's a brand new way
--- Content provided by FirstRanker.com ---
What do you do when you are a leading MNC and want to tap into the Indianconsumer market? Look at how the second best global brands have executed
their India strategy.
--- Content provided by FirstRanker.com ---
While global market leaders have proven to be flat-footed and bookish, brands
--- Content provided by FirstRanker.com ---
like Reebok, LG, Hyundai and Lee have stolen a march over their arch-rivals byburning the book and thinking on their feet. Most MNC companies are run by a
global manual, but those succeeded in India have shredded this manual and
--- Content provided by FirstRanker.com ---
taken the 'when in India, go local' approach and developed on local consumer
insight to chart their strategy, reasons marketing consultant Harish Bijoor,
--- Content provided by FirstRanker.com ---
CEO, Harish Bijoor Consults. Consider Lee. When it entered India in 1995,there was a very nascent market for branded apparel, much less premium jeans
wear. Premium brands like Levi's chose to play it safe by using the multi-brand
--- Content provided by FirstRanker.com ---
outlet route, but Lee chose to go it alone and set up exclusive showrooms.
According to market watchers, Levi's suffered from a brand perception problem
--- Content provided by FirstRanker.com ---
because it was clubbed with non-premium brands.Further, Arvind Brands, which owns the licence for Lee in India, decided to
--- Content provided by FirstRanker.com ---
retain ownership of operations for Lee. According to Chakor Jain, head(business development, Lee), Arvind Brands, Exclusive showrooms and
owning the operations added to our costs. However, it also added to the overall
--- Content provided by FirstRanker.com ---
customer
experience,
--- Content provided by FirstRanker.com ---
whichwe
considered
--- Content provided by FirstRanker.com ---
most
important.
--- Content provided by FirstRanker.com ---
When Reebok came to India in 1995, it forged alliances with health clubs andfitness centres to create brand awareness. When the retail market matured,
Reebok changed focus. Says Subhinder Sing Prem, MD, Reebok India, On the
--- Content provided by FirstRanker.com ---
retail front, we went about opening up new markets beginning with metros and
large cities, we swiftly moved into tier II and III towns.
--- Content provided by FirstRanker.com ---
To further establish its brand, Reebok signed up Indian cricketers, while Nikecontinued showing its international advertisements in Indian media. Today,
Reebok has a exclusive retail presence through 400 plus outlets, second only to
--- Content provided by FirstRanker.com ---
Bata, while Nike lags behind. LG's is the proverbial 'third time lucky' story.
After two failed joint ventures, it made a re-entry into the Indian market in 1998
--- Content provided by FirstRanker.com ---
all by itself. The other chaebols were on their way here, too, while Phillips andSony were already well-established. LG began with a rapid national roll-out,
mass customisation and products adapted specifically for Indian markets. It also
--- Content provided by FirstRanker.com ---
kept its dealers happy with a wide portfolio and allowed them to cut sweet deals.
Our success in India can be attributed to our ability to focus on empowering
--- Content provided by FirstRanker.com ---
people, profit-driven market presence and being an open organisation, with justabout all employees having access to the company's finances, says LG India's
MD, KR Kim. Today, with over Rs 7,500 crore in sales, LG leads in almost all
--- Content provided by FirstRanker.com ---
the categories in consumer durables. When Hyundai, with a name prone to mis-
pronounciation and virtually no global heritage, entered India in 1998, it signed
--- Content provided by FirstRanker.com ---
up Shah Rukh Khan to educate the consumers about the brand.Behind the scenes, the company resorted to extensive market studies and
technical camps before coming up with its first offering, Santro, a hatchback
--- Content provided by FirstRanker.com ---
with tall boy design. And it had chosen its market well, starting with the smallcar. To date, Hyundai has stayed true to its strategy and played by the
conventional Indian market rules tailored to suit its specific targets.
--- Content provided by FirstRanker.com ---
1.3.4. Farex to acquire a new taste
--- Content provided by FirstRanker.com ---
A Rs.250-crore brand a few years back, Farex has now slipped to less thanRs.10 crore. So a few eyebrows were raised when Wockhardt announced its
acquisition of the baby food brand last week. But Wockhardt says it has a few
--- Content provided by FirstRanker.com ---
plans up its sleeve to reposition the brand in a big way. That includes changing
its look and flavour. The in-house spraydry milk processing technology will
--- Content provided by FirstRanker.com ---
come in handy for Wockhardt in adding a dash of fresh milk`s taste in blandFarex. It may even launch Farex in different flavours to tingle the baby palate.
This will be done to regain the lost market shares. Market research showed that
--- Content provided by FirstRanker.com ---
babies do not like the taste of the 50-year old infant nutrition product, and seem
to prefer Nestle`s Cerelac, which is the leader in this segment. For Farex,
--- Content provided by FirstRanker.com ---
Wockhardt will be its third owner. The brand had changed hands twice earlier ?first, when the original owner, Glaxo, sold it to the ketchup major Heinz India
almost a decade ago. Subsequently, the brand moved from Heinz to Dumex
--- Content provided by FirstRanker.com ---
India, which was acquired by the UK-based Royal Numico in 2004. Wockhardt
had last week announced the acquisition of this brand along with another
--- Content provided by FirstRanker.com ---
medical nutritional brand Protinex in a deal, which involves takeover of DumexIndia, a company owned by the UK-based Royal Numico.
Besides the two heritage brands with over 50 years of brand equity, Wockhardt
--- Content provided by FirstRanker.com ---
inherits a strong sales and marketing organisation with 235 personnel with this
deal. The acquisition follows Royal Numico`s decision to exit India and focus
--- Content provided by FirstRanker.com ---
on China and other markets. Royal Numico move to exit India comes less thana year after it acquired Farex from Heinz and at a time when the company was
setting up a Rs 100-crore plus modern manufacturing facility for nutritional
--- Content provided by FirstRanker.com ---
supplement products. Under the agreement, Royal Numico will also offertechnical know-how to Wockhardt for the manufacture of specialised sugar-free
infant food products currently marketed in India and internationally, under its
--- Content provided by FirstRanker.com ---
brand names Dulac and Dupro. These brands are fast gaining acceptance in the
Indian market.
--- Content provided by FirstRanker.com ---
1.3.5. Future Beholds A Global CorpInfosys Technologies, as it rings In Its 25th Anniversary this year is uniquely
positioned to take the Global Delivery Model it has perfected, to the next level.
--- Content provided by FirstRanker.com ---
INFOSYS CEO Nandan Nilekani is rather fond of saying the model of the
future is yet to emerge, with reference to IT services companies. Implicit in the
--- Content provided by FirstRanker.com ---
statement is the assumption, more rather the belief, that if Infosys were to playits cards right, it will have a better shot at defining the new global standard than
anybody else, local or global. Nobody can accuse Infosys or its iconic founders
--- Content provided by FirstRanker.com ---
of thinking small. The logic being that it takes the same amount of energy and
time to think big as small!.
--- Content provided by FirstRanker.com ---
Infosys, as it rings in its 25th anniversary, is uniquely positioned to take themodel it has almost perfected, to the next level. It is a given that IT services as
they were historically delivered by companies like EDS, CSC, IBM Global
--- Content provided by FirstRanker.com ---
Services, is history. All of them, IBM being the most aggressive, have
embraced the virtues of offshoring and of the global delivery model. In the
--- Content provided by FirstRanker.com ---
meantime Indian IT services like Infosys who led the offshoring charge andbrought about a paradigm shift in the industry are building the front ends in the
US and other western markets and beefing up their consulting arms.
--- Content provided by FirstRanker.com ---
Infosys is betting that going from top to bottom as the big American companies
are doing (from a high-cost platform with expensive consultants to a low cost
--- Content provided by FirstRanker.com ---
platform), will prove to be more disruptive for the balance sheets of thosecompanies than the reverse will be for Infosys and ilk. That is go from a solid
low cost model and build the costlier high end in the US and Europe. Some
--- Content provided by FirstRanker.com ---
might quibble with this theory, arguing that it is easier to set up people factoriesin India and other low-cost destinations than to build a strong brand and front
end in the Western world. Infosys, of course, isn`t buying the toughness` of this
--- Content provided by FirstRanker.com ---
argument. The model of the future,` that Infosys wants to script to a large extent
depends on it emerging as a true global corporation. To its chairman and
--- Content provided by FirstRanker.com ---
talisman, NR Narayana Murthy, Infosys will be truly global when it will be ableto walk into the top campuses in the world and get the best talent from there to
work for it.
--- Content provided by FirstRanker.com ---
Infosys, as he points out, is already truly global in terms of its customers. As
over 90% of its revenues flow in from overseas, it follows that its clients are
--- Content provided by FirstRanker.com ---
outside of India. It now needs to get global in terms of employees, andgeographical presence. As K Dinesh, a co-founder of Infosys says: Our biggest
challenge will be to be a truly global company. Today, we are still very India
--- Content provided by FirstRanker.com ---
centric though we have 38 nationalities working with us. We need to be present
in all the continents and not just US and Europe. While the company has
--- Content provided by FirstRanker.com ---
local nationals on its sales team, it is now planning to set up HR hubs overseasand increase the number of foreign nationals even in the delivery function. As
Infosys crosses the quarter century mark and aims for true blue MNC status,
--- Content provided by FirstRanker.com ---
another issue it needs to confront is, Who, after the founders?`
This is not an immediate concern as Nilekani at 51 has another seven years to
--- Content provided by FirstRanker.com ---
retirement. But with the rest of the promoters being in Nilekani`s age bracket, itis essential for the company to groom the next tier, who at the moment aren`t
visible, publicly at least. Also, one might argue that the first 25 years were the
--- Content provided by FirstRanker.com ---
easy ones. The absolute ignorance about the IT sector meant that Infosys grew
to its current size is attracting very little attention from the political
--- Content provided by FirstRanker.com ---
establishment. But increasingly as its ambitious growth targets and need tohouse its thousands of employees run smack into political forces who are
inimical to parting with land in boom towns like Bangalore, Infosys` ability to
--- Content provided by FirstRanker.com ---
tread the fine line will become critical.1.3.6 Welspun wraps up UK's Christy
--- Content provided by FirstRanker.com ---
Welspun India today announced that acquisition of 85 per cent stake in CHT
Holdings, the promoters of UK`s leading towel brand Christy, for an enterprise
--- Content provided by FirstRanker.com ---
value of Rs 132.6 crore. The acquisition is in line with the company`s strategyof emerging as one of the largest global home textile company by 2008. B K
Goenka, vice-chairman and managing director of Welspun India, said the
--- Content provided by FirstRanker.com ---
company had paid Rs 100 crore towards the acquisition. The company
mobilised Rs 40 crore from internal resources and took a loan of Rs 60 crore
--- Content provided by FirstRanker.com ---
from Bank of India. Standard Chartered Bank advised Welspun on the deal.Following the announcement of the acquisition, the share price of Welspun
closed at Rs 87.70 on the BSE, 12.51 per cent higher over its previous Rs 77.95.
--- Content provided by FirstRanker.com ---
The balance 15 per cent stake will continue to be with CHT management.
Welspun will acquire the stake after three years. Both the parties shall be able to
--- Content provided by FirstRanker.com ---
exercise a put / call option after April 1, 2009. Rajesh Mandawewala, joint MDof Welspun has been appointed as chairman of Christy. Founded in 1851,
Christy is the world`s oldest towel maker and enjoys 75 per cent share of the UK
--- Content provided by FirstRanker.com ---
market with an annual turnover of pound 35 million (nearly Rs 284 crore). It
invented the first loom to mechanically weave and the sole supplier to
--- Content provided by FirstRanker.com ---
Wimbledon Championship tennis towel. It supplies to retailers such as Markand Spencer`s and John Lewis in UK.
Goenka, said, We want to benefit from Christy`s product technology. Christy
--- Content provided by FirstRanker.com ---
also complements our recent initiatives to develop a more robust model
providing global consumers including the UK and US with contemporary
--- Content provided by FirstRanker.com ---
products for the home. The acquisition is expected to give Welspun an accessto UK and European markets and extend the Christy brand to domestic
consumers through Welspun retail. Welspun is expected to cross the $1 billion
--- Content provided by FirstRanker.com ---
mark at the end of the current financial year. Welspun said it would realign itsUS distribution network with Christy`s own network. Joel Rosenblatt, CEO of
Christy, said the company expected to post a turnover of nearly Rs 338 crore
--- Content provided by FirstRanker.com ---
next year. Welspun is the largest terry towel producer in Asia and fourth largest
in the world.
--- Content provided by FirstRanker.com ---
1.3.7. Outsourcing is passe, companies now bet on Co - sourcing
New methods of outsourcing are today redefining the way of working. One
--- Content provided by FirstRanker.com ---
such way is co-sourcing which is an investment relationship marked by shared
objectives, shared risks and shared rewards between two companies, one of
--- Content provided by FirstRanker.com ---
which is a service provider. Specifically, the service provider would have tohelp restructure the company and be willing to make new investments, while
driving out costs from the co-sourcing company`s existing ways working.
--- Content provided by FirstRanker.com ---
According to a joint case study by Accenture and Thomas Cook, the cosourcing
agreement between Accenture and Thomas Cook, UK and Ireland has helped
--- Content provided by FirstRanker.com ---
Thomas Cook to improve operations and reduce costs. The study notes that dueto the alliance, Thomas Cook has been able to save ?140 million ($243.72
million) in 16 months.
--- Content provided by FirstRanker.com ---
The more recent expansion of services at Accenture`s delivery centre
capabilities has resulted in an additional 30% savings. The study notes that
--- Content provided by FirstRanker.com ---
under a 10-year arrangement, Accenture transitioned approximately 60% of theshared services workload, including functional areas such as application
management, accounting operations, payroll help desk and training
--- Content provided by FirstRanker.com ---
administration, to its delivery centre in Bangalore. The remaining shared
services resources focused on more strategic activities, including IT operations,
--- Content provided by FirstRanker.com ---
reporting and payroll processing. The term was able to migrate the majority ofthe work in six months, and completed the transition in 11 months with all
transition goals met on time and on budget.
--- Content provided by FirstRanker.com ---
Accenture had initially collaborated with Thomas Cook UK and Ireland to sharea 10-year co-sourcing arrangement. The main component of this agreement was
a cost-effective shared services centre co-located in Peterborough, United
--- Content provided by FirstRanker.com ---
Kingdom. Accenture and Thomas Cook designed the shared services centre to
be a multi-process centre covering all the services under one roof. According to
--- Content provided by FirstRanker.com ---
Carl Dawson, Thomas Cook UK and Ireland`s IT director, We knew that co-sourcing would enable us to create a single administrative focus, with a single
set of information systems under the management of experts. In addition, the
--- Content provided by FirstRanker.com ---
arrangement would free Thomas Cook UK from non-strategic functions,
allowing it to propel its business forward. To support the shared services
--- Content provided by FirstRanker.com ---
model, Accenture transferred nearly 400 Thomas Cook employees to Accenture.Accenture also collaborated with Thomas Cook to develop a single, integrated
SAP platform for the entire business. Given the cost savings and other benefits,
--- Content provided by FirstRanker.com ---
co-sourcing can well be the new model for outsourcing allowing both parties to
retain stake.
--- Content provided by FirstRanker.com ---
1.4 Summary:
In future we will see the emergence of economic domains, which have no regard
--- Content provided by FirstRanker.com ---
to borders. The world is reorganising itself around economic domains.
Celebrated futurist John Naisbitt spoke about globalisation long before anyone
--- Content provided by FirstRanker.com ---
did in the 1980s. He predicted the rise of China and Asia in 1996, much beforethe now famous Goldman Sach`s BRIC report. In his latest book Mind Set he
has given eleven mindsets which may help global business managers to have
--- Content provided by FirstRanker.com ---
better perspective of global trends. He mentioned that the compulsion to be right
is the enemy of creativity and growth. Organizations should not worry about
--- Content provided by FirstRanker.com ---
wrong decisions. They should learn from their mistakes. The success as well asfailure stories have to be documented and should be shared among different
divisions, entities, subsidiaries, etc., One of the key mindsets is that you get
--- Content provided by FirstRanker.com ---
results not by solving problems but by seeking opportunities. Problem solversare necessarily dealing with yesterday. Most of the business organizations are
responding proactively to the changes in the international business environment
--- Content provided by FirstRanker.com ---
and reaping rich benefits.
--- Content provided by FirstRanker.com ---
1.5 Glossary:BRIC Report This report is prepared by Goldman Sach an international
financial and consulting firm. In it they mentioned countries such as Brazil,
--- Content provided by FirstRanker.com ---
Russia, India and China will become major economies and alter the structure of
international business.
--- Content provided by FirstRanker.com ---
Chaebols: South Korean business conglomerates popularly known as chaebols.Cosourcing: Which is an investment relationship marked by shared objectives,
shared risks and shared rewards between two companies, one of which is a
--- Content provided by FirstRanker.com ---
service provider.
--- Content provided by FirstRanker.com ---
1.6 Self Assessment Questions:1. Describe briefly the findings of McKinsey Global survey of executives on
top business trends.
--- Content provided by FirstRanker.com ---
2. Give two example of how Indian companies are approaching the
internationalization of their businesses.
--- Content provided by FirstRanker.com ---
3. Explain with examples how global companies are localizing their businessstrategies to suit Indian market conditions.
--- Content provided by FirstRanker.com ---
1.7 Further Readings:
--- Content provided by FirstRanker.com ---
Financial Dailies:
--- Content provided by FirstRanker.com ---
18. The Economic Times19. Business Standard
20. Business Line
--- Content provided by FirstRanker.com ---
21. The Financial Express
--- Content provided by FirstRanker.com ---
Business Magazines:22. Business World
--- Content provided by FirstRanker.com ---
23. Business India
24. Business Today
--- Content provided by FirstRanker.com ---
25. Outlook Money--- Content provided by FirstRanker.com ---
Lesson 5:--- Content provided by FirstRanker.com ---
International Management ? Schools of Thought
--- Content provided by FirstRanker.com ---
Objectives:After studying this lesson you should be able to:
To understand the concepts of international management
--- Content provided by FirstRanker.com ---
To study traditional theories of International TradeTo know modern competitive models of international business
Structure
--- Content provided by FirstRanker.com ---
1.30 Introduction1.31 International Trade Theories
1.32 Alternative Theories
--- Content provided by FirstRanker.com ---
1.33 Competitive Models of International Business
1.34 Summary
--- Content provided by FirstRanker.com ---
1.35 Glossary1.36 Self Assessment Questions
1.37 Further Readings
--- Content provided by FirstRanker.com ---
1.1 Introduction;
--- Content provided by FirstRanker.com ---
International business activity is not new. The transfer of goods and servicesacross national borders has been taking place for thousands of years. Since the
end of World War II, however, international business has undergone a
--- Content provided by FirstRanker.com ---
revolution. Contemporary business is characterized by growing globalization.
Globalization refers to the process of internationalization, typical of open
--- Content provided by FirstRanker.com ---
economies. There are different theories which explain how and why MNCscome up, in what direction they are moving or when they will take a definite
form, etc., Let us discuss briefly these theories in the following sections.
--- Content provided by FirstRanker.com ---
1.2 International Trade Theories:
Whenever a buyer and seller come together, each expects to gain something
--- Content provided by FirstRanker.com ---
from the other. The same expectation applies to nations that trade with each
other. It is virtually impossible for a country to be completely self-sufficient
--- Content provided by FirstRanker.com ---
without incurring undue costs. Therefore, trade becomes a necessary activity,though in some cases trade does not always work to the advantage of the nations
involved. Virtually all governments feel political pressure when they experience
--- Content provided by FirstRanker.com ---
trade deficits. Too much emphasis is often placed on the negative effects of
trade, even though it is questionable whether such perceived disadvantages are
--- Content provided by FirstRanker.com ---
real or imaginary. The benefits of trade, in contrast, are not often stressed, norare well communicated to workers and consumers.
Why do nations trade? A nation trades because it expects to gain something
--- Content provided by FirstRanker.com ---
from its trading partner. One may ask whether trade is like a zero-sum game, in
the sense that one must lost so that another will gain. The answer is no, because
--- Content provided by FirstRanker.com ---
though one does not mind gaining benefits at someone else`s expense, on onewants to engage in a transaction that includes a high risk of loss. For trade to
take place, both nations must anticipate gain from it. In other worlds, trade is a
--- Content provided by FirstRanker.com ---
positive sum game. In order to explain how gain is derived from trade, it is
necessary to examine a country`s production possibility curve. How absolute
--- Content provided by FirstRanker.com ---
and relative advantages affect trade options are based on the trading partners`production possibility curves.
--- Content provided by FirstRanker.com ---
1.2.1. Production Possibility Curve
Without trade, a nation would have to produce all commodities by itself in order
--- Content provided by FirstRanker.com ---
to satisfy all its needs. Exhibit 1 shows a hypothetical example of a countrywith a decision concerning the production of two products, computers and
automobiles. This graph shows the number of units of computer or automobile
--- Content provided by FirstRanker.com ---
the country is able to produce. The production possibility curve shows the
maximum number of units made when computers and automobiles are produced
in various combinations, since one product can be substituted for the other
--- Content provided by FirstRanker.com ---
within the limit of available resources. The country may elect to specialize or
put all its resources into making either computers (point A) or automobiles
--- Content provided by FirstRanker.com ---
(point B). At point C, product specialization has not been chosen, and thus aspecific number of each of the two products will be produced.
Because each country has a unique set of resources, each country possesses its
--- Content provided by FirstRanker.com ---
own unique production possibility curve. This curve, when analyzed, provides
an explanation of the logic behind international trade. Regardless of whether the
--- Content provided by FirstRanker.com ---
opportunity cost is constant or variable, a country must determine the propermix of any two products and must decide whether it wants to specialize in one
of the two. Specialization will likely occur if specialization allows the country
--- Content provided by FirstRanker.com ---
to improve its prosperity by trading with another nation. The principles of
absolute advantage and relative advantage explain how the production
--- Content provided by FirstRanker.com ---
possibility curve enables a country to determine what to export and what toimport.
Exhibit 1
--- Content provided by FirstRanker.com ---
Production Possibility Curve: Constant Opportunity Cost
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
A
--- Content provided by FirstRanker.com ---
Units of
--- Content provided by FirstRanker.com ---
C
--- Content provided by FirstRanker.com ---
ComputerO
--- Content provided by FirstRanker.com ---
B
Units of Automobile
1.2.2. Mercantilism:
--- Content provided by FirstRanker.com ---
According to the philosophy of mercantilism prevalent in the sixteenth and
seventeenth centuries, nations should create and accumulate wealth through
--- Content provided by FirstRanker.com ---
trade, by maximizing net export surplus (exports minus imports). Accordinglytrade and commerce was deemed more important than manufacturing and
production. Several trading companies such as East India Company and Dutch
--- Content provided by FirstRanker.com ---
India Company started exploring and exploiting colonies like India in search of
raw materials and market for the finished goods of mother countries like
--- Content provided by FirstRanker.com ---
England and Holland. Thus, the then MNCs in the crudest form confined only totrading initially and eventually tried to build an empire in the form of which
capitalism spread.
--- Content provided by FirstRanker.com ---
This theory emphasizes the responsibility of the state to protect and promote
national wealth by encouraging exports and limiting imports. Since wealth is
--- Content provided by FirstRanker.com ---
limited, trade between nations is a zero-sum game, so one country can onlybenefit at the expense of another. Mercantilism was advocated by a number of
English, French and German writers, many of whom were merchants. Leading
--- Content provided by FirstRanker.com ---
Mercantilists included Gerald Malynes (1586-1641), Thomas Mun (1571-1623)
and John Locke (1632-1704). Mercantilists welcomed government involvement
--- Content provided by FirstRanker.com ---
in economic matters as a means of stimulating the creation of wealth, andfavored such policies as high-import tariffs, prohibition of bullion exports, and
exchange control.
--- Content provided by FirstRanker.com ---
1.2.3. Absolute advantage theory:
This model comes under classical economic model suggests the use of the
--- Content provided by FirstRanker.com ---
principles and policies of laissez faire to get the best out of a developmentprocess. Extension of this philosophy from domestic to international transactions
implies that free-trade` is better than restricted trade` which is better than no-
--- Content provided by FirstRanker.com ---
trade`. The wealth of nations can grow only through free-trade between
countries based on the principle of Absolute Cost Advantage` or Comparative
Cost Advantage`. Either way, free trade will generate gains from trade`. As a
--- Content provided by FirstRanker.com ---
corollary, countries should encourage not only foreign trade, but also foreign
investment.
--- Content provided by FirstRanker.com ---
Absolute advantage theory of Scottish economist Adam Smith (1723-1790) wasan international trade history theory that asserted individuals or nations trade
because they have superior productivity in particular industries. Nations should
--- Content provided by FirstRanker.com ---
produce and export goods for which they possess an absolute advantage and
import others which other nations possess an absolute advantage for. A country
--- Content provided by FirstRanker.com ---
has an absolute advantage economically over another when it can producesomething more cheaply. Governments may attempt to counter absolute
advantage by erecting trade barriers, allowing young, uncompetitive, industries
--- Content provided by FirstRanker.com ---
enough time to become established. Adam Smith`s absolute advantage theory
was superseded by the comparative advantage approach.
--- Content provided by FirstRanker.com ---
1.2.4. Comparative Advantage:The theory of comparative advantage explains why it can be beneficial for two
to trade, even though one of them may be able to produce every kind of item
--- Content provided by FirstRanker.com ---
more cheaply than the other. What matters is not the absolute cost of production,
but rather the ratio between how easily the two countries can produce different
--- Content provided by FirstRanker.com ---
kinds of things. The concept is highly important in modern international tradetheory.
Comparative advantage was first described by Robert Torrens in1815 in an
--- Content provided by FirstRanker.com ---
essay on the corn trade. He concluded that it was to England`s advantage to
trade various goods with Poland in return for corn, even though it might be
--- Content provided by FirstRanker.com ---
possible to produce that corn more cheaply in England than Poland. However,the theory is usually attributed to David Ricardo, who explained it in greater
detail in his 1817 book The Principles of Political Economy and Taxation in an
--- Content provided by FirstRanker.com ---
example involving England and Portugal. In Portugal it is possible to produce
both wine and cloth with less work than it takes in England. However, the
relative costs of producing those two goods are different in the two countries. In
--- Content provided by FirstRanker.com ---
England it is very hard to produce wine, and only moderately difficult to
produce cloth. In Portugal both are easy to produce. Therefore, while it is
--- Content provided by FirstRanker.com ---
cheaper to produce cloth in Portugal than England, it is cheaper still for Portugalto produce excess wine, and trade that for English cloth. Conversely, England
benefits from this trade because its cost for producing cloth has not changed but
--- Content provided by FirstRanker.com ---
it can now get wine at closer to the cost of cloth.
In simple words David Ricardo showed that a nation might properly import
--- Content provided by FirstRanker.com ---
goods it could make itself with a lower expenditure of labour as long as itsrelative efficiency in making other exportable goods was greater. He suggested
that specialization, based on absolute cost advantage, would not be possible
--- Content provided by FirstRanker.com ---
because of the immobility of both capital and labour. However, the assumption
of this theory were questioned by many.
--- Content provided by FirstRanker.com ---
Critical Analysis of Ricardo's theoryRicardo's principle relies on a variety of implicit assumptions that are debatable,
such as that there is no (or a low) cost for transportation, and that the advantages
--- Content provided by FirstRanker.com ---
of increased production outweigh externalities such as environmental
contamination or social inequities. Opponents of free trade often point out that
--- Content provided by FirstRanker.com ---
globalized communications and transportation unavailable in Ricardo's timeinvalidate the assumption of capital immobility and cause capital to gravitate
toward absolute advantage. Another concern is that comparative advantage only
--- Content provided by FirstRanker.com ---
works when competition is absolutely perfect. It has also been argued that
comparative advantage may reduce economic diversity to risky levels. Advice to
--- Content provided by FirstRanker.com ---
diversify one's portfolio is allegedly generally applicable to economies also.Some would dissent, however, and say that globalization has decreased
transportation costs and despite the increased movement of capital, differences
--- Content provided by FirstRanker.com ---
in capacities of production are still wide, in fact, usually the opponents of
globalization also claim that the gap is widening. As to perfect competition,
supporters of the theory claim that this could be achieved through universal free
--- Content provided by FirstRanker.com ---
trade, which although has not been achieved to date should be an active goal of
state leaders.
--- Content provided by FirstRanker.com ---
1.2.5. Heckscher-Ohlin Trade theory (1919):
First developed by Eli Heckscher (1879-1952) and later developed by fellow
--- Content provided by FirstRanker.com ---
Swedish economist Bertil Ohlin (1899-1979) in 1933, Heckscher-Ohlin trade
theory is a theory to explain the existence and pattern of international trade
--- Content provided by FirstRanker.com ---
based on a comparative cost advantage between countries producing differentgoods. Heckscher and Ohlin state that this advantage exists because of the
relative resource endowments of the countries trading. Heckscher-Ohlin
--- Content provided by FirstRanker.com ---
identified the source of comparative advantage not just in labour costs but in
total factor-endowments` in different countries. A labour-abundant country
--- Content provided by FirstRanker.com ---
will specialize in the production of labour-intensive goods; a capital-abundantcountry will specialize in the production of capital-intensive goods.
Accordingly, there will be trade between countries depending on their respective
--- Content provided by FirstRanker.com ---
factor-endowments. A labour-abundant country will export labour-intensive
goods, but import capital-intensive goods. However, the Russian-born American
--- Content provided by FirstRanker.com ---
economist Wassily Leontief (1906-1999) in 1954 examined US foreign tradeand found that US exports were more labor intensive and imports were more
capital intensive (the Leontief paradox). Where as we believe US is capital-
--- Content provided by FirstRanker.com ---
intensive rather than labour-abundant.
This generalization is based on the tacit assumption of factor immobility,
--- Content provided by FirstRanker.com ---
identical production functions, perfect competition, zero information costs,absence of external economies of production, scale and norms of market
efficiency-all these conditions being obtained with the trading partners. On this
--- Content provided by FirstRanker.com ---
basis countries will enter international trade until it equalizes factor prices
between countries` (Samuelson). The major weakness of this model lies in the
unrealistic nature of the underlying assumptions. In particular, in today`s world,
--- Content provided by FirstRanker.com ---
factors like labour, capital and technology are mobile among the countries.
Therefore, empirical findings on flows of foreign capital, foreign technology,
--- Content provided by FirstRanker.com ---
foreign goods and services, foreign brand names across countries often negatethe proposition of this model.
--- Content provided by FirstRanker.com ---
1.2.6. Trade Theories ? Conclusion:
Trade theories, in spite of their usefulness, simply explain what nations should
--- Content provided by FirstRanker.com ---
do rather than describe what nations actually do. The desired trade pattern basedon those theories related to comparative advantage and factor endowment often
deviates significantly from the actual trade practice. It is thus necessary to
--- Content provided by FirstRanker.com ---
modify the theories to account for the divergence caused by extraneous
variables. Industrial nations` high-income levels for instance may foster a
--- Content provided by FirstRanker.com ---
preference for high-quality products that least developed countries (LDCs) maybe unable to supply. Furthermore, trade restrictions, a norm rather than an
exception, heavily influence the extent and direction of trade, and any
--- Content provided by FirstRanker.com ---
investigation is not complete without taking tariffs, quotas, and other trade
barriers into consideration. Perhaps the most serious problem with classical
--- Content provided by FirstRanker.com ---
trade theories is their failure to incorporate marketing activities into the analysis.It is inappropriate to assume that consumers` tastes are homogeneous across
national markets and that such tastes can be largely satisfied by commodities
--- Content provided by FirstRanker.com ---
that are homogeneous. Marketing activities such as distribution and promotion
add more value to a product, the success of the product is often determined by
--- Content provided by FirstRanker.com ---
the planning and execution of such activities.In theory, the more different two countries are, the more they stand to gain by
trading with each other. There is no reason why a country should want to trade
--- Content provided by FirstRanker.com ---
with another that is a mirror image of itself. However, a look at world trade
casts some doubt on the validity of classical trade theories. Developed countries
trade more among themselves than with developing countries.
--- Content provided by FirstRanker.com ---
1.3.1. Alternative Models:
This section outlines a brief view of alternative models, which also influence the
--- Content provided by FirstRanker.com ---
major international business decisions.1.3.1: Theory of International Product life cycle:
--- Content provided by FirstRanker.com ---
Long-term patterns of international trade are influenced by product innovation
and subsequent diffusion. A country that produces technically superior goods
--- Content provided by FirstRanker.com ---
will sell these first to its domestic market, then to other technically advancedcountries. In time, developing countries will import and later manufacture these
goods, by which stage the original innovator will have produced new products.
--- Content provided by FirstRanker.com ---
The international product life cycle (IPLC) theory, developed by Vernon and
others economists to explain trade in a context of comparative advantage,
--- Content provided by FirstRanker.com ---
describes the diffusion of an innovation across national boundaries. The lifecycle begins when a developed country, having a new product to satisfy
consumer needs, wants to exploit its technological breakthrough by selling
--- Content provided by FirstRanker.com ---
abroad. Other advanced nations soon start up their own production facilities, and
before long LDC`s do the same. Efficiency / comparative advantage shifts from
--- Content provided by FirstRanker.com ---
developed countries to developing nations. Finally, advanced nations, no longercost-effective, import products from their former customers. The moral of this
process could be that an advanced nation becomes a victim of its own creation.
--- Content provided by FirstRanker.com ---
The international product life cycle can be defined as market life span stages the
product goes through in international markets sequentially, simultaneously or
--- Content provided by FirstRanker.com ---
asynchronously. The sequential stages are introduction, growth, maturity,decline and extinction in the international markets. When a product is positioned
in different international markets at the same time and is going through similar
--- Content provided by FirstRanker.com ---
life cycle stages, the cycle process is simultaneous. The life cycle stages are
asynchronous when the product is in different stages in different international
markets at the same time. The life cycle stage in which a product can be
--- Content provided by FirstRanker.com ---
positioned is influenced by macro variables indigenous to country markets.
Stanton and others cite examples of this phenomenon. Steel-belted auto radial
--- Content provided by FirstRanker.com ---
tires had reached the saturation level in Western Europe when they were beingdiscovered by the U.S. market. Thus it was in the maturity stage in Western
Europe and introductory stage in the United States.
--- Content provided by FirstRanker.com ---
1.3.2. Technological gap theory:
--- Content provided by FirstRanker.com ---
Technological gap theory proposes that changes in international trade aredictated by the relative technological sophistication of countries. Some nations,
such as the US or Japan, have a competitive trade advantage because of their
--- Content provided by FirstRanker.com ---
ability to innovate. Over time, other countries will bridge a particular gap
although the really innovative will have opened others.
--- Content provided by FirstRanker.com ---
1.3.3. Diamond Model ? Competitive Advantage of Nations
--- Content provided by FirstRanker.com ---
The Diamond model of Michael Porter for the Competitive Advantage of
Nations offers a model that can help understand the competitive position of a
--- Content provided by FirstRanker.com ---
nation in global competition. This model can also be used for other majorgeographic regions.
Traditionally, economic theory mentions the following factors for comparative
--- Content provided by FirstRanker.com ---
advantage for regions or countries:
A. Land
--- Content provided by FirstRanker.com ---
B. LocationC. Natural resources (minerals, energy)
D. Labor, and
--- Content provided by FirstRanker.com ---
E. Local population size.
Because these factor endowments can hardly be influenced, this fits in a rather
passive (inherited) view towards national economic opportunity.
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
Exhibit 5.2
--- Content provided by FirstRanker.com ---
Porter's Diamond Model for Competitive Advantage of Nations:Government
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
FirmStrategy,
--- Content provided by FirstRanker.com ---
Structure and rivalry
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
Factor
--- Content provided by FirstRanker.com ---
DemandEndowments
Conditions
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
Relatedand
--- Content provided by FirstRanker.com ---
Supporting Industries
--- Content provided by FirstRanker.com ---
Porter says sustained industrial growth has hardly ever been built on abovementioned basic inherited factors. Abundance of such factors may actually
undermine competitive advantage! He introduced a concept of "clusters," or
--- Content provided by FirstRanker.com ---
groups of interconnected firms, suppliers, related industries, and institutions thatarise in particular locations.
As a rule Competitive Advantage of nations has been the outcome of 4
--- Content provided by FirstRanker.com ---
interlinked advanced factors and activities in and between companies in these
clusters. These can be influenced in a pro-active way by government.
--- Content provided by FirstRanker.com ---
These interlinked advanced factors for Competitive Advantage for countries orregions in Porters Diamond framework are:
1. Firm Strategy, Structure and Rivalry (The world is dominated by
--- Content provided by FirstRanker.com ---
dynamic conditions, and it is direct competition that impels firms to work for
increases in productivity and innovation)
--- Content provided by FirstRanker.com ---
2. Demand Conditions (The more demanding the customers in an economy,the greater the pressure facing firms to constantly improve their
competitiveness via innovative products, through high quality, etc)
--- Content provided by FirstRanker.com ---
3. Related Supporting Industries (Spatial proximity of upstream or
downstream industries facilitates the exchange of information and promotes
--- Content provided by FirstRanker.com ---
a continuous exchange of ideas and innovations)4. Factor Conditions (Contrary to conventional wisdom, Porter argues that the
"key" factors of production (or specialized factors) are created, not inherited.
--- Content provided by FirstRanker.com ---
Specialized factors of production are skilled labour, capital and
infrastructure. "Non-key" factors or general use factors, such as unskilled
--- Content provided by FirstRanker.com ---
labor and raw materials, can be obtained by any company and, hence, do notgenerate sustained competitive advantage. However, specialized factors
involve heavy, sustained investment. They are more difficult to duplicate.
--- Content provided by FirstRanker.com ---
This leads to a competitive advantage, because if other firms cannot easily
duplicate these factors, they are valuable).
--- Content provided by FirstRanker.com ---
The role of government in Porter's Diamond Model is "acting as a catalyst and
challenger; it is to encourage - or even push - companies to raise their
--- Content provided by FirstRanker.com ---
aspirations and move to higher levels of competitive performance. They mustencourage companies to raise their performance, stimulate early demand for
advanced products, focus on specialized factor creation and to stimulate local
--- Content provided by FirstRanker.com ---
rivalry by limiting direct cooperation and enforcing anti-trust regulations.
Porter introduced this model in his book: The Competitive Advantage of
--- Content provided by FirstRanker.com ---
Nations, after having done research in ten leading trading nations. The book wasthe first theory of competitiveness based on the causes of the productivity with
which companies compete instead of traditional comparative advantages such as
--- Content provided by FirstRanker.com ---
natural resources and pools of labour.
--- Content provided by FirstRanker.com ---
1.4. Competitive Models of International BusinessThe following section deals with models of contemporary nature and very useful
for strategy formulation of MNCs.
--- Content provided by FirstRanker.com ---
1.4.1. Core competency
The concept of core competencies was developed in the management field.
--- Content provided by FirstRanker.com ---
C.K.Prahalad and Gary Hamel introduced the concept in a 1990 HarvardBusiness Review article. They wrote that a core competency is "an area of
specialized expertise that is the result of harmonizing complex streams of
--- Content provided by FirstRanker.com ---
technology and work activity." As an example they gave Honda`s expertise in
engines. Honda was able to exploit this core competency to develop a variety of
--- Content provided by FirstRanker.com ---
quality products from lawn mowers and snow blowers to trucks andautomobiles. To take an example from the automotive industry, it has been
claimed that Volvo`s core competence is safety. A company's core competency
--- Content provided by FirstRanker.com ---
are things that a firm can do well and that meet the following three conditions;
1. It provides customer benefits,
--- Content provided by FirstRanker.com ---
2. It is hard for competitors to imitate, and3. it can be leveraged widely to many products and markets.
--- Content provided by FirstRanker.com ---
A core competency can take various forms, including technical / subject matterknow how, a reliable process, and/or close relationships with customers and
suppliers. It may also include product development or culture such as employee
--- Content provided by FirstRanker.com ---
dedication. Modern business theories suggest that most activities that are not
part of a company's core competency should be outsourced. If a core
--- Content provided by FirstRanker.com ---
competency yields a long term advantage to the company, it is said to be asustainable competitive advantage.
Ever since this concept is introduced in the 1990`s many researchers have tried
--- Content provided by FirstRanker.com ---
to highlight and further illuminate the meaning of core competence. According
to Leonard-Barton, D. Capabilities are considered core if they differentiate a
--- Content provided by FirstRanker.com ---
company strategically. On the other hand Galunic and Rodan (1998) argue thata core competence differentiates not only between firms but also inside a firm
it differentiates amongst several competencies. In other words, a core
--- Content provided by FirstRanker.com ---
competency guides a firm recombining its competencies in response to demands
from the environment.
--- Content provided by FirstRanker.com ---
It is important to distinguish between individual competencies or capabilitiesand core competencies. Individual capabilities stand-alone and are generally
considered in isolation. Gallon, Stillman, and Coates (1995) made it explicit that
--- Content provided by FirstRanker.com ---
core competencies are more than the traits of individuals. They defined core
competencies as "aggregates of capabilities, where synergy is created that has
--- Content provided by FirstRanker.com ---
sustainable value and broad applicability." That synergy needs to be sustained inthe face of potential competition and, as in the case of engines, must not be
specific to one product or market. So according to this definition, core
--- Content provided by FirstRanker.com ---
competencies are harmonized, intentional constructions. Coyne, Hall, and
Clifford (1997) proposed that "a core competence is a combination of
--- Content provided by FirstRanker.com ---
complementary skills and knowledge bases embedded in a group or team thatresults in the ability to execute one or more critical processes to a world class
standard." Two ideas are especially important here. The skills or knowledge
--- Content provided by FirstRanker.com ---
must be complementary, and taken together they should make it possible toprovide a superior product."
For example, Black and Decker`s core technological competency is in 200 to
--- Content provided by FirstRanker.com ---
600 W electric motors. All of their products are modifications of this basic
technology (with the exception of their work benches, flash lights, battery
--- Content provided by FirstRanker.com ---
charging systems, toaster ovens, and coffee percolators). They produce productsfor three markets;
--- Content provided by FirstRanker.com ---
1. the home workshop market - In the home workshop market, small
electric motors are used to produce drills, circular saws, sanders, routers,
--- Content provided by FirstRanker.com ---
rotary tools, polishers, and drivers.2. the home cleaning and maintenance market - In the home cleaning and
maintenance market, small electric motors are used to produce dust busters,
--- Content provided by FirstRanker.com ---
etc.
3. kitchen appliance market. In the kitchen appliance market, small electric
--- Content provided by FirstRanker.com ---
motors are used to produce can openers, food processors, blenders, breadmakers, and fans.
1.4.2. Sustainable Competitive Advantage:
--- Content provided by FirstRanker.com ---
Sustainable competitive advantage (SCA) A company that is more profitable
than its rivals is exploiting some form of competitive advantage. The benchmark
--- Content provided by FirstRanker.com ---
for profitability is the company's cost of capital. To consistently make profits inexcess of its cost of capital - economic rent - the company must possess some
form of sustainable competitive advantage (SCA) to derive firm specific
--- Content provided by FirstRanker.com ---
distinctive strategic positioning.
A firm possesses a SCA when it has value creating processes and positions that
--- Content provided by FirstRanker.com ---
cannot be duplicated or imitated by other firms that lead to the production of
above normal rents. A SCA is different from a competitive advantage (CA) in
--- Content provided by FirstRanker.com ---
that it provides a long-term advantage that is not easily replicated. However,these above normal rents can attract new entrants who drive down economic
rents. A CA is a position a firm attains that lead to above normal rents or a
--- Content provided by FirstRanker.com ---
superior financial performance. The processes and positions that engender such
a position (CA) is not necessarily non-duplicable or inimitable. It is possible for
--- Content provided by FirstRanker.com ---
some companies to, temporarily, make profits above the cost of capital withoutsustainable competitive advantage.
A key difference between CA and SCA is that the processes and positions a firm
--- Content provided by FirstRanker.com ---
may hold are non-duplicable and inimitable when a firm possesses a SCA.
Hence a sustainable competitive advantage is one that can be maintained for a
--- Content provided by FirstRanker.com ---
significant amount of time even in the presence of competition. This brings us tothe question what is a significant amount of time". A CA becomes SCA when all
duplication and imitation efforts have ceased and the rival firms have not been
--- Content provided by FirstRanker.com ---
able to create the same value that the said firm is creating.
In marketing and strategic management, sustainable competitive advantage is
--- Content provided by FirstRanker.com ---
an advantage that one firm has relative to competing firms. The source of theadvantage can be something the company does that is distinctive and difficult to
replicate, also know as a core competency. It can also simply be a result of the
--- Content provided by FirstRanker.com ---
industry's cost structure, for example the large fixed costs that tend to create
natural monopolies in utility industries
--- Content provided by FirstRanker.com ---
For example P&G' ability to derive superior consumer insights and implementthem in managing its brand portfolio. It can also be an asset such as a brand, e.g.
Coca Cola or a patent, such as Viagra.
--- Content provided by FirstRanker.com ---
1.4.3. Value Chain
--- Content provided by FirstRanker.com ---
The Value chain was described and popularized by Michael Porter in his 1985
best-seller, Competitive Advantage: Creating and Sustaining Superior
--- Content provided by FirstRanker.com ---
Performance. The value chain categorizes the generic value-adding activities ofan organization. The "primary activities" include: inbound logistics, operations
(production), outbound logistics, sales and marketing, and service
--- Content provided by FirstRanker.com ---
(maintenance). The "support activities" include: administrative infrastructure
management, human resources management, R&D, and procurement. The costs
--- Content provided by FirstRanker.com ---
and value drivers are identified for each value activity. The value chainframework quickly made its way to the forefront of management thought as a
powerful analysis tool for strategic planning. Its ultimate goal is to maximize
--- Content provided by FirstRanker.com ---
value creation while minimizing costs.
The concept has been extended beyond individual organizations. It can apply to
--- Content provided by FirstRanker.com ---
whole supply chains and distributions networks. The delivery of a mix ofproducts and services to the end customer will mobilize different economic
actors, each managing its own value chain. The industry wide synchronized
--- Content provided by FirstRanker.com ---
interactions of those local value chains create an extended value chain,
sometimes global in extent. Porter terms this larger interconnected system of
--- Content provided by FirstRanker.com ---
value chains the "value system." A value system includes the value chains of afirm's supplier (and their suppliers all the way back), the firm itself, the firm
distribution channels, and the firm's buyers (and presumably extended to the
--- Content provided by FirstRanker.com ---
buyers of their products, and so on). Capturing the value generated along the
chain is the new approach taken by many management strategists.
--- Content provided by FirstRanker.com ---
For example, a manufacturer might require its part suppliers to be locatednearby its assembly plant to minimize the cost of transportation. By exploiting
the upstream and downstream information flowing along the value chain, the
--- Content provided by FirstRanker.com ---
firms may try to bypass the intermediaries creating new business models, or inother ways create improvements in its value system.
--- Content provided by FirstRanker.com ---
1.5. Summary
The ability of corporations of all sizes to use globally available factors of
--- Content provided by FirstRanker.com ---
production is a far bigger factor in international competitiveness than broadmacroeconomic differences among countries. Based in part on the development
of modern communications and transportation technologies, the rise of the
--- Content provided by FirstRanker.com ---
multinational corporation was unanticipated by the classical theory of
international trade as first developed by Adam Smith and David Ricardo. In
--- Content provided by FirstRanker.com ---
present day world differences among corporations are becoming more importantthan the aggregate differences among countries. Furthermore, the increasing
capacity of even small companies to operate in a global perspective makes the
--- Content provided by FirstRanker.com ---
old analytical framework even more obsolete. In this present day integrated
world, the best model for organizations is Creating and Sustaining Superior
--- Content provided by FirstRanker.com ---
Performance.1.6. Glossary
--- Content provided by FirstRanker.com ---
Invisible hand:
This phrase was used by Scottish economist Adam Smith (1723-1790) in
--- Content provided by FirstRanker.com ---
explaining his belief that the actions of individuals, although taken for their owneconomic benefit, are guided in such a manner as to benefit society as a whole.
Leontief Paradox:
--- Content provided by FirstRanker.com ---
According to Factor endowment model the trade will be done between countries
depending their respective factor endowments. A labour-abundant country will
--- Content provided by FirstRanker.com ---
export labour-intensive goods, but import capital-intensive goods. Leontiefobserved that US exports more labour intensive and imports were more capital
intensive. These paradoxical findings are known as Leontief Paradox.
--- Content provided by FirstRanker.com ---
Laissez-faireAn economic doctrine that opposes governmental regulation of or interference in
commerce beyond the minimum necessary for a free-enterprise system to
--- Content provided by FirstRanker.com ---
operate according to its own economic laws. It is often used interchangeably
with the term free market`. Some may use the term laissez-faire to refer to "let
--- Content provided by FirstRanker.com ---
do, let pass" attitude for concepts in areas outside of economics.1.7. Self Assessment Questions:
1. What are the important traditional theories of international Trade? Explain
--- Content provided by FirstRanker.com ---
them briefly.
2. Explain the relevance of International Product Life Cycle` model in the
--- Content provided by FirstRanker.com ---
context of present day international business environment.3. Describe Porter`s Diamond Model for Competitive Advantage of Nations.
4. Explain various Competitive Models of International Business.
--- Content provided by FirstRanker.com ---
1.8. Further Readings:
6. Manab Adhikary, Global Business Management In an International
--- Content provided by FirstRanker.com ---
Economic Environment (2001), Macmillan India Limited, New Delhi.7. Sak Onkvisist., John J.Shaw., International Marketing Analysis and Strategy
(1997), Prentice-Hall of India, New Delhi.
--- Content provided by FirstRanker.com ---
8. Warren J.Keegan, Global Marketing Management (1995), Prentice-Hall of
India, New Delhi.
--- Content provided by FirstRanker.com ---
9. Alan C Shapiro, Multinational Financial Management (2002), Prentice-Hallof India, New Delhi.
10. Anant R.Negandhi, International Management (1987) Prentice-Hall of India,
--- Content provided by FirstRanker.com ---
New Delhi.
Unit II
GROWTH AND DEVELOPMENT OF MNCs
--- Content provided by FirstRanker.com ---
INTRODUCTION
Multinational corporations are spreading their wings globally. Their growth
--- Content provided by FirstRanker.com ---
is unprecendented. The causes for their growth are diverse. They bring benefits tonation States and their potentials to harm them are also very high. They also face
problems created by nation states. All these and more are presented in this lesson.
--- Content provided by FirstRanker.com ---
GROWTH OF MULTINATIONAL CORPORATIONS
Multination al Corporation s hav e been growing in number, volume,
--- Content provided by FirstRanker.com ---
geographical spread and so on. Though, generally and MNC consists of a parentcompany located in the home country and atleast five or six subsidiaries with a
high degree of strategic alliance among the units, there are MNCs which have over
--- Content provided by FirstRanker.com ---
150 foreign subsdiaries as well. The MNCs had a global sales in excess of 24.8
trillion which is larger than the value of global trade in 2005. About a third of world
--- Content provided by FirstRanker.com ---
ou tp ut is co ntrib uted b y th e MNCs. About 100 million people are in directemployment with the MNCs, representing 10% of world employment in non-
agricultural employment. The number of MNCs was at around 47000 in 2005 with
--- Content provided by FirstRanker.com ---
over 2 lakh for eign su bsd iaries. Th e top most 100 MNCs, ex cluding those in
banking and finance, held 6.8 trillion in 2005, of which 40% were located outside
--- Content provided by FirstRanker.com ---
their home country.1
With liberalisation of economic policy being earnestly followed by most
--- Content provided by FirstRanker.com ---
countries of the world, there has been enormous increase in the geographical spreadof MNCs.
--- Content provided by FirstRanker.com ---
The popularity of MNCs can be known from the fact that most of them
receive 50% or more of their revenues and profits. Some of them are: IBM, Gillette,
--- Content provided by FirstRanker.com ---
Colgate-Polmolive, Philips, Xerox, Hewlett-Packard, Coca-Cola and so on. It issaid that coco-cola earns more money by selling soda in Japan than it does in USA.
Exxon a American base MNC, had about 56% of its assets, 74% of its sales and
--- Content provided by FirstRanker.com ---
97% of its profits abroad.
In India of the top 500 companies by market value, about 225 were MNCs
--- Content provided by FirstRanker.com ---
during 2004-05. 60 of the MNCs came in the top 50. Notable MNCs present inIndia include the lever, the ITC, the Nestle, the Ponds, the Glaxo, the smithkline-
beecham etc. These MNCs brands are almost house-hold names in India. Thus
--- Content provided by FirstRanker.com ---
MNCs have been growing in stature and spread all over.
REASONS FOR GROWTH OF MNCs
--- Content provided by FirstRanker.com ---
There are several factors that underlie the growth of MNCs. These include,increasing factor mobility, opening up of command economies, growth urge, and
opportunities for growth, the Bretton woods system, market capturing, raw-material
--- Content provided by FirstRanker.com ---
availability, low-cost of production possibilities, profit orientation and management
culture.
--- Content provided by FirstRanker.com ---
2FACTOR MOBILITY
First factor mobility is the most important of all factors that has contributed
--- Content provided by FirstRanker.com ---
to the growths of MNCs. During the time of the great economists like Adam Smithand David Ricardo , Cr oss-b ord er mo vement of g ood s only o n the b asis of
comparative cost principle was envisaged. Cross-border movement of factors of
--- Content provided by FirstRanker.com ---
p rod uction was no t env is ag ed. Now capital, techn olog y, labo ur an d ev en
man agement just mo ve fr om an ywher e to any where. Perh aps international
--- Content provided by FirstRanker.com ---
understanding and economic corporation have paved the way for world-wide flowof factors of production.
Technical collab orations, overseas job market expan sion and overseas
--- Content provided by FirstRanker.com ---
management consultancy are all on the increase. MNCs play a vital role in this
factor mobility contributing to their growth. As a r esult of factor mobility, instead
--- Content provided by FirstRanker.com ---
of goods being traded across national borders, production plants are set up in theidentified markets themselves by the MNCs.
ECONOMIC REFORMS
--- Content provided by FirstRanker.com ---
Second, the economic reforms undertaken in most of the developing and
u nd er d evelo ped econ omies ar e ano ther cause f or th e gr ow th o f MN Cs.
--- Content provided by FirstRanker.com ---
Governments of most of these countries having become vexed with the regressedperformance of their public sector and their bureaucracy and consequent waste of
precious resources resulting in poor gross domestic product growth fuelling poverty
--- Content provided by FirstRanker.com ---
and unemployment, in order to take their economies on to the growth path have
started embarking on a programme of economic reforms.
--- Content provided by FirstRanker.com ---
3Globalisation as a part of such reforms process, has opened their economies
to international players on an equal footing with domestic operators. Ever since
--- Content provided by FirstRanker.com ---
the reforms process has been introduced in India, for instance, many MNCs havestarted opening up their shops in the country. Pepsi, Coco-Cola etc. have set their
--- Content provided by FirstRanker.com ---
foot in India.
Existing multinations have enhanced their stake in the country and some
--- Content provided by FirstRanker.com ---
ar e p utting u p 100% subsidiaries. For instance P&G is putting up P&G HomeProducts Private Limited to make detergents, Gillette is putting up Wilkinson India
Private Limited to channelise investments into other companies, H.P. is putting up
--- Content provided by FirstRanker.com ---
H.P. India to develop and export software and GEC is putting GEC India Limited
to oversee the group s expanding Indian operations. 100% ownership will enable
--- Content provided by FirstRanker.com ---
the parent company to retain proprietary control over technologies and products.Beside backward integration to gain economies and shed diseconomies of scale is
possible.
--- Content provided by FirstRanker.com ---
OPENING UP OF COMMAND ECONOMIES
Third, opening up of command economies is a factor behind, recent growth
--- Content provided by FirstRanker.com ---
in MNCs. China, Russia, etc. are no longer command economies. Socialism andCommunism have given way to capitalism in their very place of origin and growth.
The communist countries have opened up their economies to competition. Since
--- Content provided by FirstRanker.com ---
1985, Russia introduced restructuring measures. The collapse of political structure
has hampered the transition to market economy resulting in economic disruption.
--- Content provided by FirstRanker.com ---
Privatisation is being acceleratingly followed in Russia. A logical extension of thisprivatisation programme is the entry of MNCs into these lands.
4
--- Content provided by FirstRanker.com ---
China is sporting excellently in opening up its economy, as is borne out byforeign investment statistics. The Chinese reforms process has been introduced in
top-down orderly fashion. Of late, foreign investment rose significantly and many
--- Content provided by FirstRanker.com ---
MNCs have put up their plants in China. Some have hastened to have their plants
--- Content provided by FirstRanker.com ---
there, as they did not want to lag behind potential competitors.GROWTH URGE
Fourth, MNCs generally have the growth impetus with them. They always
--- Content provided by FirstRanker.com ---
look upon growth opp ortu nities anywhere in the globe and tr y to seize th em.
Strategic alliance, joint ventures, wholly owned subsdiaries, mergers on acquisition,
--- Content provided by FirstRanker.com ---
franchising etc. are th e diverse strategies they adopt to expand their op erationglobally. The motives for such expansion are securing supplies of materials, energy
and scarce raw materials.
--- Content provided by FirstRanker.com ---
- development of technology or brand recognition leading to global
demand met through overseas investment and
--- Content provided by FirstRanker.com ---
- availability o f cheap er factors overseas and using the same bygeographically spreading the operations.
MNCs have technology and competitiv e edge. With these they easily
--- Content provided by FirstRanker.com ---
establish brand image. Global spread is very simple for them unless nation, states
are vociferously against the entry of MNCs. Liberalisation and reforms process
--- Content provided by FirstRanker.com ---
adopted in the third world nations have opened out vast growth opportunities forMNCs. However, the essential element is the urge of MNCs to seek out, undertake,
and integrate manufacturing, marketing, R&D and finance opportunities on a global
--- Content provided by FirstRanker.com ---
scale rather than on domestic level.
5
BRETTON WOODS SYSTEM
--- Content provided by FirstRanker.com ---
Fifth, the Bretton woods organs-the world Bank and International Monetary
Fun d and their subsdiaries like the International Development Association,
--- Content provided by FirstRanker.com ---
International Finance Corporation, Multilateral Investment Guaratnee Agency andother multilateral bodies generally insist on borrowing countries to open their
economies and going for competitive bidding. This paves the way for the growth
--- Content provided by FirstRanker.com ---
of MNCs.
MARKET POTENTIAL
--- Content provided by FirstRanker.com ---
Sixth, there are MNCs who always have an eye on foreign markets. IBM,Valvo, Unilever etc. come in this category. Originally American firms bought plant
and equipment in Western Europe. Later, Western Europe firms opened shops in
--- Content provided by FirstRanker.com ---
USA. In the last part of the 20 th C
entury, Japanese acquired firms in Europe and
--- Content provided by FirstRanker.com ---
America. Now, there is camping of MNCs in the emerging world markets like India,China, Mexico etc. Perceiv ed r estrictions on imports led to MNCs opening up
factories in foreign lands.
--- Content provided by FirstRanker.com ---
India and China are a great attraction as market for most MNCs at present.
There is a classic difference between US and Japanese MNCs in market capturing.
--- Content provided by FirstRanker.com ---
US MNCs look at the up-end of the market, while Japanese MNCs look at theunattended low-end. Low-end market has lot of growth potential and this gives scale
econ omies. With accu mu lated resou rce, wid e mark et, and pr oven process
--- Content provided by FirstRanker.com ---
technology, Japanese MNCs are a threat to the US MNCs.
RAW MATEIRAL AVAILABILITY
Seventh, initially most MNCs were spreading their wings globally just to
--- Content provided by FirstRanker.com ---
tap raw-materials available elsewhere for supporting production at the patent plant.
British, French and Dutch East India Companies are classic examples of MNCs of
--- Content provided by FirstRanker.com ---
the raw-material seeking type. Now instead of tapping raw-materials, the MNCsset up plants where factor markets are favourable. Because their search for growth
never is inward but always outwards. That is their culture.
--- Content provided by FirstRanker.com ---
LOW COST PRODUCTION POSSIBILITIES
Eighth, MNCs are now driven by cost-minimisation drives. They set up
--- Content provided by FirstRanker.com ---
plants at places where low-cost production possibilities are great. Taiwan, Hongkongand Finland are preferred by MNCs for setting up electronic industrial units for
there is cost efficiency. India, being a cheap labour country, MNCs have started
--- Content provided by FirstRanker.com ---
flooding into India. IBM, Ford outsource production of parts to low-wage countries
such as Mexico and by establishing assembly plants and R&D Centres in Europe
--- Content provided by FirstRanker.com ---
and Japan.RISK-MINIMISING
Nineth, MNCs have long back realized the need for risk-minimising. Threats
--- Content provided by FirstRanker.com ---
from their oligopolitic competitors are always there. Further, country-risk is always
there. Meeting both the risks is facilitated by geographical spread. By being close
--- Content provided by FirstRanker.com ---
to market, better orientation to market is possible and that monopolistic productdifferentiation is easily facilitated. Geographical spread is risk-minimising strategy
and there is growth. Japanese Competition affects the American Auto Industry. So,
--- Content provided by FirstRanker.com ---
American Auto firms go out to the third wo rld in search o f strategic allian ce
partnership.
PROFIT ORIENTATION
--- Content provided by FirstRanker.com ---
Tenth, MNCs are interested in profits. And MNCs are generally highly
profitable. Profit booking facilitates growth, diversification, modernization and
--- Content provided by FirstRanker.com ---
R&D competitiveness. Actually MNCs book profits by being flexible, adaptableand quick. In today s head-on competition, the most important factor for growth is
speed. Ability to design, develop and distribute products / services in short span of
--- Content provided by FirstRanker.com ---
time holds the key to success.
MANAGEMENT CULTURE
--- Content provided by FirstRanker.com ---
Eleventh, growth of MNCs is very much influenced by their managementculture. MNCs generally adopt to local conditions and the relationship between
parent and subsdiar ies is that of coordinated federation . Decisions on investment
--- Content provided by FirstRanker.com ---
financing and market are localized. But Japanese MNCs do centralize decisions.
The East-West difference is thus found. But the underlying similarity is the basis
--- Content provided by FirstRanker.com ---
fo r actio n. Co rpo rate strateg ic p lan ning is an essen tial packag e o f MNCsmanagement practice whereby the MNCs scan and plan for enhanced integration
and co-ordination of their global activities.
--- Content provided by FirstRanker.com ---
Microsoft Corporation allows its European subsdiaries to develop local
strategies to meet local market needs. This type of autonomous adoption to fast
--- Content provided by FirstRanker.com ---
changing local business environment has been the main reason for the spread ofMNCs. The au tonomy enjoyed by subsd iaries is not to turn into dysfunctional
anarchy, for the behaviour of individual managers is well shaped through shared
--- Content provided by FirstRanker.com ---
vision of identification with and binding commitment to the global strategy of the
MNCs. Hence the growth of MNCs.
--- Content provided by FirstRanker.com ---
8DEVELOPMENT IN COMMUNICATION TECHNOLOGY
Twelf th and fin ally the g r owth of MNCs is p ar tially attrib uted to
--- Content provided by FirstRanker.com ---
developmen t in communication an d transportatio n techno log y. The advent ofinformation technolo gy has helped MNCs to sp read their wings far and wide.
Internet, e-mail, Fax and other communication tools being used by MNCs to do
--- Content provided by FirstRanker.com ---
their business from the place of its origin to the place of doing transaction.
--- Content provided by FirstRanker.com ---
DEVELOPMENT OF MNCsThe development and spread of the MNCs through direct foreign investment
is a more recent phenomenon. The earliest MNCs were mainly European fir ms,
--- Content provided by FirstRanker.com ---
setting up manufacturing facilities in their colonies to extract primary resources
for con ver sion into finished p rodu cts b ack at home. I nstitution s such as the
--- Content provided by FirstRanker.com ---
International Monetary Fund, the World Bank, World Trade Organisation and theWorld Court provided a stable world wide environment in which MNCs could
conduct their business. Due to the advent of globalization, the arrival of MNCs
--- Content provided by FirstRanker.com ---
have become unavoidable. In term of its ability to move knowledge, people, capital,
goods and services and technology across borders, the process of globalization led
--- Content provided by FirstRanker.com ---
by MNCs had gone far beyond the reach of any national sovereign Government orMultinatio nal Agreement. To borrow a ph rase from an expert on multinational
business, Raymond, the MNC had reached a level of maturity and influence world
--- Content provided by FirstRanker.com ---
wide whereby it could keep sovereignity at bay .
ROLE AND SIGNIFICANCE OF MNCs
--- Content provided by FirstRanker.com ---
It is observed that MNCs have their branches or subsdiaries not only indeveloping countries or third world countries in Asia, Africa and Latin America
but also in developed countries in Europe, Australia and Newzealand.
--- Content provided by FirstRanker.com ---
9
The MNCs in developing countries generally operate in the following fields:
var ious plantations, in mine extracting and refining crude oil, pharmaceuticals,
--- Content provided by FirstRanker.com ---
fertilizers, manufacture of various consumer goods and of capital goods, electronic
& telecommunication goods both for domestic consumption and for exports. The
--- Content provided by FirstRanker.com ---
MNCs are also functioning in various services such as banking, insurance, shippingand tourism etc.
--- Content provided by FirstRanker.com ---
The MNCs have been play ing a v ery sig nificant r ole in the economic
development of many countries some of which are stated below:
--- Content provided by FirstRanker.com ---
- The MN Cs h ave a str on g f inancial bas e an d th ro ug h d irectinvestment in developing and under developed countries, have been
contributing to their economic development. As the rate of domestic
--- Content provided by FirstRanker.com ---
savings in most underdeveloped countries is low, the MNCs help
these countries to push the rate of investment which is vital aspect
--- Content provided by FirstRanker.com ---
of development strategy.- Because of their stro ng fin ancial base, MNCs can su ccessfully
undertake business risks which are inherent in the initial stages of
--- Content provided by FirstRanker.com ---
industrialisation of developing countries. These countries are not in
a position to su ccessf ully und er tak e r isks which are gr eat in
--- Content provided by FirstRanker.com ---
industries like mining, oil exploration etc.- MNCs are in a p osition to develo p and pr ovide infrastr uctural
facilities like mean s of trans por t and co mmun ication , po wer,
--- Content provided by FirstRanker.com ---
technical institutes. These ar e all essential for r ap id eco nomic
development of less developed countries.
--- Content provided by FirstRanker.com ---
10- MNCs h elp d evelo pmen t o f modern skills in d ev elo ping and
--- Content provided by FirstRanker.com ---
underdeveloped countries as also entrepreneurial, managerial andorganisational capabilities and variou s oth er sk ills necessary for
modernization of th ese econ omies wh ich generally lack these
--- Content provided by FirstRanker.com ---
abilities and skills.
- Research and Development are the very foundations of economic
--- Content provided by FirstRanker.com ---
development and progress. They require huge investment initiallyand there is no guarantee about the success of various experiments
conducted for quite some time. The R&D by the MNCs often result
--- Content provided by FirstRanker.com ---
in discovering new products or new uses of existing natural resources
contributing to their economic development.
--- Content provided by FirstRanker.com ---
- The MN Cs tr an sf er mod er n tech no lo gies to dev elo pin g andunderdeveloped countries. Among various inputs, technology is the
most important for increasing efficiency, productivity and consequent
--- Content provided by FirstRanker.com ---
rapid economic development of these countries.
- The MNCs adopt aggressive marketing and advertising strategy and
--- Content provided by FirstRanker.com ---
thus help capture foreign markets into which goods and servicesfrom under developed countries may enter and thus help acquire
foreign currencies needed for developmental imports.
--- Content provided by FirstRanker.com ---
- The MNCs help further utilization of natural and human resources
of third world co untries, help to raise level o f employment and
--- Content provided by FirstRanker.com ---
income and thus bring about rise in standard of living of people inthese countries.
- When MNCs enter other under developed countries, the latter are
--- Content provided by FirstRanker.com ---
exposed to modern techniques and values which help bring about
social and psychological transformation which is absolutely essential
--- Content provided by FirstRanker.com ---
for rapid economic development of less developed countries.
PATTERN OF GROWTH OF MNCs and Country of origin
--- Content provided by FirstRanker.com ---
As you know already, a multinational enterprise in any business that hasproductive activities in two or more countries. Since the 1960s, there have been
two notable trends in the demographics of the MNCs.
--- Content provided by FirstRanker.com ---
(i) the risk of non-U.S. multi nations particularly Japanese Multinations
and
--- Content provided by FirstRanker.com ---
(ii) the growth of mini multi nationals.NON U.S. MULTINATIONALS
In the 1960s, multinational business activity was dominated by large U.S.
--- Content provided by FirstRanker.com ---
mu ltinational corpor ations with U.S. firms accounting for ab out two-thirds of
foreign direct investment dur ing 1960s, one would expect non MNCs to be U.S.
--- Content provided by FirstRanker.com ---
enterprises. According to the sources from the Economics of the MNC, 1973, 48.5percent of the world s 260 largest multinationals were U.S. firms. The second largest
sou rce country was th e U.K. with 1 8.8 p er cent of th e larg est MNCs. Japan
--- Content provided by FirstRanker.com ---
accounted for only 3.5 percent of the world s largest MNCs at the time.
By 2000, however things had shifted significantly. U.S. firms accounted for
--- Content provided by FirstRanker.com ---
26 percent of the world s 100 largest MNCs, followed by Japan with 17 percent.France was third with 13 percent. The globalization of the world economy
together
--- Content provided by FirstRanker.com ---
with Japan s rise to the top rank of economic powers has resulted in a relativedecline in the dominance of U.S. firm in the global market place.
According to United Nations data, the rank s of the world s largest 100
--- Content provided by FirstRanker.com ---
multinationals are still dominated by firms from developed economies. However,
for the first time three firms from developing economies entered in the UN s list
--- Content provided by FirstRanker.com ---
of the 100 largest MNCs. They were Hutchison of Hong Kong, China which ranked48 in terms of Foreign assets, Petroleos de Venezuela of Venezuela which ranked
8 ,
--- Content provided by FirstRanker.com ---
th and Cemex of Mexico which came in at 100. However, if we look at smaller
firms, it is ev ident that th ere h as been growth in the number of MNCs from
--- Content provided by FirstRanker.com ---
developed economies. At starting of 2000, the largest 50 MNCs from developingeconomies had foreign sales of $ 103 billion out of total sales of $ 453 billion and
employed over more than 4,50,000 people outside of their home country. Looking
--- Content provided by FirstRanker.com ---
to the future, we can reasonably expect growth of new MNCs from the world s
--- Content provided by FirstRanker.com ---
developing nations.THE SIZE OF MINI-MULTINATIONS
Another trend in multinational business has been the growth of medium
--- Content provided by FirstRanker.com ---
sized and small multinationals. When people think of multinational business, they
tend to think of firms such as General Motors, Ford, Fuji, Kodak, Matsushita,
--- Content provided by FirstRanker.com ---
Procter & Gamble, Sony and Unilever large, complex multinational corporationswith operation s th at span th e g lo be. Alth oug h it is certainly tru e that most
international trade and investment is still conducted by large firms, it is also true
--- Content provided by FirstRanker.com ---
that many medium sized and small business are becoming increasingly involved
in multinational trade and investment.
--- Content provided by FirstRanker.com ---
13SUMMARY
This lesson sets the scene for understanding the growth and development
--- Content provided by FirstRanker.com ---
of MNCs. The reasons for the growth of MNCs are clearly discussed in detail. Therole and significance of MNCs are also highlighted. We have also explained the
changing nature of MNCs which have been demographically divided into Non
--- Content provided by FirstRanker.com ---
US MNCs and Mini-MNCs. Multinational business is conducted not just by large
firms but also by medium sized and small enterprises.
LESSON 2
--- Content provided by FirstRanker.com ---
DIFFERENT MANAGEMENT STYLES
Introduction
--- Content provided by FirstRanker.com ---
Although some people treat the terms managership and leadership assimilar, two should be distinguished. As a matter of fact, there can be leaders of
completely, unorganized groups, but there can be managers, only where organized
--- Content provided by FirstRanker.com ---
structures create roles. Separatin g leadership from man ager ship has analytical
adv an tag es . It permits leaders hip to b e sin gled ou t f or stu dy witho ut the
--- Content provided by FirstRanker.com ---
encumbrance of qualifications relating to the more general issue of managership.Leadership is an important aspect of managing. As this lesson will highlight,
the ability to lead effectively is one of the keys to being an effective manager, also,
--- Content provided by FirstRanker.com ---
undertaking the other essentials of managing doing the entire managerial job
has an important tearing on ensuring that a manager will be an effective leader.
--- Content provided by FirstRanker.com ---
Multinational Cor poration Managers must exercise all the functions of their rolein order to combine human and material resources to achieve objectives. The key
to doing this is the existence of a clear role and a degree of discretion or authority
--- Content provided by FirstRanker.com ---
to support manager s actions.
Management Styles
--- Content provided by FirstRanker.com ---
There are several theories on management styles. This part focuses on(1) Management style based on the use of authority
(2) Likert s four systems of managing
--- Content provided by FirstRanker.com ---
(3) The managerial grid and(4) Manager s in volving a var iety of styles, r anging from a maximum to a
--- Content provided by FirstRanker.com ---
minimum use of power and influence.
Styles Based on Use of Authority
--- Content provided by FirstRanker.com ---
Earlier management analysts classified styles based on how authority wasbeing used. Managers were seen as applying three basic styles.
The Autocratic style which commands and expects compliance, is dogmatic
--- Content provided by FirstRanker.com ---
and positive, and leads by ability to with hold or give rewards and punishment.
The democratic or participative style is one where the manager consults with
--- Content provided by FirstRanker.com ---
subordinates on proposed actions and decisions and encourages participation fromth em. This type of manager ranges from the per son who does not take action
without subordinates concurrence to the one who makes decisions but consults
--- Content provided by FirstRanker.com ---
with subordinates before doing so.
The free rein management style is a style where manager uses his power
--- Content provided by FirstRanker.com ---
very little, giving subordinates a high degree of independence in their operations.Such managers depend largely on subordinates to set their own goals and the means
of achieving them and they see their role as one of aiding the operations of followers
--- Content provided by FirstRanker.com ---
by fu rnishing them with information and acting primarily as a contact with the
group s external environment.
--- Content provided by FirstRanker.com ---
There are variations with in this simple classification of management styles.Some autocracies are seen as benevolent autocrats . Although they listen
considerably to their followers opinions before making a decision, the decision
--- Content provided by FirstRanker.com ---
is
16
th eir own. Th ey may be willing to hear and consider subo rdinates ideas and
--- Content provided by FirstRanker.com ---
concerns, but when a decision is to be made, they may be more autocratic than
--- Content provided by FirstRanker.com ---
benevolent.A variation of the participative manager is the person who is supportive.
In this category, they may look upon their task as not only consulting with followers
--- Content provided by FirstRanker.com ---
and carefully con sidering their op in ion s b ut also d oin g all they can supp ort
subordinates in accomplishing their duties.
--- Content provided by FirstRanker.com ---
The use of any management style will depend on the situation. A managermay be highly autocratic in an emergency; one can hardly imagine a fir e chief
holding a long meeting with the view to consider the best way of fighting a fire.
--- Content provided by FirstRanker.com ---
Managers may also be autocratic when they alone have the answers to certain
questions.
--- Content provided by FirstRanker.com ---
A manager may gain considerable knowledge and a better commitment onthe part of persons involved by consulting with subordinates. Further, a manager
dealing with a group of research scientists may given them free rein in developing
--- Content provided by FirstRanker.com ---
their inquiries and experiments. But the same manager might be quite autocratic
in enforcing a rule stipulating that employees were protective covering when they
--- Content provided by FirstRanker.com ---
are handling certain potentially dangerous chemicals.Likerts Four Systems of Management
Professor Liker t and his associates at the Un iversity of Michigan h ave
--- Content provided by FirstRanker.com ---
studied the patterns and styles of managers for three decades. In the course of this
resear ch, Likert has developed certain ideas and approaches to understan ding
--- Content provided by FirstRanker.com ---
managerial behaviour. He sees an effective manag er as strong ly or iented to17
subordinates, relying on communication to keep all parties working as a unit. All
--- Content provided by FirstRanker.com ---
members of the group, including the manager adopt a supportive attitude in whichthey sh ar e in o ne an oth er s co mmo n n eed s, values , g oals asp iration s and
expectations. Since, it appeals to human motivations, Likert views this approach
--- Content provided by FirstRanker.com ---
as the most effective way to lead a group.
--- Content provided by FirstRanker.com ---
As guidelines for research and for the classification of his concepts, Likerthas suggested four systems of management.
System 1 managemen t is d escribed as exploitive authoritative; its
--- Content provided by FirstRanker.com ---
managers are highly autocratic, have little trust in subordinates, motivate people
through fear and punishment and only occasional rewards, engage in downward
--- Content provided by FirstRanker.com ---
communication and limit decision making to the top.System 2 management is called benevolent authoritative; its managers
have a patronizing confidence and trust in subordinates, motivate with rewards and
--- Content provided by FirstRanker.com ---
some fear and punishment, permit some upward communication, solicit some ideas
and opinions from subordinates, and allow some delegation of decision making
--- Content provided by FirstRanker.com ---
but with close policy control.System 3 management is referred to as consultative . Managers in this
system have substantial but not complete confidence and trust in subordin ates,
--- Content provided by FirstRanker.com ---
usually try to mak e use of subor dinates ideas an d o pinions, use reward s for
inspir ation with occasion al pu nishmen t and some par ticip ations , en gage in
--- Content provided by FirstRanker.com ---
communication flow both down and up, make broad policy and general decisionsto be made at lower levels, and act consultatively in other ways.
18
--- Content provided by FirstRanker.com ---
System 4 Likert saw this management as the most participative of all andreferred to it as participative group . Under this system, managers have complete
trust and co nfidence in sub ordin ates in all matters; they always get id eas and
--- Content provided by FirstRanker.com ---
opinions from subordinates and constructively use them. They also give economic
rewards on the basis of group participations and involvement in such areas as setting
--- Content provided by FirstRanker.com ---
goals and appraising progress toward goals. They engage in much communicationdown and up with peers, encourage decision making throughout the organization
and operate among themselves and with their subordinates as a group.
--- Content provided by FirstRanker.com ---
In general Likert found that those managers who app lied the System 4
approach to their operations had greatest success as leaders in the multinational
--- Content provided by FirstRanker.com ---
corporations. Moreover, he noted that departments and companies managed bythe System 4 approach were most effective in setting goals and achieving them
and were generally more productive. He ascribed this success mainly to the degree
--- Content provided by FirstRanker.com ---
of participation and the extent to which the practice of supporting subordinates was
maintained.
--- Content provided by FirstRanker.com ---
The Managerial GridA well known approach to defining management styles is the managerial
grid, developed some years ago by Robert Blake and Jane Mouton. Building on
--- Content provided by FirstRanker.com ---
precious research that showed the importance of a managers having concern both
for pr oduction an d f or peo ple, Blake and Mouton dev ised a clever dev ice to
--- Content provided by FirstRanker.com ---
dramatise this concern. This grid, shown in figure 2.1, has been used throughoutthe world as a means of training managers and of identifying various combinations
of management styles.
--- Content provided by FirstRanker.com ---
19
The Grid Dimensions
--- Content provided by FirstRanker.com ---
The gr id has two d imensio ns : co ncern for peop le and co ncern forproduction. As Blake and Mouton have emphasised, the phrase concern for is
meant to convey how managers are concerned about production or how they
--- Content provided by FirstRanker.com ---
are
--- Content provided by FirstRanker.com ---
1.9 ManagementHigh 9
9.9 Management
--- Content provided by FirstRanker.com ---
Thoughtful attention to
Work accomplished
--- Content provided by FirstRanker.com ---
needs of people leads to ais from committed
friendly and comfortable
--- Content provided by FirstRanker.com ---
people with
organization atmosphere
--- Content provided by FirstRanker.com ---
interdependence8
and work tempo.
--- Content provided by FirstRanker.com ---
through a common
stake in organization
--- Content provided by FirstRanker.com ---
purpose and withtrust and respect.
7
--- Content provided by FirstRanker.com ---
6
5.5 Management
--- Content provided by FirstRanker.com ---
Adequate performance5
through balance of work
--- Content provided by FirstRanker.com ---
requirements and
maintaining satisfactory
--- Content provided by FirstRanker.com ---
morale.4
3
--- Content provided by FirstRanker.com ---
2
9.1 Management
--- Content provided by FirstRanker.com ---
1.1 ManagementEfficiency results from
Exertion of minimum
--- Content provided by FirstRanker.com ---
arranging work in such
effort is required to get
--- Content provided by FirstRanker.com ---
a way that humanLow 1
work done and sustain
--- Content provided by FirstRanker.com ---
elements have little
organization morale.
--- Content provided by FirstRanker.com ---
effect.1
Low 2 3 4 5 6 7 8 9
--- Content provided by FirstRanker.com ---
High
CONCERN FOR PRODUCTION
--- Content provided by FirstRanker.com ---
Adopted from R.R. Blake and J.S. Mouton, The managerial Grid (Page 10)20
concerned about people and not such things as how much production they are
--- Content provided by FirstRanker.com ---
concerned about getting out of a group.
Concern for Production includes the attitudes of a supervisor toward a wide
--- Content provided by FirstRanker.com ---
variety of things, such as the quality of policy decisions, procedures and processes,
creativeness of research, quality of staff services, work efficiency and volume of
--- Content provided by FirstRanker.com ---
output. Concern for people is likewise interpreted in a broad way. It includessuch elements as degree o f personal commitment toward go al achiev ement,
maintenance of the self-esteem of workers, provision of good working conditions
--- Content provided by FirstRanker.com ---
and maintenance of satisfying interpersonal relations.
The Four Extreme Styles
--- Content provided by FirstRanker.com ---
Blak e an d Mo uto n r ecognise fo ur extremes o f style. Under 1.1 sty le(referred to as impoverished management ), managers concern themselves very
little with either people or production and have minimum involvement in their jobs;
--- Content provided by FirstRanker.com ---
to all intents and purposes, they have abandoned their jobs and only mark time or
act as messengers communicating information from superiors to subordinates.
--- Content provided by FirstRanker.com ---
At the other extreme are the 9.9 managers, who display in their actions thehighest possible dedication both to people and to production. They are the real
team managers who are able to mesh the production needs of the enterprise with
--- Content provided by FirstRanker.com ---
the needs of individuals.
Another style is 1.9 management (called country club management ) in
--- Content provided by FirstRanker.com ---
which managers have little or no concern for production but are concerned onlyfor people. They promote an environment in which every one is relaxed, friendly
and happy an d n o on e is concern ed about putting forth co-ordinated effort to
--- Content provided by FirstRanker.com ---
accomplish enterprise goals.
21
At another extreme are the 9.1 managers (sometimes referred as autocratic
--- Content provided by FirstRanker.com ---
task managers), who are concerned only with developing an efficient operation,
who have little or no concern for people and who are quite autocratic in their style
--- Content provided by FirstRanker.com ---
of leadership.
By usin g these fo ur extremes as p oints of refer ence, every managerial
--- Content provided by FirstRanker.com ---
technique, approach or style can be placed somewhere on the grid. Clearly 5.5
manager s have medium concern fo r p roduction and for people. They o btain
--- Content provided by FirstRanker.com ---
adequate but not outstanding, morale and production. They do not set goals toohigh, and they are likely to have a rather benevolently autocratic attitude toward
people.
--- Content provided by FirstRanker.com ---
The manager ial grid is a useful device fo r identifying an d classif ying
managerial styles but it does not tell us why a manager falls into one part or another
--- Content provided by FirstRanker.com ---
of the grid. To determine the reason, one has to look at underlying causes, such asthe personality characteristics of the managers or the followers, the ability and
training of manages, the enterprise environment and other situational factors that
--- Content provided by FirstRanker.com ---
influence how managers and followers act.
Management as a Continuum
--- Content provided by FirstRanker.com ---
The adaptation of management styles to different contingencies has beenwell char acterised b y Robert and H. Sch emidt, developers of the Management
Continuum concept. Under this concept, management as involving a variety of
--- Content provided by FirstRanker.com ---
styles, ranging from one that is highly boss-centered to one that is highly subordinate
centered. The sty les vary with the degree of freedo m a manag er grants to
--- Content provided by FirstRanker.com ---
subordin ates. Thus, in stead of suggesting a choice between the twostyles of
22
--- Content provided by FirstRanker.com ---
management authoritarian or democratic this approach offers a range of styles,with no suggestion that one is always right and another is always wrong.
This contin uum theory recognises that which style of management is
--- Content provided by FirstRanker.com ---
appropriate depends on the manager, the followers and the situation. To Robert
and Schmidt, the most important elements that may influence a manager s style
--- Content provided by FirstRanker.com ---
can be seen along a continuum as(1) The forces operating in the manager s personality, including his value system,
confidence in sub ordinates, inclination toward s management styles and
--- Content provided by FirstRanker.com ---
feelings of security in uncertain situations ;
(2) The forces in subordinates (such as their willingness to assume responsibility,
--- Content provided by FirstRanker.com ---
their knowledge and experience and their tolerance for ambiguity) that willaffect the manager s behaviour ; and
--- Content provided by FirstRanker.com ---
(3) The forces in the situation, such as organisation values and traditions,
the
--- Content provided by FirstRanker.com ---
effectiveness of subordinates working as a unit, the nature of a problem andthe feasibility of safely delegating the authority to handle it and the pressure
of time.
--- Content provided by FirstRanker.com ---
In reviewing their continuum model in 1993, Robert and Schmidt placed
much importance on the concept in such a way that it represent to influence on the
--- Content provided by FirstRanker.com ---
style imposed by both the organisational environment and the social environment.This was done to emphasise the open-system of management styles and the various
impacts of the organisational environment and of the social environment outside
--- Content provided by FirstRanker.com ---
an enterprise. In their 1993 review, they put increased stress on the interdependency
of management style and environmental forces such as labour unions,
--- Content provided by FirstRanker.com ---
greater23
pressures for social responsibility, the civil rights movement and the ecology and
--- Content provided by FirstRanker.com ---
consumer movements that challenge the rights of managers to make decisionsor
handle their subordinates without considering interests outside the organisation.
--- Content provided by FirstRanker.com ---
Fiedler s Contingency Approach to Management
Althoug h their ap proach to managemen t is primarily one of analysing
--- Content provided by FirstRanker.com ---
management sty le, Fiedler and his associates at the University of Illinois havesuggested a contingency theory of management. The theory holds that people
become managers / leaders not only because of the attributes of their personalities
--- Content provided by FirstRanker.com ---
but also because of various situational factors and the interactions between managers
--- Content provided by FirstRanker.com ---
and group members.Critical Dimensions of the Management Situation
On the basis of his studies, Fiedler described three critical dimensions of
--- Content provided by FirstRanker.com ---
the management situation that help determine what style of management will be
most effective ;
--- Content provided by FirstRanker.com ---
(1) Position PowerThis is the degree to which the power of a position, as distinguished from
other sources of power such as personality or expertise enables a leader to get group
--- Content provided by FirstRanker.com ---
members to comply with directions; in the case of manages, this is the power arising
from organisational authority.
--- Content provided by FirstRanker.com ---
(2) Task StructureWith this dimension, Fiedler had in mind the extent to which tasks can be
clearly spelled out and people held responsible for them. If tasks are
--- Content provided by FirstRanker.com ---
clear, the
24
quality of performance can be more easily controlled and employees can be held
--- Content provided by FirstRanker.com ---
more definitely responsible for performance.
--- Content provided by FirstRanker.com ---
(3) Manager Employee RelationsFiedler regarded this dimension as the most important from a manager s
point of view, since position power and task structure may be largely under the
--- Content provided by FirstRanker.com ---
control of an enterprise. It has to do with the extent to which group members like
and trust a manager and are willing to abide by the regulations formulated by
--- Content provided by FirstRanker.com ---
him.Management Styles
To approach his study, Fiedler set forth two major styles of management.
--- Content provided by FirstRanker.com ---
One of these is primarily task oriented and the other is oriented toward achievinggood interpersonal relations and attaining a position of personal prominence.
In reviewing Fiedler s research one finds that there is nothing automatic or
--- Content provided by FirstRanker.com ---
good in either the task oriented or the people satisfaction oriented style.
Management eff ectiveness depends up on the various elemen ts in th e g roup
--- Content provided by FirstRanker.com ---
environment.The Path Goal Approach to management Effectiveness
The path goal appr oach suggests that the main function of the manager /
--- Content provided by FirstRanker.com ---
leader is to clarify and set goals with subordinates, help them find the best path
for achieving the goals and remove obstacles. This approach, rather than suggesting
--- Content provided by FirstRanker.com ---
that there is one best way to lead, it suggests that appropriate style depends on thesituation. Ambiguous and uncertain situations can be frustrating for subordinates,
and a mo re task or iented sty le may b e called for. In o th er wo rds, wh en
--- Content provided by FirstRanker.com ---
25
subordinates are confused, then the manager may tell them what to do and show
--- Content provided by FirstRanker.com ---
them a clear path to goals.
Summary
--- Content provided by FirstRanker.com ---
Man agement is the art of getting th ings done by others perh aps usingdifferent styles to achieve desired goals. There are various approaches to this study,
ranging from the trait to the contingency approach. One such approach focuses
--- Content provided by FirstRanker.com ---
on
three styles : the autocratic, the democratic and the free rein. Likert identified
--- Content provided by FirstRanker.com ---
four systems of management, ranging from system 1 (exploitative authoritative)throug h system 4 ( participative group) which he considers the most effective
system.
--- Content provided by FirstRanker.com ---
The managerial grid identified two dimensions : concern for production and
concern for people. On these basis, four extreme styles are identified and a middle
--- Content provided by FirstRanker.com ---
of the road style is recommended for practice . Management can also be viewedas a continuum. At one extreme, the manager has a gr eat deal of freedom while
subordinates have very little. At the other extreme, the manager has very little
--- Content provided by FirstRanker.com ---
freedom where as subordinates have a great deal.
Fiedler s contingency approach takes into account the position of power of
--- Content provided by FirstRanker.com ---
the manager, the structure of the task and the r elations between the manager andthe employees. The conclusion is that there is no best management style and that
managers can be successful if placed in appropriate situ ations. The path-g oal
--- Content provided by FirstRanker.com ---
app ro ach to man agement su gg ests that the mo st effective manag er s h elp
subordinates achieve enterprise and personal goals.
--- Content provided by FirstRanker.com ---
26LESSON 3
--- Content provided by FirstRanker.com ---
STRATEGIC ISSUESINTRODUCTION
In the last lesso n, we have seen the differ ent management styles being
--- Content provided by FirstRanker.com ---
followed b y managers of various multinational corporations. In this lesson, we
propose to discuss the different strategies that multinationals pursue when competing
--- Content provided by FirstRanker.com ---
globally. Consider the merits and demerits of these strategies, explain the variousfactors that affect a firm s choice of str ategy and look at the tactis multinational
adopt when competing in the international arena.
--- Content provided by FirstRanker.com ---
NATURE OF MULTINATIONAL STRATEGIC MANAGEMENT
Str ategic man ag ement is concer ned with the pro cess of f ormulating,
--- Content provided by FirstRanker.com ---
implementing and evaluating strategies to achieve a firm s objectives. In concept,strategic management process is a multinational corporation is similar to that in
any other form of organisation, the main complicating factors being the numerous
--- Content provided by FirstRanker.com ---
coun tr y an d region al en viron ments it has to analyse and understand b efo re
considering the various strategic options.
--- Content provided by FirstRanker.com ---
More time and effort are required to identify and evaluate external trendsand events in MNCs Geographic distances, cultural and national differences and
variations in business practices, often make communication between home offices
--- Content provided by FirstRanker.com ---
and overseas operations difficult. Strategy implementation can be more difficult
because different cultures have different norms, values and work this.
--- Content provided by FirstRanker.com ---
27Strategic management is critical to multinational business. An MNC needs
to keep track of its increasingly diversified oper ations in a continuously changing
--- Content provided by FirstRanker.com ---
multinational environment. This need is particularly obvious when one considersthe amount of foreign direct investment that has taken place in recent years. Foreign
direct investment has outgrown trade acro ss th e glob e and this development
--- Content provided by FirstRanker.com ---
necessitates the need to coordinate and integrate diverse operations with an effective
--- Content provided by FirstRanker.com ---
strategy.For example, take the case of Ford Motor, which has re-entered the market
in Thailand and despite a shrinking demand for automobiles there, is beginning to
--- Content provided by FirstRanker.com ---
build a strong sales force and to increase market share. The firm s strategic plan is
based on offerin g the right contribution of price and financing to a car efully
--- Content provided by FirstRanker.com ---
identified market segment. In particular, Ford is working to bring down the monthlypayment so that customers can afford a new vehicle. This is the same strategy that
Ford used in Mexico, where the currency crisis of 1994, resulted in serious problems
--- Content provided by FirstRanker.com ---
for many multinationals.
An MNC is able to increase its profitability in ways often not available to
--- Content provided by FirstRanker.com ---
a domestic firm. For example, a global firm is able to:Earn a greater return from its distinctive skills and core competencies.
Realise location of economies by dispensing operations to those locations
--- Content provided by FirstRanker.com ---
where they can be performed most efficiently.
Realise greater economies of scale, which reduces the cost of production.
--- Content provided by FirstRanker.com ---
Acquire and or/develop widely known brands.28
However, the MNC s ability to increase its profitability by exploiting the
--- Content provided by FirstRanker.com ---
four strategies stated above depends on how well its formulates its production,mark eting and finance strategies and implemen ts them in diff er in g national
--- Content provided by FirstRanker.com ---
environments.
ACQUIRING AND/OR DEVELOPING BRANDS
--- Content provided by FirstRanker.com ---
Nestle, a multinational food company has been highly successful in its globaloperations. It has ad opted sev eral strategies to achieve th e success. Th rough
aggressive acquisition s it has expanded its sales with new, high margin, and
--- Content provided by FirstRanker.com ---
sophisticated products. Another company Mittal Steels which is using the strategy
of acquiring number of companies in Eur ope and other regions. The final strategy
--- Content provided by FirstRanker.com ---
being used here is that the company has given local managers substantialautonomy.
REAPING THE BENEFITS OF LARGE SCALE PRODUCTION
--- Content provided by FirstRanker.com ---
Multinational corporations reap the benefits of large scale production therebyreducing the production costs and fixing competitive selling price. One firm that
has exploited the strategy of mass production is in India by name Hero Cycles.
--- Content provided by FirstRanker.com ---
Mass production has led to the organisation to fix low selling price and increase
the market share in the cycle segment. This Hero Honda has entered into many
--- Content provided by FirstRanker.com ---
European and African markets and successfully doing its business profitably.REALISING LOCATION ECONOMIES
As we are aware, that countries differ on a wide range of dimensions such
--- Content provided by FirstRanker.com ---
as economic, political, legal, cultural and that these differences can either increase
or decr ease the costs of do ing bu siness, location of pr oduction units
--- Content provided by FirstRanker.com ---
play an29
important role in optimising the profit levels. Advantages of location economic help
--- Content provided by FirstRanker.com ---
a firm lower its cost of production and help it differentiate its product from thoseof competitions. For example General Motors did precisely the same thing. Design
of its pontiac car was done in Germany, key components were manufactured in
--- Content provided by FirstRanker.com ---
Japan, Singapore and Taiwan, assemply was performed in South Korea, and the
advertising strategy was formulated in Great Britain. Each of these countries was
--- Content provided by FirstRanker.com ---
best suited to perform a particular value creation activity.
CORE COMPETENCIES
--- Content provided by FirstRanker.com ---
The term core competence refers to skills within the firm that competitors
cannot easily initiate. The skills may exist in production, finance, R&D in marketing,
--- Content provided by FirstRanker.com ---
but they are the bedrock of the firms competitive advantage. For example, Toyotahas a co re competen ce in the pr odu ction of cars; Mc Do nald s has a co re
competence in managing fast food operations and P&G has core competence in
--- Content provided by FirstRanker.com ---
developing and marketing consumer products.
MULTINATIONAL STRATEGIC MANAGEMENT PROCESS
--- Content provided by FirstRanker.com ---
Strategic man agement process invo lves for mulation of str ategies, theirimplementation and evaluation and con trol of the con sequences. Specifically
multinational strategic management involves four major steps namely:
--- Content provided by FirstRanker.com ---
Scanning of global environment
Formulation of strategies
--- Content provided by FirstRanker.com ---
Implementation of strategies andEvaluation and control
30
--- Content provided by FirstRanker.com ---
ENVIRONMENTAL SCANNINGEnvironmental scanning provides management with accur ate forecasts of
trends that relate to external changes in geographic areas where the firm is currently
--- Content provided by FirstRanker.com ---
doing business. An MNC is interested in three areas of macro environment.
First, the MNC will begin by conducting a forecast of macro economic and
--- Content provided by FirstRanker.com ---
industry performance dealing with factors such as markets for specific productsper capita income of the population and availability of labour and raw materials.
A second commo n forecast will p redict likely trends in exchan ge r ates,
--- Content provided by FirstRanker.com ---
exchange controls, balance of payments and rates of inflation.
A third in the forecast of the company s potential market share in a particular
--- Content provided by FirstRanker.com ---
geographic area as well as that of the competitors.Several MNCs have profited fr om car eful environ mental scanning. For
example, Alcatel of France after a careful analysis of macro environment, made a
--- Content provided by FirstRanker.com ---
ser ies o f acquisition s and alliances an d n ow is the world s largest teleph one
equipmen t company. Alon g with th e scanning of external env iron men t, MNC
--- Content provided by FirstRanker.com ---
conducts a study of internal resource position which helps the firm evaluate itscurrent managerial, technical, financial and material strengths and weaknesses. This
strategy is used by the firm to determine its ability to take advantage of multinational
--- Content provided by FirstRanker.com ---
market opportunities.
STRATEGY FORMULATION
--- Content provided by FirstRanker.com ---
Before describing how strategies are formulated by an MNC, it is useful tounderstand that the firm has four major strategy options:
31
--- Content provided by FirstRanker.com ---
World Wide ItegrationNational Responsiveness
--- Content provided by FirstRanker.com ---
Regional Responsiveness and
Multifocal Approach
--- Content provided by FirstRanker.com ---
WORLD WIDE INTEGRATIONA wo rldwid e in tegr atio n strategy is aimed at d evelopin g r elativ ely
standardized pro ducts with glo bal ap peal, as well as rationalisin g o per atio ns
--- Content provided by FirstRanker.com ---
throughout the world. Rationalisation means exploiting the comparative advantage
of costs which nations possess.
--- Content provided by FirstRanker.com ---
Worldwide integration is based on the notion that there are a number ofproducts that can be used around the globe with alteration of specifications. Coca-
cola which is sold in more than 165 countries, is a classic example of a global
--- Content provided by FirstRanker.com ---
product requiring only limited alterations of formula. Not all products and situations
lend themselves to such cross-country integration.
--- Content provided by FirstRanker.com ---
NATIONAL RESPONSIVENESSA national responsiveness strategy allows subsdiaries to have substantital
latitude in adapting products and services to suit the particular needs and political
--- Content provided by FirstRanker.com ---
realities of the countries in which they operate. Subsidiaries operate almost as if
they were stand alone companies, although they retain many of the substantial
--- Content provided by FirstRanker.com ---
benefits of being affiliated with an MNC, such as shared financial risks and accessto global R&D resources.
32
--- Content provided by FirstRanker.com ---
REGIONAL RESPONSIVENESSThis strategy allows regional offices to have substantial freedom to
co-ordinate the activities of local subsidiaries and adapt products and services to
--- Content provided by FirstRanker.com ---
suit the particular needs and political realities of the regions in which they operate.
Regional offices are able to obtain some economies of scale and make adjustments
--- Content provided by FirstRanker.com ---
to suit regional tastes, yet still retain many of the benefits of being affiliated with amultinational company. For example, Thomson Consumer Electronics of France
established four factories in Europe that assemble specific types of TV sets for the
--- Content provided by FirstRanker.com ---
European market.
MULTIFOCAL EMPHASIS
--- Content provided by FirstRanker.com ---
A mutlifocal strategy is aimed at achieving the advantages of world wideintegration wherever possible, while still attempting to be responsive to national
needs. Thus, the str ategy encompasses both world wide integration and national
--- Content provided by FirstRanker.com ---
responsiveness. Firms with multifocal strategies are difficlt to manage as they need
to be concerned with two dimensions simultaneously.
--- Content provided by FirstRanker.com ---
GOAL SETTING FOR STRATEGY FORMULATIONWhatever may be the focus, strategy formulation should be preceded by goal
setting. MNCs pursue a variety of goals. These goals typically serve as an umbrella
--- Content provided by FirstRanker.com ---
beneath which the subsdiaries operate.
Profitability and marketing usually dominate the strategic plans of today s
--- Content provided by FirstRanker.com ---
MNCs. Profitability is of a very high significance because MNCs generally needhigher profitability from their overseas operations than they expect from
domestic
--- Content provided by FirstRanker.com ---
activities. The reason is obvious. Setting up overseas operations involves greaterrisk and effort. Further, a firm that has done well domestically with a product or
service usually has done so because the competition is less severe. Firms, with such
--- Content provided by FirstRanker.com ---
an advantage often find additional lucrative opportunities beyond their borders.
Moreover, the more successful a firm is domestically, the more difficult it
--- Content provided by FirstRanker.com ---
is to increase market sh are without strong competitive response. Multinatio nalmarkets, however, offer an ideal alternative to the desir e for increased growth and
profitability.
--- Content provided by FirstRanker.com ---
Another reason why profitability and marketing top the list of goals is that
these tend to be more externally environmentally responsive, whereas production,
--- Content provided by FirstRanker.com ---
finance and personnel areas tend to be more internally controlled. Thus, for strategicplanning, profitability and marketing goals are given higher importance and deserve
closer attention.
--- Content provided by FirstRanker.com ---
Once the strategic goals are set, the MNC will develop specific operational
goals and controls, usually through a two-way process at the subsidiary or affiliate
--- Content provided by FirstRanker.com ---
level. For example, the MNC headquarters may require periodic financial reports,an d require that all client contracts be clear ed through the house office. These
guidelines are designed to ensure that the overseas group s activities support the
--- Content provided by FirstRanker.com ---
goals in the strategic plan and that all units operate in a co-ordinated effort.
STRATEGIC IMPLEMENTATION
--- Content provided by FirstRanker.com ---
The strategy formulated needs to be implemented. Strategy implementationis the process of attaining goals by using the organisational structure to
execute
--- Content provided by FirstRanker.com ---
34
the strategy formulated. Three issues deserve serious
implementation.c onsideration for strategy
--- Content provided by FirstRanker.com ---
Location.
--- Content provided by FirstRanker.com ---
Ownership decisions andFunctional area implementation.
LOCATION
--- Content provided by FirstRanker.com ---
An MNC must decide the location of its subsidiary. Core consideration in
choosing a country is the size of its market. MNCs have traditionally invested in
--- Content provided by FirstRanker.com ---
the rich countries. Another consideration in choosing a country is the extent ofGovernment control. Earlier, MNCs refused to do business in eastern European
countries and to some extent even in India. The recent liberalization of economy
--- Content provided by FirstRanker.com ---
in India and shift towards free market in the republics of the former Soviet Union
and other European nations, however encouraged MNCs to change their perception
--- Content provided by FirstRanker.com ---
and they are now making moves in this largely untapped part of the globalmarket.
Location is important for an MNC for a number of reasons. Facilities in a
--- Content provided by FirstRanker.com ---
host country contribute to the competitive edg e to the MNC. Location is also
important because host country citizens prefer locally produced products. Imported
--- Content provided by FirstRanker.com ---
goods may be subject to tariff restrictions. Besides, an MNC may already be doingso much business in a country that the local Government will insist that it set up
local operations and begin producing more of its goods internally.
--- Content provided by FirstRanker.com ---
35
OWNERSHIP
Ownership of multinational operations has become an important issue in
--- Content provided by FirstRanker.com ---
recent years. There are a number of forms of ownership in international operations.
The most common ownership patterns are joint ventures, alliances, mergers and
--- Content provided by FirstRanker.com ---
acquisitions and new facilities. Depending on the region of the world, some patternsare more popular than others. For example in China joint ventures are more popular
while in Australia alliances are widely used. However, the most widely recognized
--- Content provided by FirstRanker.com ---
strategies are wholly owned subsdiaries acquired through mergers and acquisitions,
licensing agreements, franchising and basic export and import operations.
--- Content provided by FirstRanker.com ---
FUNCTIONAL STRATEGIESFunctional strategies are used to coordinate operations and to examine that
the str ategies are implemented effectively. While the specific functions in MNCs
--- Content provided by FirstRanker.com ---
vary, they typically fall into five major areas namely marketing, manufacturing,
finance, technology and human resources.
--- Content provided by FirstRanker.com ---
EVALUATION AND CONTROLThe final phase in multinational strategic management is evaluation and
co ntrol. Ev aluation involves an examination of th e MNCs performance for the
--- Content provided by FirstRanker.com ---
purpose of determining:
i. how well the organisation has done and
--- Content provided by FirstRanker.com ---
ii. what corrective actions should be taken in the light of this performance.36
Strategy evaluation includes two basic activities:
--- Content provided by FirstRanker.com ---
i. assessing the actual results and comparing them with the expected onesand
ii. taking corrective actions to ensure that performance conforms the plans.
--- Content provided by FirstRanker.com ---
Strategy evaluation is essential to ensure that stated objectives are being
achieved. It is also important because MNCs face dynamic environments in which
--- Content provided by FirstRanker.com ---
forces change quickly and dr amatically. Today s success is not guaranteed fortomorrow. An organisation should never be lulled into complacency with
success.
--- Content provided by FirstRanker.com ---
Quan titativ e criteria such as financial r atios, may also be emplo yed to
evaluate the performance of the firm. Some key financial ratios that are particularly
--- Content provided by FirstRanker.com ---
useful as criteria for evaluation include Return on investment, Return on equity,Profit margin, Debt to equity, Earnings per share and Sales and Assets growth.
SUMMARY
--- Content provided by FirstRanker.com ---
In this lesson we have seen multinational strategic management issues in
general and more particularly strategic management process. We have also analysed
--- Content provided by FirstRanker.com ---
multinational environment scanning. Further, we have analysed how strategies areformu lated and its four major strategy options such as world wide integration,
national and regional responsiveness an d multifocal ap proach . We have also
--- Content provided by FirstRanker.com ---
analysed the implementation part of the strategy and the involvement of three issues
namely location, ownership, decisions and functional areas of implemen tation.
--- Content provided by FirstRanker.com ---
Finally evaluation and con trol o f multinational strategic manag ement ar e alsodiscussed in detail.
QUESTIONS
--- Content provided by FirstRanker.com ---
1. Explain the factors behind the growth of MNCs.2. Write a short note on the development of MNCs.
3. The study of multinational business is fine if you are going to work in
--- Content provided by FirstRanker.com ---
a large MNC, but it has no relevance for individuals who are going to
work in small firms. Evaluate this statement.
--- Content provided by FirstRanker.com ---
4. What is strategic management? How is it important for an MNC?5. Describe the Multinational Strategic Management Process?
6. Explain how MNCs formulate their strategies?
--- Content provided by FirstRanker.com ---
7. How is environmental scanning useful to multinational business?
8. Explain Lickert s four systems of management?
--- Content provided by FirstRanker.com ---
9. Write a note on Managerical Grid ?10. Explain contingency approach to management style?
11. Discuss management styles based on use of authority?
--- Content provided by FirstRanker.com ---
REFERENCES
1. International Business - Charles W.L. Hill
--- Content provided by FirstRanker.com ---
2. International Business - Aswathappa3 International Business - Francis Cherunilam
4. Management - Herold Koontz & Heinz Weikmich
--- Content provided by FirstRanker.com ---
UNIT ?III[Comparative Management : Importance and scope; Methods of comparative
--- Content provided by FirstRanker.com ---
management ; management styles and practices in US ,Japan, China, Korea,
India; Organizational design and structure of international corporations; Locus
--- Content provided by FirstRanker.com ---
of decision making; Headquarter and subsidiary relations in international firms.]Learning Objectives:
--- Content provided by FirstRanker.com ---
After reading this chapter, you should be able to understand the
Importance and scope of comparative management.
Management styles and practices in different countries
--- Content provided by FirstRanker.com ---
Various forms of International organizational structure.Locus of decision making.
Headquarters and subsidiary relationships and control.
--- Content provided by FirstRanker.com ---
III A - COMPARATIVE MANAGEMENT
--- Content provided by FirstRanker.com ---
Today's and tomorrow's managers confront increasingly complex organizations,accelerated technological change, and a demanding business environment.
Internationalization and globalization of the markets and an ever increasing
--- Content provided by FirstRanker.com ---
exchange with foreign cultures have become reality in everyday business today.
Nearly all small and medium-sized companies are increasingly exporting to
--- Content provided by FirstRanker.com ---
foreign countries or are part of a global supply chain. How does the enterprisedeal with highly competitive and open market economies which directly affect
the bottom lines of organizations? How to prepare a responsible manager?
--- Content provided by FirstRanker.com ---
What business rules apply in different countries? Immediate relevance to current
business issues and the lasting benefit to corporations are the guidelines in
--- Content provided by FirstRanker.com ---
designing multinational corporations management programme.In a fast changing global business environment Multinational Companies are
preparing a comprehensive approach which will work effectively at various
--- Content provided by FirstRanker.com ---
environmental conditions. The basic idea of this approach is to study themultiplicity of business environments and management principles adopted by
the companies to administer the situation. Based on the experiences at different
--- Content provided by FirstRanker.com ---
countries firms are proficient to identify the cause and effect relationships by
which they can prepare a strategy for meeting different environmental
--- Content provided by FirstRanker.com ---
requirements which is called as comparative management.Comparative management is defined as the study and analysis of
--- Content provided by FirstRanker.com ---
management in different environments and the reasons that enterprises show
different results in various countries. Management is an important element in
--- Content provided by FirstRanker.com ---
economic growth and in the improvement of productivity. The art and the skillof comparative management require manager understanding of the Political,
Economic, Social, Technological and Ecological context in which enterprises
--- Content provided by FirstRanker.com ---
operate. Managers must make a judgment call about what works where and why.
--- Content provided by FirstRanker.com ---
i)IMPORTANCE OF COMPARATIVE MANAGEMENT
--- Content provided by FirstRanker.com ---
The increase in the number of multinational companies that invest
directly in foreign countries has given rise to a relatively new management field
--- Content provided by FirstRanker.com ---
known as comparative management. Comparative management is identifying,
measuring, and interpreting similarities and differences among managers`
--- Content provided by FirstRanker.com ---
behavior, techniques, and practices in various countries.--- Content provided by FirstRanker.com ---
Multinational companies have opened plants in foreign countries for
several reasons: to gain a share in a foreign market to take advantage of
--- Content provided by FirstRanker.com ---
economies of scale, to capitalize on savings gained through fluctuations in theforeign exchange market, to avoid trade restrictions, and to take advantages of
low-cost government loans that encourage foreign investment. Difficulties arise
--- Content provided by FirstRanker.com ---
from the different environments, beliefs, government influences, social customs,and forces in the foreign country. Comparative management approach has
become essential to solve the problems faced by a company operating in a
--- Content provided by FirstRanker.com ---
foreign environment. Following are the major points for captivating comparative
management.
--- Content provided by FirstRanker.com ---
1. Versatile :There are several reasons to understand management in an international
context. First, as an increasing number of managers go abroad for overseas
--- Content provided by FirstRanker.com ---
assignments, they are faced with the problems of motivating and
communicating with the foreign work force. Understanding and being
--- Content provided by FirstRanker.com ---
responsive to local conditions help managers to achieve personnel andorganizational goals. Second, awareness of potential conflict between the
multinational company and the host country makes for a mutually beneficial
--- Content provided by FirstRanker.com ---
relationships. For example; the multinational might hire a higher percentage
of nationals for managerial positions or permit more local autonomy as a
--- Content provided by FirstRanker.com ---
way of smoothing labor relations. Third, getting to know how the managersin foreign countries perform their tasks expedites continued trade and
cooperation. Fourth, observing how different cultures solve similar problems
--- Content provided by FirstRanker.com ---
provides the multinational with innovative problem-solving techniques,
which lead to improved management. Finally, the ability to see worthwhile
--- Content provided by FirstRanker.com ---
differences and to observe how to act in varying situations is made available.2. Convergence:
--- Content provided by FirstRanker.com ---
There is a divergence of opinion with respect to this concept. A German
manager of a U.S. plant suggests: We are finding out that the way of the
--- Content provided by FirstRanker.com ---
future is one world ? one market place. The plethora of goods such aswatches, cars, musical instruments, office copiers, and the electronic
products supplied by multinationals suggests that a common set of
--- Content provided by FirstRanker.com ---
managerial beliefs is becoming more relevant. As countries share morecommon external problems, their different management and organizational
system results to a convergence or adoption of various traditional
--- Content provided by FirstRanker.com ---
management systems.
On the other hand, there are those who argue that environmental factors will
--- Content provided by FirstRanker.com ---
continue to dominate management of a foreign plant. It is interesting to note,however, that successful Japanese and Europeans approaches to
management have been adopted in several of their U.S. plants.
--- Content provided by FirstRanker.com ---
3. Semantic difficulties :
--- Content provided by FirstRanker.com ---
Misunderstandings about the different ways cultures interpret certain wordsor concepts can lead to major inefficiencies. For example, the word leader
has a different meaning in Australia than in the United States. Even the word
--- Content provided by FirstRanker.com ---
manager does not have a uniform meaning throughout the world. And words
like status, security, and esteem mean different things in different countries.
--- Content provided by FirstRanker.com ---
In some countries, the meaning and the measurement of what it means areboth in a single word. Further, a number of managerial terms originated in
the United Status and have been adopted unchanged in the foreign
--- Content provided by FirstRanker.com ---
languages, but the common meaning of the word in the foreign country has
grown to mean something quite different from the original U.S. term.
--- Content provided by FirstRanker.com ---
Additionally, every culture has some idiomatic expressions that convey nomeaning at all when translated into another language.
--- Content provided by FirstRanker.com ---
ii) SCOPE OF COMPARATIVE MANAGEMENT
Globalisation of business complicated the management of international
--- Content provided by FirstRanker.com ---
companies at various levels. Striving to be a truly global company is a relativelynew quest. A few early explorers steered uncharted courses during the first half
of the 20th century. But most companies recognized the opportunities presented
--- Content provided by FirstRanker.com ---
by an increasingly global marketplace only in the past two decades. So it's notsurprising that the number of global companies remains extremely small.
Besides the newness and, of course, the difficulty of this quest, there is one other
--- Content provided by FirstRanker.com ---
important reason so few global companies exist today. Not many
executives/managers possess the qualities needed to lead their companies around
--- Content provided by FirstRanker.com ---
the world. The practice of comparative management increases the scope for themanagers to learn in a versatile environment. The following are the scope of
comparative management in management of multinational companies
--- Content provided by FirstRanker.com ---
1. Think globally, act locally:
--- Content provided by FirstRanker.com ---
Companies working through comparative management get the opportunity offinding the best management approach. Players in this new environment will
have a fast response capability, will be comfortable with cross-cultural
--- Content provided by FirstRanker.com ---
influences, and will be entrepreneurial and flexible. Global managers will
require a working knowledge of international relationships and foreign affairs,
--- Content provided by FirstRanker.com ---
including global financial markets and exchange-rate movements. Theseexpanded business management skills will need to be coupled with global
responsibilities to take advantage of manufacturing rationalization, "mass
--- Content provided by FirstRanker.com ---
customization" of products, and low-cost, global sourcing. The global mind-set
required by these new economic and competitive realities will be needed at all
--- Content provided by FirstRanker.com ---
levels in the firm. Managers with this global perspective will need to strike abalance between national responsiveness and exploitation of global economies
of scale. This is the vaunted ability to "think globally, but act locally."
--- Content provided by FirstRanker.com ---
2. Forming of transnational corporations:
--- Content provided by FirstRanker.com ---
Managing change in the unstable environment is an unending challenge.Constantly fine-tuning the balance between global and local pressures under
changing competitive conditions will contribute to the need for frequent reor-
--- Content provided by FirstRanker.com ---
ganization of resources, human networks, technology, and marketing anddistribution systems. The shortening of product life cycles, driven by
technological change in the products and how they are manufactured and
--- Content provided by FirstRanker.com ---
delivered, contributes to the acceleration of change. As difficult as these
constant changes are to manage, the overall transition to global operations
--- Content provided by FirstRanker.com ---
represents a formidable challenge in itself. Existing international operations,often marked by standardization of products and uniformity of procedures, may
be a barrier to effective globalization. For example, a long history of mass-
--- Content provided by FirstRanker.com ---
producing standard products may make it especially difficult to invest in and
effectively operate flexible factories, one way that firms may offer differentiated
--- Content provided by FirstRanker.com ---
products to different markets on a global scale.For a successful transition to global operations, it is also important that country
--- Content provided by FirstRanker.com ---
managers are in agreement with the strategy. If poorly implemented, the move to
globalisation can pit headquarters managers against country or field managers.
--- Content provided by FirstRanker.com ---
There is a tendency for autonomous units in a firm to protect their own turf. Ifglobal strategy is perceived as a move toward a centralization of responsibility, a
local manager's role may become less strategic. Subsidiary managers who joined
--- Content provided by FirstRanker.com ---
a company because of its commitment to local autonomy and adapting products
to local environments may become disenchanted or even leave the organization.
--- Content provided by FirstRanker.com ---
In terms of organization structure, effective global managers will need the skillsto manage the transition from independence/dependence to interdependence,
from control to coordination and cooperation, and from symmetry to
--- Content provided by FirstRanker.com ---
differentiation.
--- Content provided by FirstRanker.com ---
3. Ability to Manage Cultural Diversity:Global aptitude encompasses several different qualities. First, of course, is
foreign experience. But probably equally important is sensitivity to other
--- Content provided by FirstRanker.com ---
cultures. As one starts to function internationally, an understanding of cultureand its impact on behavior, particularly management behavior and practices,
becomes essential. Very often, people experience difficulties when they have to
--- Content provided by FirstRanker.com ---
work in another culture because peoples' world views and mental programs are
different in different cultures. Culture has been called "the collective
--- Content provided by FirstRanker.com ---
programming of the mind which distinguishes one human group from another."As a result of having different mental programs, people often see situations
differently and has different approaches and solutions to problems. Each tends to
--- Content provided by FirstRanker.com ---
believe that his or her way is the right way and makes the most sense. The result
can be frustration, conflict, and an inability to successfully carry out strategy or
--- Content provided by FirstRanker.com ---
plans. Understanding has two parts: cultural awareness or how another person'sculture affects his or her behavior; and self-awareness or understanding how our
own culture affects our behavior. It is not sufficient to understand how others
--- Content provided by FirstRanker.com ---
differ, if we do not understand how we also differ.
--- Content provided by FirstRanker.com ---
The first imperative for effectively managing cultural diversity is cultural sensi-tivity. The marketers of Coca-Cola, the world's most recognized brand, attribute
their success to the ability of their people to hold and to understand the
--- Content provided by FirstRanker.com ---
following perspectives simultaneously: Their corporate culture, the culture of
their brand, and the culture of the people to whom they market the brand.
--- Content provided by FirstRanker.com ---
Sometimes cultural sensitivity leads to marketing one's products to a particularmarket segment across cultural boundaries, basically finding common
subcultures within otherwise diverse cultures. In a classic study of international
--- Content provided by FirstRanker.com ---
marketing practices of several bed linen companies headquartered in the United
Kingdom, findings stressed the ability to develop a high level of cultural
--- Content provided by FirstRanker.com ---
awareness in order to:1. Know the culture and understand consumption pattern.
2. Obtain high product acceptance in light of the fact that culturally
--- Content provided by FirstRanker.com ---
rooted differences have a significant impact on a product's success ina global market.
3. Recognize universal themes by segmenting according to similarities
--- Content provided by FirstRanker.com ---
instead of geographical differences.
--- Content provided by FirstRanker.com ---
Lack of cultural awareness can be devastating to organizations competing glob-ally. An organization not managed according to values felt by its members is
likely to experience conflict. Hidden values and beliefs must be recognized and
--- Content provided by FirstRanker.com ---
understood in order to manage effectively. Global managers must have the
ability to recognize that cultural differences operate internally and externally. It
--- Content provided by FirstRanker.com ---
is important to understand the influence of the home office's own cultural filterswhen dealing with foreign affiliates and to accept that the home office way of
doing things will not be appropriate in all instances.
--- Content provided by FirstRanker.com ---
In today's global environment, a firm's home culture must no longer dominate
--- Content provided by FirstRanker.com ---
the entire organization's culture. Instilling such an attitude, a global mind-set, isnot as simple as sending a memo announcing the change. Attitudes are
notoriously resistant to change. There are four distinct attitude clusters that are
--- Content provided by FirstRanker.com ---
useful in thinking about, and characterizing, corporate worldviews or mind-sets:
ethnocentric, polycentric, regiocentric, and geocentric. These attitudes may be
--- Content provided by FirstRanker.com ---
reflected in a firm's structure; authority and decision-making processes;selection, development, evaluation, control, and reward systems; information
flows; and geographical identification.
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
4. Design Flexible Organizations:
Companies worldwide are facing unprecedented challenges in handling
--- Content provided by FirstRanker.com ---
uncertainty, and thus in managing their organization structure too. Given thecomplexities of the global economy and its attendant demands on managers, it is
unlikely that any single organizational form will be adequate to the tasks. Global
--- Content provided by FirstRanker.com ---
managers will surely need significantly increased creativity in organizational
design, but limited organizational capability may represent the most critical con-
--- Content provided by FirstRanker.com ---
straint in responding to the new strategic demands. An individual managercannot be expected to develop and use all the diverse skills required for
successful global management. It is essential then that the organization support
--- Content provided by FirstRanker.com ---
global managers. Global managers will, therefore, be called on to design and
operate the very organizations that will help them to be more effective.
--- Content provided by FirstRanker.com ---
The best managers are already creating borderless organizations where the abil-
ity to learn, to be responsive, and to be efficient occurs within the firm's
--- Content provided by FirstRanker.com ---
administrative heritage. This suggests that a wide range of people in such firms
must demonstrate the capacity for strategic thinking and action, assisted by open
--- Content provided by FirstRanker.com ---
communication of plans, decentralization of strategic tasks, early opportunitiesfor development of top management capabilities, and control systems measuring
performance across many dimensions. These new organizations will have
--- Content provided by FirstRanker.com ---
multiple centers of influence and managers will move between jobs at these
centers. This lateral movement between centers and jobs will be common and
--- Content provided by FirstRanker.com ---
will displace hierarchy and promotion "up the ladder. To ensure that thepotential cultural diversity in such situations is taken advantage of, managers
will need the ability to create an alignment of authority and responsibility
--- Content provided by FirstRanker.com ---
between home office and field offices that moves decision making as close as
possible to the customer. Balance is required though and, as noted earlier, the
ability to coordinate manufacturing interdependencies to maximize economies
--- Content provided by FirstRanker.com ---
of production will be a key task of the global manager.
To operate effectively in these radically different, global organizations will take
--- Content provided by FirstRanker.com ---
new skills and old skills honed to a new sharpness. Some of the abilities andcharacteristics needed by the global manager to function in flexible
organizations will be:
--- Content provided by FirstRanker.com ---
1. New levels of creativity and inventiveness in organizational design.
2. High tolerance for ambiguity.
--- Content provided by FirstRanker.com ---
3. The ability to learn, be responsive, and be efficient, all simultaneously.4. The ability to identify and implement diverse managerial behaviors and
ideas for ongoing renewal of the organization.
--- Content provided by FirstRanker.com ---
5. The ability to coordinate complicated financial, human resource,
marketing and manufacturing interdependencies, not only across
--- Content provided by FirstRanker.com ---
functions, but also within each business activity.6. The ability to recognize different manufacturing, marketing, and
organizational problems and priorities across different locations and to
--- Content provided by FirstRanker.com ---
accommodate these with new structures and processes.
--- Content provided by FirstRanker.com ---
5. Building global teams:Increased cultural diversity in today's global organisations, combined with the
popularity of team based management techniques, makes the influence of
--- Content provided by FirstRanker.com ---
cultural differences on work team process and function a salient management
issue. Team-working is not the great panacea. It's not the latest management fad.
--- Content provided by FirstRanker.com ---
It's not the easy way of reducing costs. Team-working is a means to an end. Itenables organisations to employ a range of other techniques for improving
quality and reducing unit costs. Teams provide the platform on which to build
--- Content provided by FirstRanker.com ---
continuous improvement, just-in-time production systems, an empowered,
motivated and self-managed workforce committed to common goals. Teams
don't make these things happen - they enable them.
--- Content provided by FirstRanker.com ---
Even before the advent of global companies, effective teamwork was becoming
essential for managerial success. As specialization of people and differentiation
--- Content provided by FirstRanker.com ---
in organizations increased there was a concomitant increased need forintegration-for putting the specialized units back together in the service of the
organization's objectives. Teams, committees, and task forces were among the
--- Content provided by FirstRanker.com ---
devices used to accomplish the desired integration.
The need for transnational teamwork shows up in different ways in different
--- Content provided by FirstRanker.com ---
functions. Consider the different assumptions about the nature and purpose ofaccounting and auditing in various parts of the world, for example. In one
country financial statements are meant to reflect fundamental economic reality
--- Content provided by FirstRanker.com ---
and the audit function is to ensure that this is so. In another country the audit is
to check the accuracy of the statements vis-?-vis the economic records. In still
--- Content provided by FirstRanker.com ---
another country it is only to make sure legal requirements have been met.Imagine, then, the need for cross-cultural understanding and sensitivity in
auditing an international subsidiary or the teamwork needed to develop
--- Content provided by FirstRanker.com ---
international audit standards.
--- Content provided by FirstRanker.com ---
Other functions pick up the teamwork theme differently. In operations manage-ment, the literature emphasizes the need to develop system-sensitive outlooks
and processes that will develop personal relationships across subsidiaries. The
--- Content provided by FirstRanker.com ---
human resource literature emphasizes the need to develop capabilities for
leading multinational teams in flexible and responsible ways. The ability to
--- Content provided by FirstRanker.com ---
work effectively with other people and in teams will be critical to the successfulimplementation of a global strategy. Participation in global teams should,
therefore, occur early in the careers of managers in order to transform these
--- Content provided by FirstRanker.com ---
developing people into globally effective managers.
6. Ability to Communicate:
Managers of global companies make decisions across a range of firm and plant-
--- Content provided by FirstRanker.com ---
level activities encompassing activities associated with traditional functions such
as finance, marketing and production, as well as those associated with less
--- Content provided by FirstRanker.com ---
traditional actions such as international business-government relations andinternational accounting. Although it is difficult to define a homogeneous set of
management principles that harmonize the heterogeneous set of activities
--- Content provided by FirstRanker.com ---
ongoing in a global organization, it is possible to identify several core and
common concerns. It is obvious that in a global environment managers will need
--- Content provided by FirstRanker.com ---
to be able to communicate with diverse groups of people.To do so effectively will require multilingual skills and high levels of cross-
--- Content provided by FirstRanker.com ---
cultural awareness and sensitivity. In addition to the positive effects of good
communication skills among colleagues and with customers, there is another
--- Content provided by FirstRanker.com ---
advantage of particular importance to geographically dispersed and culturallydiverse organizations. Sensitive communications will also build trust, and a
common message can help build a strong corporate culture emphasizing shared,
--- Content provided by FirstRanker.com ---
global value systems.
--- Content provided by FirstRanker.com ---
7. Ability to Learn and to Transfer Knowledge in an Organization:Given the diversity of market requirements and needs, the dispersion of
manufacturing and sourcing, the rise of Research and Development leadership
--- Content provided by FirstRanker.com ---
in developed countries, and the importance of technological advances for
product and process innovations, learning and transfer of knowledge are key to
--- Content provided by FirstRanker.com ---
global success. Managers who are globally competent will be deeply curious;organizations that are successful will be able to coordinate, transfer, and use the
knowledge gained by curious executives rapidly and effectively.
--- Content provided by FirstRanker.com ---
The ability of organizations to learn and to transfer knowledge will only increasein importance as markets continue to globalize. In a global environment, the
ability of people to learn from diverse sources and to transfer knowledge within
--- Content provided by FirstRanker.com ---
their organization is essential for success.
--- Content provided by FirstRanker.com ---
iii) METHODS OF COMPARATIVE MANAGEMENTToday, the framework of planning, organizing, staffing, leading and controlling
--- Content provided by FirstRanker.com ---
has become the most popular way of structuring managerial knowledge.
Managerial experience based on this framework are widely used around the
--- Content provided by FirstRanker.com ---
world. Still, there are challenging tasks ahead for integrating the body ofmanagerial knowledge into a unified theory. There is evidence that the
management theory jungle not only continuous to flourish but get more dense,
--- Content provided by FirstRanker.com ---
with nearly twice as many schools or approaches as were found more than 20
years ago.
--- Content provided by FirstRanker.com ---
At the same time, there are signs that the various schools of thought are
converging. Realizing that these are only signs along the road to a more unified
--- Content provided by FirstRanker.com ---
and operational theory of management, and that there is more of this road to
travel, let us briefly examine some of methods towards comparative
--- Content provided by FirstRanker.com ---
management.1. The Empirical Approach:
--- Content provided by FirstRanker.com ---
In reviewing the many programs that use cases as a means of educating
managers, one finds that there appears to be much greater emphasis on distilling
--- Content provided by FirstRanker.com ---
fundamentals that there was two or three decades ago. Likewise, in the field ofbusiness policy, there has been increased emphasis on teaching and research
that goes beyond recounting what happened in given situation to analyzing the
--- Content provided by FirstRanker.com ---
underlying causes. One major result of all this has been a new emphasis onstrategic management.
--- Content provided by FirstRanker.com ---
2. Systems Approach:
Practicing managers as well as operational theories increasingly use the basics
--- Content provided by FirstRanker.com ---
of systems theory in analyzing managerial jobs. On the macro level, managers,especially those in multinational corporations, are viewing their operations as a
global interdependent system. Japanese managers, for example, are in change of
--- Content provided by FirstRanker.com ---
their manufacturing plants in the United States, and U.S. managers direct their
firms in Europe and other countries.
--- Content provided by FirstRanker.com ---
3. Situational Approach :
It is now clear that the concept of situational, or contingency management are
--- Content provided by FirstRanker.com ---
merely a way of distinguishing between science and art, knowledge and
practice. Those writers and scholars who have emphasized situation or
--- Content provided by FirstRanker.com ---
contingency approaches have done the field of management theory and practicea great service by stressing that what the intelligent manager actually does
depends on the realities of the situation, whether it is in the United States or
--- Content provided by FirstRanker.com ---
abroad.
--- Content provided by FirstRanker.com ---
4. The Motivational Theory Approach:Another interesting sign of the move toward a comparative management is the
way that research and analysis have tended to merge motivation and leadership
--- Content provided by FirstRanker.com ---
theory. Leadership research and theory have found that people tend to follow
those who offer them a means of satisfying their own desires. Thus, explanations
--- Content provided by FirstRanker.com ---
of leadership have been increasingly related to motivation.Implied by most recent research and theory is the clear message that effective
leaders design a system that takes into account the expectations of subordinates,
--- Content provided by FirstRanker.com ---
the variability of motives between individuals, the factors specific to a situation,the need for clarity of role definition, interpersonal relations and types of
rewards.
--- Content provided by FirstRanker.com ---
5. Organization Development Approach:
--- Content provided by FirstRanker.com ---
Both organization development and the field ordinarily referred to asorganization behavior have grown out of the interpersonal and group behavior
approaches to management. Many specialists in these areas are now beginning
--- Content provided by FirstRanker.com ---
to see that basic management theory and techniques fit well into their programs
of behavior intervention.
--- Content provided by FirstRanker.com ---
Studies indicate that many experts in this field are beginning to understand thatthe study of behavioral elements in group operations must be more closely
integrated with the study of organization structure design, staffing, planning, and
--- Content provided by FirstRanker.com ---
control. This is a hopeful sign. It is recognition that analysis of individual and
group behavior, at least in managed situations, easily and logically falls into
--- Content provided by FirstRanker.com ---
place in the scheme of operational-management theory. By the application ofcomparative management firms can develop an excellent international
organization.
--- Content provided by FirstRanker.com ---
6. Impact of Technology: Research an Old Problem :
--- Content provided by FirstRanker.com ---
Technology has wide impact on organization structure, behavior patterns, andother aspects of managing has been recognized by practitioners for many years.
Fortunately, academic researchers in recent years have directed their attention to
--- Content provided by FirstRanker.com ---
the impact of technology on managerial effectiveness.
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
III B - MANAGEMENT STYLES AND PRACTICESIN DIFFERENT COUNTRIES:
--- Content provided by FirstRanker.com ---
1-UNITED STATES
--- Content provided by FirstRanker.com ---
The United States is a democratic country and it is more difficult to determine towhat extent authority is centered at the top and to what extent it is balanced by
the authority of the working population exercising their power through the
--- Content provided by FirstRanker.com ---
withdrawal of their labour.
--- Content provided by FirstRanker.com ---
US managers are often under pressure by stockholders to show favorablefinancial results. This, unfortunately, may not encourage investments that have a
payout in the more distant future. Also, Americans usually stay in their
--- Content provided by FirstRanker.com ---
managerial positions only a relatively short time, and so a myopic decision can
seldom be traced to the manager who had made it but in the meantime was
--- Content provided by FirstRanker.com ---
promoted or even changed companies.Decisions are made primarily by individuals, and usually only a few people are
--- Content provided by FirstRanker.com ---
involved. Consequently, after a decision has been made, it has to be sold to
others, often people with different values and different perceptions of what the
--- Content provided by FirstRanker.com ---
problem really is and how it should be solved. In this way the making of adecision is rather fast, but its implementation is very time consuming and
requires compromise with those managers holding different view points.
--- Content provided by FirstRanker.com ---
The management of human resource in USA is quite different from other
--- Content provided by FirstRanker.com ---
countries. American firms also recruit employees from schools, but they hireemployees from other companies too. A common practice in America to
appraise the performance of new employees rather soon after they join the
--- Content provided by FirstRanker.com ---
company. If the performance does not meet the companion`s expectationsemployment may be terminated. But even for those who have been with a
company for many years, performance is evaluated at least once in a year. In
--- Content provided by FirstRanker.com ---
general, the focus of performance appraisal is on short?term results and
individuals contributions to the companies aims.
--- Content provided by FirstRanker.com ---
The managerial function of leading is carried out quite differently inU.S.companies. Leaders are seen as decision makers heading the group, they are
expected to be directive, strong, firm, and determined. their task is to integrate
--- Content provided by FirstRanker.com ---
diverse values, but the emphasis on individualism in the society in general and
in organization in particular may hinder cooperation.
--- Content provided by FirstRanker.com ---
Features:Short-term orientation.
Involvement of few people.
--- Content provided by FirstRanker.com ---
Decision making at the top, flowing down.
Fast decision making.
--- Content provided by FirstRanker.com ---
Loyalty to profession.Comprehensive performance evaluation.
Job insecurity.
--- Content provided by FirstRanker.com ---
Face- to face confrontation.
Fixing blame.
--- Content provided by FirstRanker.com ---
2-JAPANIn the post-World War II era a set of Japanese cultural patterns and managerial
practices came to be known collectively as the Japanese management style or
--- Content provided by FirstRanker.com ---
Japanese management techniques. Many of these techniques were credited with
helping vault the Japanese economy to its status as the world's second largest,
--- Content provided by FirstRanker.com ---
behind only the United States. Japanese management styles have never been thatdifferent from those prevalent in Western business, although many managers
and pundits appear to believe they are. However, there certainly have been
--- Content provided by FirstRanker.com ---
several useful concepts emanating from or developed by Japanese entrepreneursand management. Kaizen is a good example, although Edwards Deming and
others from the West largely articulated this (Japanese) Buddhist view of
--- Content provided by FirstRanker.com ---
organisation, influencing management pundits such as Masaaki Imai.
In Japan planning is greatly aided by the cooperation between government and
--- Content provided by FirstRanker.com ---
business. After second world war II Japan developed policies for economicgrowth and strength as well as international competitiveness. These policies
harmonized monetary and fiscal policies with in the industrial structure. One of
--- Content provided by FirstRanker.com ---
the most interesting part of Japanese management is the way decision are made.
In typical organisation, several levels are involved in making a decision.
--- Content provided by FirstRanker.com ---
Actually, the most important aspect of the process is the understanding and theanalysis of the problem and development of various alternative solutions.
Japanese managers are seen as social integrators who are a part of the work
--- Content provided by FirstRanker.com ---
group. Using a paternalistic leadership approach, managers show great concern
for the welfare of other subordinates. Common values and team spirit facilitates
--- Content provided by FirstRanker.com ---
cooperation. The role of managers is to create an environment of spirit de corps,and they are willing to help out in doing the same work their subordinates do. In
an attempt to maintain harmony at almost any cost, managers avoid face-to-face
--- Content provided by FirstRanker.com ---
confrontation. This means that things may be purposely left ambiguous.
One of the major contributions of Japanese management to the world is Z
--- Content provided by FirstRanker.com ---
theory. Theory Z is often referred to as the 'Japanese' management style, whichis essentially what it is. It's interesting that Ouchi chose to name his model
'Theory Z', which apart from anything else tends to give the impression that it's a
--- Content provided by FirstRanker.com ---
Mcgregor idea. One wonders if the idea was not considered strong enough to
stand alone with a completely new name... Nevertheless, Theory Z essentially
--- Content provided by FirstRanker.com ---
advocates a combination of all that's best about theory Y and modern Japanesemanagement, which places a large amount of freedom and trust with workers,
and assumes that workers have a strong loyalty and interest in team-working and
--- Content provided by FirstRanker.com ---
the organisation.Theory Z also places more reliance on the attitude and responsibilities of the
workers, whereas Mcgregor's X,Y theory is mainly focused on management and
--- Content provided by FirstRanker.com ---
motivation from the manager's and organisation's perspective. There is no doubt
that Ouchi's Theory Z model offers excellent ideas, albeit it lacking the simple
--- Content provided by FirstRanker.com ---
elegance of Mcgregor's model, which let's face it, thousands of organisationsand managers around the world have still yet to embrace.
Features:
--- Content provided by FirstRanker.com ---
Long term orientation.
Collective decision making.
--- Content provided by FirstRanker.com ---
Slow decision making.Paternalistic leadership style.
Common values facilitating cooperation.
--- Content provided by FirstRanker.com ---
Control by peers.
Saving face.
--- Content provided by FirstRanker.com ---
3-CHINAIn the age of globalisation, China presents a unique setting for organizations.
The unprecedented growth of China's economy, which remains the fastest
--- Content provided by FirstRanker.com ---
growing in the world, offers significant potential for the practice of modern
management concepts. As China's economy evolves -- growing larger, more
--- Content provided by FirstRanker.com ---
complex and more competitive -- so is the way that multinational corporations(MNCs) are managing their operations there. CEOs and other senior executives
at MNCs in the U.S., Europe and Asia are focusing more of their time and their
--- Content provided by FirstRanker.com ---
companies' resources on China. A research suggests that the MNCs that have
had the most success in China are those whose top managers have gone out of
their way to stress the importance of their China businesses in relation to their
--- Content provided by FirstRanker.com ---
global operations. At the same time, the managers on the ground in China are
also changing. Expatriates still hold the most senior positions in China, but
--- Content provided by FirstRanker.com ---
Chinese locals are assuming a greater role in both middle- and senior-management ranks.
In years to come, multinationals will face new challenges in their China
--- Content provided by FirstRanker.com ---
operations: nurturing the growing number of more educated and experienced
Chinese managers and leveraging their China operations in a way that
--- Content provided by FirstRanker.com ---
contributes to their global competitive advantage. In past years, the typicalgeneral manager in China was assigned the relatively straightforward task of
either selling his multinational's products in that country or helping the parent
--- Content provided by FirstRanker.com ---
firm establish operations to leverage China's strength as a low-cost producer. To
be sure, these remain important responsibilities; indeed, the number of
--- Content provided by FirstRanker.com ---
companies that wish to outsource to China is accelerating. But the demand onChina managers has become more multifaceted. For one thing, China managers
still have to address significant growth in demand in China and all of the
--- Content provided by FirstRanker.com ---
challenges inherent in competing against foreign and domestic companies in
what is already a vast, difficult market. They also must deal with the global
--- Content provided by FirstRanker.com ---
migration of customers. Industrial companies or suppliers that providecomponents to assembly plants are finding that more and more of their
customers are migrating their manufacturing to China either because of demand
--- Content provided by FirstRanker.com ---
or China's attractiveness as a low-cost space. Hence, China managers must now
interact with a constant stream of visits by customers from many parts of the
--- Content provided by FirstRanker.com ---
world. Furthermore, general managers of MNCs in China must strengthen theirability to develop managerial talent -- as well as engineers and scientists --
within China.
--- Content provided by FirstRanker.com ---
In 2003, Boston Consulting Group and the Wharton School (BCG ) conducted asurvey to benchmark the best corporate approaches to China. The study focused
on ways in which 14 MNCs manage their overall presence in China from a
--- Content provided by FirstRanker.com ---
broad corporate perspective, as distinct from the level of individual business
units. BCG also looked at how MNCs ensure sufficient global visibility of their
--- Content provided by FirstRanker.com ---
China operations and how functions and processes are carried out. Specifically,the consultancy analyzed the MNCs from a number of perspectives: how the
multinational manages its China operations; target setting and management
--- Content provided by FirstRanker.com ---
processes; government and public relations; localization and human resources
development; the role of the China operation; the relationship of sourcing to
--- Content provided by FirstRanker.com ---
sales and marketing; and the extent of cross-product development activities.The study found that leading MNCs treat China uniquely in at least 10 ways:
1. The China operation has a very senior, accountable sponsor at the global
--- Content provided by FirstRanker.com ---
level; at Samsung, for example, the China CEO is one of three top group
executives.
--- Content provided by FirstRanker.com ---
2. Clear, bold targets are set internally, and sometimes externally; GE hasgoals of $5 billion in sales and $5 billion in sourcing by 2005.
3. A continual, top-down management push is reinforced with management
--- Content provided by FirstRanker.com ---
processes; Michael Dell of Dell Computer and other CEOs visit China at
least once a year.
--- Content provided by FirstRanker.com ---
4. The MNC is willing to change its rules regarding global priorities andnorms to favor China; Kodak moved its Asia headquarters to China.
5. China-specific products are pursued; virtually all major MNCs have
--- Content provided by FirstRanker.com ---
China-specific products.
6. The MNC works aggressively to bring the industry value chain,
--- Content provided by FirstRanker.com ---
including R&D, into China; Samsung set up a 300-person handset R&Dlaboratory in Beijing.
7. Managers are nurtured for the long term; Motorola University runs
--- Content provided by FirstRanker.com ---
management development programs in China.8. Government relations and public relations are strongly emphasized;
Pepsi has stepped up its government-relations focus on the central
--- Content provided by FirstRanker.com ---
government and less on provincial governments.
9. The China operation is given a truly "value-added" role; Kodak's China
--- Content provided by FirstRanker.com ---
organization prepares an integrated strategy across six businesses.10. China is made a global or regional center -- or both -- for key
responsibilities; Nike says its China operation will become increasingly
--- Content provided by FirstRanker.com ---
important in the build-up to the 2008 Olympics.
4-KOREA
--- Content provided by FirstRanker.com ---
Korea and the other countries adjacent to China have been under the influenceof Chinese culture for up to two thousand years. Chinese culture, therefore, has
dominated Korean society and their everyday lives through political, legal and
--- Content provided by FirstRanker.com ---
social systems in addition to literature, religion and ethics. In Korea Japanese
management receives a greater deal of attention, partly because of the economic
--- Content provided by FirstRanker.com ---
success of Japanese. Korea has also known for its fast and remarkable economicgrowth, but its management practices are less known to the world. It would be
incorrect to assume that Korean management is simply an extension of Japanese
--- Content provided by FirstRanker.com ---
management. It is not although there are some cultural and structural
similarities, such as the dominance of powerful conglomerate companies.
--- Content provided by FirstRanker.com ---
In Japan, managers emphasis group harmony and cohesion, expressed in theconcept of wa; the Korean concept of inhwa also translates into harmony, but
with less accept on group values.
--- Content provided by FirstRanker.com ---
There have also been cultural changes which reflect on the Korean way of doing
business and of living. The knowledge and skills for coping with these changes
--- Content provided by FirstRanker.com ---
need to be mastered by those who want to interact with Koreans. The need forinterpersonal relationships and good communication should be emphasized.
Korean organizations are quite hierarchical, with family members occupying
--- Content provided by FirstRanker.com ---
key positions .Beyond blood relationships, the factors affecting hiring decisionsoften include the school attended or being from the same geographic region as
the top person. The leadership style can best be described as top-down, or
--- Content provided by FirstRanker.com ---
autocratic/paternalistic. This approach enables the firm to adjust quickly to the
demands in the environment by issuing commands. Lifetime employment does
--- Content provided by FirstRanker.com ---
not prevail.Indeed,the labor turnover rates are high when compared with the lowrates in Japan. Turnover is primarily attributable to people quitting their job
rather than being dismissed. All in all, Korean management is different from
--- Content provided by FirstRanker.com ---
both Japanese and U.S. management practices.
5-INDIA
--- Content provided by FirstRanker.com ---
Since 1991, the Indian industry has been exposed to a globally competitivemarketplace. Despite the impact of globalisation, Indian companies have not
completely discarded Indian managerial philosophy. India seems to be moving
--- Content provided by FirstRanker.com ---
towards a unique `hybrid' form of management that seeks to remain grounded in
selected `traditional' patterns of behaviour, while embracing many of the
--- Content provided by FirstRanker.com ---
globally accepted management practices.India has a rich and enduring cultural heritage that has shaped and reshaped
itself over thousands of years. The country has not shut itself completely to
--- Content provided by FirstRanker.com ---
global information and cultural flows. In the past three centuries, a British
inspired institutional underpinning, a vigorous democratic political system and a
--- Content provided by FirstRanker.com ---
highly-educated, English-speaking social elite have exposed the country toglobal trends. In that sense, India is quite unlike China, which shut itself off
from the Western world for several years and only recently opened up to the
--- Content provided by FirstRanker.com ---
outside world.
Management practices India exhibits India's work culture. Hierarchical
--- Content provided by FirstRanker.com ---
management, high power-distance, a low risk taking propensity and theimportance of familial and social networks have been cited as reasons for India's
relatively slow industrialisation. A high power-distance culture means that
--- Content provided by FirstRanker.com ---
workers prefer authoritative and hierarchical forms of management. They alsorespond favourably to close supervision. Managers who demonstrate a high
`power figure' type of behaviour are more likely to gain the respect of
--- Content provided by FirstRanker.com ---
subordinates. Clear and direct orders are preferred. In order to enthuse and
motivate workers, clear job descriptions and detailed instructions are needed.
--- Content provided by FirstRanker.com ---
One problem faced in professionalising Indian management is that many Indiansderive their identity based on family. Additionally, age and seniority are given
great respect in India. A typical Indian is also very loyal to his or her own group
--- Content provided by FirstRanker.com ---
or team, and places the interest of the group before his or her own interests.
On the face of it, one would expect to see this collectivism to be carried over to
--- Content provided by FirstRanker.com ---
the work place in the form of hard work, commitment, dedication and loyalty tothe company. But a closer examination reveals that Indians are not that
committed to their organisations as say the Japanese. Indeed, many Indians put
--- Content provided by FirstRanker.com ---
their individual interests ahead of those of their organisations.
Another aspect of Indian management is that Indian CEOs receive greater
--- Content provided by FirstRanker.com ---
idealisation from senior managers than their counterparts in the West.Consequently Indian leaders are insulated from critical feedback from their
senior managers. Moreover in contrast to Western managers who are expected to
--- Content provided by FirstRanker.com ---
react consistently, logically and objectively in different situations, place, time
and person influence Indian managers. Some behaviour that is judged
--- Content provided by FirstRanker.com ---
appropriate for a given place, time and person(s) may not be appropriate forother times, places and person. But here again, thanks to globalisation, things are
changing, especially in industries like the IT.
--- Content provided by FirstRanker.com ---
Ultimately, it is the quality of management, which will determine India's
progress in the next few decades. Indian managers need to introspect and show
flexibility. They must accept the best practices from other countries and yet
--- Content provided by FirstRanker.com ---
modify them to suit the country's unique needs.
III C-ORGANISATION DESIGN AND STRUCTURE
--- Content provided by FirstRanker.com ---
OF
INTERNATIONAL CORPORATION
--- Content provided by FirstRanker.com ---
Organisation design, sometimes called organisation structure, is the overall
pattern of structural components and configurations used to manage the total
--- Content provided by FirstRanker.com ---
organisation.
Organizational structures generally establish internal authority relationships,
--- Content provided by FirstRanker.com ---
responsibility for work performance, and paths of communication and controlrequired for a company to achieve its objectives. These structures are typically
set up to blend the specialized expertise needed to facilitate decision making on
--- Content provided by FirstRanker.com ---
a variety of short- and long-range problems. The development of structures
should generally be planned and managed.
--- Content provided by FirstRanker.com ---
The type of structure managers select should take into consideration the socialand psychological aspects of the environment and personnel and should be
designed to achieve operational efficiency and control without inhibiting
--- Content provided by FirstRanker.com ---
individual creativity and initiative. This task becomes much more complex when
a domestic enterprise desires to internationalize its operations. This is because
--- Content provided by FirstRanker.com ---
organizations` managers need to establish lines of authority and responsibilityfrom top headquarters management to managers in a variety of foreign
environments and at the same time keep open the necessary lines of
--- Content provided by FirstRanker.com ---
communication required to manage effectively and efficiently in all the diverse
environments.
--- Content provided by FirstRanker.com ---
Importance of organisation designA firm through its organisation design (organisation structure)
1. Allocates organisational resources.
--- Content provided by FirstRanker.com ---
2. Assigns tasks to its employees.3. Instructs those employees about the company`s rules, procedures, and
expectations relating to their job
--- Content provided by FirstRanker.com ---
4. Collects and transmits information necessary for problem solving and
decision making.
--- Content provided by FirstRanker.com ---
TRADITIONAL AND MODERN
INTERNATIONAL ORGANISATION STRUCTURES
--- Content provided by FirstRanker.com ---
The term organization takes new meaning for a multinational company based
--- Content provided by FirstRanker.com ---
on the dimensions of the business. The basic dimensions of an internationalbusiness enterprise are technical or product needs, functional needs, and regional
or environment needs. Technical or product needs are specialized factors such as
--- Content provided by FirstRanker.com ---
construction, operation, manufacturing, research and development, special
knowledge, and experience. Functional needs are special knowledge of such
--- Content provided by FirstRanker.com ---
functions as personnel, planning, purchasing and finance. Regional orenvironmental needs are special knowledge of areas such as the foreign
government, politics, trends and economy. To attain maximum over all benefit
--- Content provided by FirstRanker.com ---
and to ensure effective communication and develop the means to make effective
decisions, the international organizational structure managers must effectively
--- Content provided by FirstRanker.com ---
integrate these three basic dimensions throughout the organization.An organization`s international structure is usually based on one of few
traditional or contemporary models. The traditional models include the
--- Content provided by FirstRanker.com ---
functional structure international division, foreign subsidiary, product division,
and regional structure. The contemporary models include the matrix
--- Content provided by FirstRanker.com ---
organization, the non-equity-based contractual/strategic alliance, and the mixed(hybrid) structure. These are discussed in the following sections.
--- Content provided by FirstRanker.com ---
i) THE FUNCTIONAL STRUCTUREThis form of organization extends the traditional domestic functional hierarchy,
and its development often bypasses the international division stage. Under the
--- Content provided by FirstRanker.com ---
functional structure, major functions are the focus. Product knowledge is
centered in manufacturing, engineering and marketing, and management of each
--- Content provided by FirstRanker.com ---
of these departments is responsible for both the domestic and informationactivities. Large international companies rarely use this structure at the corporate
level; it is sometimes used in regions, divisions, and / or subsidiaries. The
--- Content provided by FirstRanker.com ---
functional structure is traditionally European. It is typically used by smaller
firms, or by larger firms with one major product and stable demand. Domestic
--- Content provided by FirstRanker.com ---
firms whose internationalization strategy entails indirect exporting often usethis structure. A firms low dependence on foreign sales and its staffs lack of
international business experience often leads it to adopt this structure, as oppose
--- Content provided by FirstRanker.com ---
to the international division structure. This structure works well in small
companies, or in those with narrowly defined technologies where integrated
--- Content provided by FirstRanker.com ---
manufacturing or service activities can achieve economic goals.Advantages of Functional Structure
1. Emphasis on functional expertise:. The key business tasks define work,
--- Content provided by FirstRanker.com ---
and functional expertise is brought to bear on all aspects of the operation.
2. Tight control. This centralized functional approach permits a small staff
--- Content provided by FirstRanker.com ---
to control the firm`s operations. Top management has authority andoperational responsibility.
3. Prevents We versus Them conflicts. The absence of secondary profit
--- Content provided by FirstRanker.com ---
centers (there is no international division) prevents internal conflicts ?
the we versus the international division problems (discussed in the
--- Content provided by FirstRanker.com ---
next section) is prevented.4. Firms can develop and transfer expertise within each functional area.
5. It is possible to maintain highly centralised control over functional
--- Content provided by FirstRanker.com ---
operations.6. It focuses attention on the key functions of the firm.
7. Accountability ? someone is responsible for the section.
--- Content provided by FirstRanker.com ---
8. Clarity in functional definition ? know your and others` roles.
Disadvantages of the Functional Structure
--- Content provided by FirstRanker.com ---
1. Weak regional coordination. Disputes between functional managers mustoften be resolved at the corporate level. The CEO is often asked to solve
problems in areas in which he or she lacks expertise, such as
--- Content provided by FirstRanker.com ---
international business.
2. In firms with multiple product lines, functional structure can lead to top-
--- Content provided by FirstRanker.com ---
heaviness. In multiproduct firms, functional managers need expertise ineach product, or a functional manager is needed for each product. The
latter, which is often the case, would lead to an expensive, top-heavy
--- Content provided by FirstRanker.com ---
structure.
3. Much greater emphasis is often placed on domestic sales than on foreign
--- Content provided by FirstRanker.com ---
sales.4. It is practical only when the firm has relatively few products or
customers.
--- Content provided by FirstRanker.com ---
5. It does not promote coordination between divisions.
6. It may result in duplication of resources between managers.
--- Content provided by FirstRanker.com ---
7. Closed communication could lead to lack of focus.8. Departments can become resistant to change.
9. Coordination may take too long.
--- Content provided by FirstRanker.com ---
10. Gap between top and bottom.
--- Content provided by FirstRanker.com ---
ii)THE INTERNATIONAL DIVISION
--- Content provided by FirstRanker.com ---
When international business continue to grow companies can go forinternational division structure. After gaining some international business
experience through indirect exporting and their reliance on international
--- Content provided by FirstRanker.com ---
business has increased somewhat, many companies internationalize their
operations further by creating an export department. Typically, the aim of the
--- Content provided by FirstRanker.com ---
export department is simply to handle shipment of existing domestic products toforeign markets. But when firms` foreign transactions subsequently increase, the
export department is generally developed into an international division. The
--- Content provided by FirstRanker.com ---
international division usually supervises exports, distribution agreements,
foreign sales forces, foreign sales branches, the foreign sales subsidiaries. Staff
--- Content provided by FirstRanker.com ---
members in the international divisions are selected on the basis of their generalfamiliarity with corporate products, technology, and the culture, combined with
their ability to the hands on managers who are culturally sensitive and
--- Content provided by FirstRanker.com ---
adaptable to the constraints imposed by the foreign environmental factors.
--- Content provided by FirstRanker.com ---
In the international division structure, functional staffs such asmarketing, finance, and research and development are typically established, and
an executive responsible for international operations is appointed. International
--- Content provided by FirstRanker.com ---
businesses adopt this structure when they desire to have an expert responsible
for managing each specialized function. Managing these functions across
--- Content provided by FirstRanker.com ---
countries requires skills beyond those required for managing them in the homecountry.
--- Content provided by FirstRanker.com ---
The international division is generally given total authority and
responsibility for the enterprise`s foreign operations and activities. Historically,
some smaller enterprises for whom an international division was not really
--- Content provided by FirstRanker.com ---
necessary have nevertheless adopted such a structure because they saw it being
used by larger, successful enterprises.
--- Content provided by FirstRanker.com ---
Advantages of the International Division:
--- Content provided by FirstRanker.com ---
1. International executive development: Managers and employees in such a
division are forced to develop expertise in international business and will
--- Content provided by FirstRanker.com ---
subsequently able to participate in, or direct, operations in foreign sites.2. Focused international responsibility and authority: Foreign operations are
generally more complex than domestic operations and distant from the
--- Content provided by FirstRanker.com ---
home base. As experienced executive whose sole responsibility and
authority is the international division is therefore more free to react to the
--- Content provided by FirstRanker.com ---
needs of such areas than would be an executive whose responsibility andauthority is for both domestic and international operations.
3. The International operation has a single, strong voice in the company`s
--- Content provided by FirstRanker.com ---
strategy/policy-setting process. Since heads of international divisions are
usually totally responsible for profits and losses of the foreign operations,
--- Content provided by FirstRanker.com ---
they will be forceful in acquiring the share of resources necessary toaccomplish the firm`s international goals. On the other hand, an executive in
charge of both domestic and foreign operations may focus more on
--- Content provided by FirstRanker.com ---
obtaining resources for domestic activities than for foreign operations.
4. Top management is cognizant of consequences: Because of the complexity
--- Content provided by FirstRanker.com ---
of international business, many domestic executives focus mainly on theirhome-country operations and lose themselves in domestic issues, therefore
ignoring global operations. By having an international division, top
--- Content provided by FirstRanker.com ---
management is made cognizant of the consequences of focused decisions onglobal operations.
5. Company-wide view of international operations: Managers in the
--- Content provided by FirstRanker.com ---
international; division are usually concerned with the success of all of the
firm`s products in foreign markets. These managers are therefore impartial
--- Content provided by FirstRanker.com ---
in determining the best overall corporate strategy for international profits.On the other hand, managers of individual product lines made responsible
for both domestic and foreign operations may be partial to their own
--- Content provided by FirstRanker.com ---
international operations as opposed to the firm`s overall international
strategy.
--- Content provided by FirstRanker.com ---
Disadvantages of the International Divisions:1. Exports slowdown: Production division may not always adequately
--- Content provided by FirstRanker.com ---
supply what the foreign division needs because they favor the domestic
operations. Consequently, foreign orders may go unfilled even if the
--- Content provided by FirstRanker.com ---
profit potential is higher than that for domestic orders. On the other hand,the heads of product divisions who are responsible for both domestic and
foreign business may pay more attention to foreign operations when they
--- Content provided by FirstRanker.com ---
see a higher profit potential than in the domestic market.
2. Bottleneck: Managers of international divisions sometimes lack adequate
--- Content provided by FirstRanker.com ---
product or technical expertise, and the physical separation betweendomestic and foreign operations often precludes enterprises from
providing adequate technical support to international divisions. This
--- Content provided by FirstRanker.com ---
cause bottlenecks.
3. Conflict between employees in the domestic division and the employees
--- Content provided by FirstRanker.com ---
in the international divisions: Organizational struggles between domesticand foreign operations often occur. Because the international division
cuts across all product areas, a we-they situation can occur.
--- Content provided by FirstRanker.com ---
4. International versus other divisions: In the ideal corporate organization,operating divisions should be equal in size and profit. In reality,
however, the international division often becomes more profitable than
--- Content provided by FirstRanker.com ---
the product divisions. When this occurs, the product divisions sometimes
gang-up to reduce the international division`s power.
--- Content provided by FirstRanker.com ---
5. International Managers spread too thin: Managers of internationaldivisions are often made responsible for several disparate markets, such
as South America, Europe, and Asia. This makes developing expertise
--- Content provided by FirstRanker.com ---
difficult.
--- Content provided by FirstRanker.com ---
iii) THE FOREIGN SUBSIDIARY STRUCTUREEnvironmental changes, such as increased demand in foreign markets, or a
--- Content provided by FirstRanker.com ---
foreign government`s mandate, or changing conditions in the home market,
often force international corporations to cease exporting and being establishing
--- Content provided by FirstRanker.com ---
manufacturing facilities in the foreign markets ? they establish subsidiaries inforeign countries. These firms thus restructure their organization; they change
from an international division structure to a foreign subsidiary structure. Each
--- Content provided by FirstRanker.com ---
foreign subsidiary is treated as an entity. Each reports directly to top
management at headquarters. Coordination between product and service
--- Content provided by FirstRanker.com ---
departments is carried out at the headquarters office. These firms therefore applythe multidomestic strategy. Applying a multidomestic strategy, the headquarters`
managers generally allow the subsidiaries to function as a loose federation with
--- Content provided by FirstRanker.com ---
local managers processing substantial autonomy, allowing them to respond
quickly to local situations.
Advantages of the Foreign Subsidiary Structure:
--- Content provided by FirstRanker.com ---
1. Autonomy of affiliates:. The affiliate subsidiaries operate free of layers
of management between them and top management. These independent
--- Content provided by FirstRanker.com ---
affiliate companies are generally allowed to operate with the little controlfrom above and can thus develop their own local identity.
2. Direct top management involvement: Problems beyond the affiliates
--- Content provided by FirstRanker.com ---
talents go to top management for response and resolution. This enables
top management to reflect long-range corporate goals rather than
--- Content provided by FirstRanker.com ---
parochial interests. Also, it forces top management to develop a stake ininternational business and acquire knowledge in that area.
Disadvantages of the Foreign Subsidiary Structure:
--- Content provided by FirstRanker.com ---
1. Diffuseness of international responsibility: there is no center for
international operations responsibility. With so many groups reporting
--- Content provided by FirstRanker.com ---
directly to the board, clarity and focus can be lost ? although the boardcan delegate the responsibility to certain expert members.
2. Potential unwieldiness: Many items that could be resolved without
--- Content provided by FirstRanker.com ---
board action, such as by experts, are often pushed to the board level
again, the board could delegate many responsibilities to expert members.
--- Content provided by FirstRanker.com ---
iv) THE PRODUCT DIVISION STRUCTURE
A company that sells a diversified selection of goods or services will likely
--- Content provided by FirstRanker.com ---
organized on a product group structure. Many corporations are diversified and
use this structure. Under the product division structure, each of the enterprises
--- Content provided by FirstRanker.com ---
product divisions has responsibility for the sale and profits of its product.Therefore, each division has its own functional, environmental, sales, and
manufacturing responsibilities. When a product division decides to
--- Content provided by FirstRanker.com ---
internationalize its operations, as in the case of one product companies, it may
first begin by indirect exporting, subsequently establishing its own export
division, and then establishing foreign subsidiaries. This means that if sales in
--- Content provided by FirstRanker.com ---
foreign markets by firms with numerous product divisions became substantial,
these enterprises could end up operating numerous subsidiary companies in a
--- Content provided by FirstRanker.com ---
single foreign territory. Ford Motors began restructuring itself along the productline in the early 1990s Canon Corporation used the product division structure
when it became a multi product enterprise in 1962. ( Figure -1 )
--- Content provided by FirstRanker.com ---
Product division structure
--- Content provided by FirstRanker.com ---
Figure-1Hewlett Packard
--- Content provided by FirstRanker.com ---
Imaging
Personal
--- Content provided by FirstRanker.com ---
andSystems
Enterprise
--- Content provided by FirstRanker.com ---
HP Services
HP Financial
--- Content provided by FirstRanker.com ---
PrintingSystems Group
Services
--- Content provided by FirstRanker.com ---
Group
Group
--- Content provided by FirstRanker.com ---
Advantages of the product Division Structure:
--- Content provided by FirstRanker.com ---
1. Product and technology emphasis. Since both the domestic and
international units report to the product division and compared with the
--- Content provided by FirstRanker.com ---
whole, product divisions tent to be small, closer ties could result.Therefore, because of the common product benefit and the closer ties,
products and technology can be easily transferred between the domestic
--- Content provided by FirstRanker.com ---
and international units.2. Worldwide product planning. Foreign and domestic plans can be more
easily integrated in a product division than in an international division. A
--- Content provided by FirstRanker.com ---
worldwide division perspective could therefore evolve.
3. Conflict minimized. The problem of substantiating the difference
--- Content provided by FirstRanker.com ---
between international and domestic needs may be less difficult thanwhen the international function is in the international division. Having
both functions in the same division may lead to similar loyalties and the
--- Content provided by FirstRanker.com ---
we-they conflict often caused by placing the international function in
an international division may be mitigated.
--- Content provided by FirstRanker.com ---
4. Managers are able to gain expertise in all aspects of a product orproducts
5. Efficiencies in production are facilitated.
--- Content provided by FirstRanker.com ---
6. Production can be coordinated at a variety of facilities reflecting global
demand and cost fluctuations.
--- Content provided by FirstRanker.com ---
7. Managers are in a position to incorporate new technologies into theirproducts and respond quickly and flexibly to technological changes that
affect their market.
--- Content provided by FirstRanker.com ---
8. Clear focus on market segment helps meet customers` needs
9. Positive competition between divisions
--- Content provided by FirstRanker.com ---
10. Better control as each division can act as separate profit centreDisadvantages of the Product Division Structure
--- Content provided by FirstRanker.com ---
1. Division managers often lack international skills. International product
managers are often selected on the basis of domestic performance and
--- Content provided by FirstRanker.com ---
may therefore lack the required international skills.2. Weakness in worldwide know-how. Managers of individual product
divisions may become knowledgeable in operating in certain markets,
--- Content provided by FirstRanker.com ---
but worldwide knowledge is often impossible. For example, in the past,many managers of U.S. domestic enterprises that internationalized their
operations have developed strong skills in the Canadian and European
--- Content provided by FirstRanker.com ---
markets but weaker skills in other parts of the world. This may result in
weak performance in certain markets.
--- Content provided by FirstRanker.com ---
3. Inherent weakness of multiproduct systems. Managers of the overallcorporate system may encounter conflicting international demands from
the different product divisions. Since managers are part of the overall
--- Content provided by FirstRanker.com ---
corporate system, they may not posses adequate abilities to handle such
conflicting demands.
--- Content provided by FirstRanker.com ---
4. Foreign coordination problems. Managers of different product divisionsoperating in the same foreign country may not coordinate efforts to attain
overall corporate efficiency because they are too busy looking out for
--- Content provided by FirstRanker.com ---
each other`s interests. For example, to cut costs, perhaps some support
functions typically carried out in all product divisions, such as personnel
--- Content provided by FirstRanker.com ---
and payroll, could be carried out by a single unit.5. It may encourage expensive duplication in functional areas and even in
physical facilities.
--- Content provided by FirstRanker.com ---
6. Each product group must develop its own knowledge about the local
environment.
--- Content provided by FirstRanker.com ---
7. Coordination and corporate learning across product groups is moredifficult.
8. Duplication of functions (e.g. different sales force for each division)
--- Content provided by FirstRanker.com ---
9. Negative effects of competition
10. Lack of central control over each separate division
--- Content provided by FirstRanker.com ---
v) REGIONAL STRUCTURE
--- Content provided by FirstRanker.com ---
The most common form of the group structure defines activities by
geographic regions. Under the regional structure, regional heads are made
--- Content provided by FirstRanker.com ---
responsible for specific territories, usually consisting of areas such as, Asia,
South America, North America, etc., and report directly to their CEO or his or
--- Content provided by FirstRanker.com ---
her designated executives at the headquarters. In general, firms with lowtechnology and a high marketing orientation tend to use this structure. Firms
whose foreign subsidiary or foreign product structure has became too large and
--- Content provided by FirstRanker.com ---
too complex to manage from a single headquarters often restructure themselves
using this form. This type of structure enables regional heads to keep abreast of,
--- Content provided by FirstRanker.com ---
and provide for, the needs of their respective regional markets. Managers atregional headquarters are typically responsible for a range of activities, such as
production for and marketing in their respective regions. Pharmaceutical, food,
--- Content provided by FirstRanker.com ---
and oil companies trend to use this structure.( Figure-2 )
--- Content provided by FirstRanker.com ---
Advantages of the Regional Structure:1. Decentralization: Authority and responsibility, and therefore
performance accountability, is delegated directly to the regional office.
--- Content provided by FirstRanker.com ---
The management tasks of planning and strategy are less complex than if
the central headquarters were to hold this responsibility.
--- Content provided by FirstRanker.com ---
2. Adaptation: Regional managers are better able to adapt to local needsthan headquarters managers because they are in closer touch with local
changes and requirements.
--- Content provided by FirstRanker.com ---
Organization by Region
--- Content provided by FirstRanker.com ---
Figure-2
Hewlett Packard
--- Content provided by FirstRanker.com ---
AmericasEurope, Middle East, Africa
Asia Pacific
--- Content provided by FirstRanker.com ---
Houston, Texas
Geneva, Switzerland
--- Content provided by FirstRanker.com ---
Hong Kong--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
3. Single management units posses regional knowledge. Regionalmanagers develop local expertise because they are responsible for
regional strategies and daily operations. Regional differences exist
--- Content provided by FirstRanker.com ---
throughout the world. Inputs from knowledgeable regional managers
can enable central headquarters managers to use these differences
--- Content provided by FirstRanker.com ---
effectively in developing and attaining overall corporate objectives.Disadvantages of the Regional Structure:
--- Content provided by FirstRanker.com ---
1. Policy barriers:. Inconsistent overall corporate management practices
--- Content provided by FirstRanker.com ---
may evolve. This is specially so when central management tries to, or ispersuaded to, satisfy specific regional needs.
2. Weak worldwide product emphasis and technical knowledge: Because
--- Content provided by FirstRanker.com ---
technical knowledge is spread out, a global perspective on products is
sometimes difficult to attain. And because the emphasis is usually on
regional concerns, the formulation of worldwide strategy formulation
--- Content provided by FirstRanker.com ---
can be difficult.
3. Technology transfer barriers: Employee loyalty is often focused on the
--- Content provided by FirstRanker.com ---
region rather than on the overall organization, and each regional managertends to claim that things are different in his or her region. Therefore,
when headquarters managers attempt to implement new technology on
--- Content provided by FirstRanker.com ---
an overall corporate basis, it may not be readily accepted by the regional.
4. Costly application: The typical support functions shown. Exist in each
--- Content provided by FirstRanker.com ---
regional division. Costly duplication of efforts results. Efficiency couldresult if these support functions were combines, but in this structure, the
number of functional product staff specialists tends to increase through
--- Content provided by FirstRanker.com ---
the years.
5. Weak communications: Necessary information may not reach top
--- Content provided by FirstRanker.com ---
management because of the regional managers` focus on regionalperformance. Overall corporate performance may therefore be weakened.
--- Content provided by FirstRanker.com ---
vi)THE MATRIX STRUCTURE
--- Content provided by FirstRanker.com ---
Matrix structure is a team approach to project development within anorganisation. The team is comprised of members from different functional areas
or departments within the company. The ideal global corporation is strongly
--- Content provided by FirstRanker.com ---
decentralized. It allows local subsidiaries to develop products that fit into local
markets. Yet at its core it is very centralized; it allows companies to coordinate
--- Content provided by FirstRanker.com ---
activities across the globe and capitalize on synergies and economies of scale.To accomplish this, many international businesses have adopted matrix
structures. Companies such as Nestle have adopted matrix organizations that
--- Content provided by FirstRanker.com ---
allow for highly decentralized decision making and development whilesimultaneously maintaining a centralized corporate strategy and vision.
Advantages of the Matrix Structure
--- Content provided by FirstRanker.com ---
1. It allows firms to draw on the functional and product expertise of its
--- Content provided by FirstRanker.com ---
employees because it brings together the functional, area, andproduct expertise of the firm into teams that can develop new
products or respond to a changing marketplace.
--- Content provided by FirstRanker.com ---
2. Coordination and cooperation across subunits enable the firm to use
its overall resources efficiently and therefore to respond well to
--- Content provided by FirstRanker.com ---
global competition in any market.3. Overall corporate global performance is highlighted.
4. Many internal conflicts are resolved at the lowest possible level, and
--- Content provided by FirstRanker.com ---
those that cannot be resolved are pushed up.
5. It promotes organisational flexibility and promotes coordination and
--- Content provided by FirstRanker.com ---
communication across divisions.6. Improves individual motivation
7. Increases job satisfaction
--- Content provided by FirstRanker.com ---
8. Enhance and evolve the organisation`s pool of available expertise
and knowledge, thus making the organisation more flexible
--- Content provided by FirstRanker.com ---
Disadvantages of the Matrix Structure
--- Content provided by FirstRanker.com ---
1. World wide responsibility may be given to product managers with weak
international experience.
--- Content provided by FirstRanker.com ---
2. The organization tends to create a mountain of paperwork.3. The dual-boss, cross-communication system is expensive and complex.
4. Decisions sometimes must be made quickly. Quick decisions can be
--- Content provided by FirstRanker.com ---
made by one person. In this matrix group decision-making process,decisions are usually made slowly.
5. It is inappropriate for firms that have few products and operate in
--- Content provided by FirstRanker.com ---
relatively stable markets.
6. Employees have more than one boss.
--- Content provided by FirstRanker.com ---
7. It creates a paradox regarding authority.8. It tends to promote compromises or decisions based on the relative
political clout of the managers involved.
--- Content provided by FirstRanker.com ---
For a successful matrix organisation:
--- Content provided by FirstRanker.com ---
1. Ensure everyone understands the rationale behind the structure--understanding the purpose behind the apparently complex structure
contributes to people exploiting its features to deliver its objectives.
--- Content provided by FirstRanker.com ---
2. Document the relationships between the different axes of the matrix
organisation in the form of protocols, contracts or service level
--- Content provided by FirstRanker.com ---
agreements.3. Foster close communication and understanding between the specialist
managements of the different axes--this is likely to involve extensive
--- Content provided by FirstRanker.com ---
networking between the senior management of the axes of the matrix .
4. Exploit latest communications technologies
--- Content provided by FirstRanker.com ---
5. To overcome problems of distance and potential information indigestion.6. Reflect the multiple dimensions in budgeting and financial reporting.
7. Ensure that individuals belong to one dimension of the matrix--
--- Content provided by FirstRanker.com ---
generally the axis that will support their career aspirations, reflecting
professional specialism, limits to personal geographic mobility,
personality or skill set.
--- Content provided by FirstRanker.com ---
8. Ensure that due allowance is provided by the each axis for the
development and training needs of staff belonging to one axis to
--- Content provided by FirstRanker.com ---
support their continued career development and professional obligations.9. Protect staff with dual reporting responsibilities from cross-fire by
creating a culture in which it is okay to escalate to dispute resolution to
--- Content provided by FirstRanker.com ---
the directors of the functions, profit centers, country units etc. making
the conflicting demands.
--- Content provided by FirstRanker.com ---
vii) CONTRACTUAL ALLIANCE STRUCTURES
--- Content provided by FirstRanker.com ---
Many enterprises enter foreign markets via non-equity based joint ventures,
often referred to as contractual alliances and strategic alliances. For example.
--- Content provided by FirstRanker.com ---
One firm`s strength may be production and another firm`s distribution. Insteadof these two firms forming an equity-based joint ventures to capitalize on each
other`s strengths, they form a non-equity-based contractual alliance. Thus, when
--- Content provided by FirstRanker.com ---
the two firms no longer need each other, in theory, they simply break up the
partnership. The advantage of this partnership arrangement is that when there is
--- Content provided by FirstRanker.com ---
a breakup, there is no long, drawn-out-fight for the division of assets, as often isthe case when equity-based partnership breaks up.
--- Content provided by FirstRanker.com ---
There are disadvantages to this approach, however. For instance, when
one partner acquires the other partner`s skills, and the reverse is not the case, the
--- Content provided by FirstRanker.com ---
learned partner may leave the unlearned partner in a dubious situation or thelearned partner may easily take over the unlearned partner. Of course, this type
of arrangement can work only when neither partner possesses an secret motive.
--- Content provided by FirstRanker.com ---
viii) NETWORKING
--- Content provided by FirstRanker.com ---
Somewhat similar to the contractual alliance arrangement is networking.
--- Content provided by FirstRanker.com ---
Applying this approach, a corporation subcontracts its manufacturing function toother companies. For example, Nike, the American shoe maker, subcontracts the
manufacture of its athletic shoes and clothing to forty separate locations, mostly
--- Content provided by FirstRanker.com ---
in Asia
--- Content provided by FirstRanker.com ---
Networking, a typical twentieth-century organisation has not operated well in arapidly changing environment. Structure, systems, practices, and culture have
often been more of a drag on change than a facilitator. If environmental
--- Content provided by FirstRanker.com ---
volatility continues to increase, as most people now predict, the standard
organisation of the twentieth-century will likely become a dinosaur
--- Content provided by FirstRanker.com ---
Organisational structures change with the changing business and socialenvironment. Increasingly, organisations are project-based, expanding and
contracting as projects of different sizes come and go. In some cases the
--- Content provided by FirstRanker.com ---
organisation exists only for one major project, eg a film production. However in
most cases there is a core organisation which continues between projects, and
--- Content provided by FirstRanker.com ---
indeed holds the projects together. The individual projects are not only tiedtogether administratively but more importantly are linked in terms of a central
business strategy, charitable purpose or artistic mission. The core organisation
--- Content provided by FirstRanker.com ---
selects projects strategically to fit its mission and core skills. In this way,
synergies are achieved.
--- Content provided by FirstRanker.com ---
The characteristics of a network organisation are:1. Independent teams.
2. Departments which share common values.
--- Content provided by FirstRanker.com ---
3. Projects which support each other
4. Multiple links between projects
5. Information and Communications Technology is used to connect the
--- Content provided by FirstRanker.com ---
projects.
--- Content provided by FirstRanker.com ---
There is a key coordinating role for the Chief Executive to construct theteams and manage the interrelationship of projects . When an organization enters
into such contractual alliances or networking agreements, it must create a unit
--- Content provided by FirstRanker.com ---
whose responsibility is to monitor the arrangement. For instance, IBM has
created an alliance council of key executives who meet monthly to keep track of
--- Content provided by FirstRanker.com ---
more than forty partnerships throughout the globe.ix) THE MIXED (HYBRID) STRUCTURE
--- Content provided by FirstRanker.com ---
The traditional and contemporary alternative structures described above
--- Content provided by FirstRanker.com ---
are not independent entities that cannot co-exist within the same company. Bymixing the structural types, the weaknesses of each type can be minimized. For
example, companies with worldwide product division structure can appoint
--- Content provided by FirstRanker.com ---
regional coordinates who attempt to supply the concentrated environmental
expertise that is usually absent in the product division structure. Similarly,
--- Content provided by FirstRanker.com ---
companies with regional structures (either worldwide or within an internationaldivision) can set up positions for product coordinators. While such coordinator
positions are not particularly new, giving them some real influence short of
--- Content provided by FirstRanker.com ---
classical line authority is a relatively recent development. Furthermore,
international organizations can centralize some functions, such as an accounting
--- Content provided by FirstRanker.com ---
division that provides services for all worldwide subsidiaries, while otherfunctions, such as marketing, remain decentralized.
x) FLAT STRUCTURES
--- Content provided by FirstRanker.com ---
Regardless of which structure is used, it should be as flat as possible. That is, itshould have fewer managerial layers than traditional hierarchical organizations.
A flat structure is needed because a twelve-layer company cannot compete with
--- Content provided by FirstRanker.com ---
the three-layer company. For example, a decade or so ago, General Motors, the
U.S. based car manufacturer, had an organizational structure consisting of more
--- Content provided by FirstRanker.com ---
than fifteen managerial levels. General Motors had a problem competing withToyota, the Japanese car manufacturer at least partially because Toyota`s
organizational structure contained only four managerial levels. (This is in part
--- Content provided by FirstRanker.com ---
because Japanese employees are not motivated by the opportunity to climb up
the hierarchy as are American employees.) One reason companies with tall
--- Content provided by FirstRanker.com ---
structures are less competitive than firms with flat structures is that they have topay more managers at more levels, thus increasing their costs.
Another reason is that an organization can create an atmosphere of maximum
--- Content provided by FirstRanker.com ---
creativity only if it reduces hierarchical elements to a minimum and creates a
corporate culture in which its vision, company philosophy, and strategies can be
--- Content provided by FirstRanker.com ---
implemented by employees who think independently and take initiative. Theflatter structure means that managers have to communicate with more
employees than do managers in tall structures. The ability to communicate with
--- Content provided by FirstRanker.com ---
more subordinates has been made possible by the enormous advancements in
communications technologies, which, as American management authority Peter
--- Content provided by FirstRanker.com ---
F. Drucker noted, enables managers to communicate with a far wider span ofindividuals than was possible in the past. Spans of control thus give way to
spans of communication.
--- Content provided by FirstRanker.com ---
xi) ORGANIC VERSUS MECHANISTIC STRUCTURES
Another problem confronting managers is determining how organic or how
--- Content provided by FirstRanker.com ---
mechanistic the organizational structure should be. Basically managers inorganic structures allow employees considerable discretion in defining their
roles and the organization`s objectives, In mechanistic organizations roles and
--- Content provided by FirstRanker.com ---
objectives are clearly and rigidly outlines for employees ? managers andsubordinates are allowed little or on discretion. Historically, large organizations
have tended to adopt the mechanistic form and small organizations the organic
--- Content provided by FirstRanker.com ---
form; mass producing organizations have tended to adopt the mechanistic form
and firms producing specialized products have tended to adopt the organic form.
--- Content provided by FirstRanker.com ---
Thus, the form an organization adopts is determined by varying situationalfactors.
In making a determination as to which approach is appropriate for an
--- Content provided by FirstRanker.com ---
organization functioning across nations, managers also need to consider national
cultural factors. For example, organizational structures tend to be more
--- Content provided by FirstRanker.com ---
mechanistic in strong uncertainty avoidance cultures, such as France andGermany, than in weak uncertainty avoidance cultures, such as Great Britain,
and organic structures tend to be more prevalent in the latter cultures than in the
--- Content provided by FirstRanker.com ---
former. If one adheres to the national cultural factors model, subsidiaries in
some nations will be more structured than subsidiaries in other nations; but if
--- Content provided by FirstRanker.com ---
one adheres to the situational factors model, the same structure is applied in thesame situation in all nations.
ADAPTABLE MANAGEMENT
--- Content provided by FirstRanker.com ---
The international organizational structure adopted by a firm`s management is
influenced by many factors, including the firm`s economic situation, the type of
--- Content provided by FirstRanker.com ---
product or technology, managerial preference (organizational culture), theforeign country`s cultural, economic, technological, and political conditions, the
wide separation of operations, and the different foreign market characteristics,
--- Content provided by FirstRanker.com ---
including the nature of competition. Therefore, organization structures that work
well for domestic operations are often not suitable for multifunctional
--- Content provided by FirstRanker.com ---
operations. For example, matrix organizations are very scarce in Latin America.This is in part because Latin America`s patron system does not lend itself to the
power sharing that characterizes matrices. The structure is also influenced by the
--- Content provided by FirstRanker.com ---
firm`s level of experience in international business and its dependence andrevenues from foreign markets.
Historically, when firm`s first venture into foreign markets, and when
--- Content provided by FirstRanker.com ---
both foreign sales and the diversity of products sold in the foreign country were
limited, global companies generally managed their international operational
--- Content provided by FirstRanker.com ---
division. Companies that subsequently expanded their sales in foreign marketswithout significantly increasing foreign products diversity generally adopted the
regional structure. Those enterprises that subsequently increased foreign product
--- Content provided by FirstRanker.com ---
diversity tended to adopt the product division structure. Firm`s that increase
both foreign sales and foreign product diversity tended to adopt the matrix
--- Content provided by FirstRanker.com ---
structure.International business executives must be thoroughly familiar with the
strengths and weaknesses of each organizational structure and be ready to switch
--- Content provided by FirstRanker.com ---
from one form to another as a means of adapting to changing environments
(including moving an important business unit`s head quarters to foreign soil.
--- Content provided by FirstRanker.com ---
The right structure must be matched to the right environment as both inertial andexternal situations change. And the fit must attain a balance between
organizational complexity and simplicity. Adopting an organizational structure
--- Content provided by FirstRanker.com ---
too complex for its environmental demands can be as in effective s adopting a
structure two simplistic to operate in a turbulent environment. Not adopting the
--- Content provided by FirstRanker.com ---
right structure can be very costly-not only in sense that it will be ineffective, butin the sense that reorganizing is very expensive.
Information Technology and Organizational Structure:
--- Content provided by FirstRanker.com ---
The advent of new information technologies such as the internet, world wide
web, teleconferencing, portable telephones now allows organizations to
--- Content provided by FirstRanker.com ---
implement inter and intra organizational structures that were impossible oreconomically unfeasible to for too long ago. These technologies enable small,
medium and large organizations to access information from most parts of the
--- Content provided by FirstRanker.com ---
world. This suggests that companies usually smaller ones, organized under thefunctional structure, can now have access to the same information as large
companies. Therefore, smaller companies by selling their products/services
--- Content provided by FirstRanker.com ---
through electronics commerce can more effectively compete with larger
corporations.
--- Content provided by FirstRanker.com ---
Companies such as Wal-Mark that are organized under the international
division structure with subsidiaries located in many parts of the world can now
--- Content provided by FirstRanker.com ---
manage more effectively from single location and may often avoid the cost of
establishing physical regional offices when they have grown. And many
--- Content provided by FirstRanker.com ---
companies with regional offices throughout the globe can now revert to a singlelocation or at least reduce the number of locations. For example, Eastman Kodak
Company consolidate a 17 data centers (on 4 continents) into seven.
--- Content provided by FirstRanker.com ---
Perhaps some of the larger companies can even restructure themselves
--- Content provided by FirstRanker.com ---
using the functional structure. As was mentioned earlier, General Electric, oneof the largest corporations in the world, has plans it restructure itself from matrix
to functional structure. Many of the functions carried out at several point in the
--- Content provided by FirstRanker.com ---
matrix structure can now be performed more easily than in the past, when they
were centralized. Therefore, the mixed structure is easier to manage, and the
--- Content provided by FirstRanker.com ---
information technology makes global strategic alliances and networks easier tomanage.
Communication Flow:
--- Content provided by FirstRanker.com ---
Identifying the ideal international organizational structure is a huge challenge
for the managers of any organization; there may not even be an ideal structure.
--- Content provided by FirstRanker.com ---
Nevertheless, regardless of which organizational structure firm adopts, a neatchart with neat boxes is useless unless information and communications flow
freely to develop proper business decisions. The relationship of domestic,
--- Content provided by FirstRanker.com ---
international, and senior corporate organization can be described by threegeneral guidelines.
1. The organization must be formulated in such a way that planning and
--- Content provided by FirstRanker.com ---
decision making on every aspect of the firm`s operations can be done by
people with the breadth of functional, geographic, and/or product
--- Content provided by FirstRanker.com ---
knowledge and responsibility necessary to develop the potential for aunified strategy.
2. The channels for the flow of important or recurring decisions and
--- Content provided by FirstRanker.com ---
information should be as directed and as short as possible.
3. Individuals with expert international knowledge and competence in
--- Content provided by FirstRanker.com ---
overcoming the obstacles to international communication should bereadily available within the organization and be used wherever their
capacities are needed.
--- Content provided by FirstRanker.com ---
This means that top management in all organizations must incorporate the
following dimensions into their systems:
--- Content provided by FirstRanker.com ---
1. The structure must allow for the development and communication of aclear corporate vision.
2. It must allow for the effective management of human resource tools to
--- Content provided by FirstRanker.com ---
broaden individuals` perspectives and develop identification with
corporate goals.
--- Content provided by FirstRanker.com ---
3. It must allow for the integration of individual thinking and activities intoa broad corporate agenda.
III D - LOCUS OF DECISION MAKING
--- Content provided by FirstRanker.com ---
Quality and timely decision-making is essential for the success of any firm. In
--- Content provided by FirstRanker.com ---
fact, how an organisation chooses to design its decision-making rules are one ofthe most fundamental aspects of its organizational design. It describes the
assignment of decision rights, along with the reward system and the way
--- Content provided by FirstRanker.com ---
performance is evaluated, as one the key aspects of an organization`sarchitecture or design. A firm`s ability to make good decisions is particularly
important in the face of increasing global competition, and the greater
--- Content provided by FirstRanker.com ---
uncertainty from exposure to more competitors and a greater number more
markets that this brings.
--- Content provided by FirstRanker.com ---
The increasing globalisation of markets has generated new debates about thedecision-making role of MNCs . Globalisation may be expected to result in
greater centralisation of the decision-making process. For various reasons MNCs
--- Content provided by FirstRanker.com ---
are adopting the strategy of decentralised decision making. Based on the
importance of the issue things are changing. In most cases it was found that
--- Content provided by FirstRanker.com ---
considerable authority was devolved to subsidiaries in terms of operationaldecisions. However, strategic decision making remained very much under the
control of the parent.
--- Content provided by FirstRanker.com ---
Locus of decision making refers to the degree to which the decision making
authority is centralized or decentralized. Number of factors influencing the
--- Content provided by FirstRanker.com ---
decision making authority that is likely to be given to subsidiary. Company sizeinfluences decision making in that large organizations have a greater need for
coordination and integration of operations. To ensure that all subsidiaries are
--- Content provided by FirstRanker.com ---
being effectively managed, the MNC will centralize the authority for a number
of critical decisions.
--- Content provided by FirstRanker.com ---
This centralisation is designed to increase overall efficiency of operations, andto the extent that the centralization creates the desired uniformity and
coordination, this is precisely what happens. The greater the MNC`s capital
--- Content provided by FirstRanker.com ---
investment, the more likely that decision making will be centralized. The home
office wants to keep a tight rein on its investment and ensure that everything is
--- Content provided by FirstRanker.com ---
running smoothly. The subsidiary manager will be required to continuallysubmit periodic report, and on-site visits from home office personnel are quite
common. The more important the overseas operation is to the MNC, the closer
--- Content provided by FirstRanker.com ---
the MNC will control it. Home office management will carefully monitorperformance, and the subsidiary manager usually will not be allowed to make
any major decisions without first clearing them with the MNC senior
--- Content provided by FirstRanker.com ---
management. In fact, in managing important overseas operations, the home
office will typically appoint someone who they know will respond to their
--- Content provided by FirstRanker.com ---
directives and will regard this individual as an extension of the centralmanagement staff.
In domestic situations, when competition increases, management will
--- Content provided by FirstRanker.com ---
decentralize authority and give the local manager greater decision making
authority. This reduces the time needed in responding to competitive threats. In
--- Content provided by FirstRanker.com ---
the international arena, however, just the opposite approach is used. Ascompetition increases and profit margins are driven down, home office
management seeks to standardize product and making decisions to reduce cost
--- Content provided by FirstRanker.com ---
and maintain profitability. More and more upper level operating decisions are
made by central management and merely implemented by the subsidiary.
--- Content provided by FirstRanker.com ---
Factors that influencing centralisation of decision making:The following factors are influencing the MNCs to go for centralisation of
decision making authority.
--- Content provided by FirstRanker.com ---
1. Corporate culture -- mainly referring to accepted management models
and practices (decentralised, partly centralised or fully centralised)
--- Content provided by FirstRanker.com ---
2. Industry type and business maturity -- including both generic industryfeatures (e.g. manufacturing vs. services, wholesale vs. retail, market
leadership, market and competition dynamics, etc.) as well as enterprise-
--- Content provided by FirstRanker.com ---
specific characteristics (e.g. size, growth, geographic distribution,
sophistication, etc.)
3. Technology infrastructure and architecture -- current status in so far as
--- Content provided by FirstRanker.com ---
an open and common environment, IT management models and
strategies
--- Content provided by FirstRanker.com ---
4. Third-party services sourcing philosophy -- attitude towards singlerather than multiple providers, internal rather external service provision
orientation, previous experience, etc.
--- Content provided by FirstRanker.com ---
5. Tax, legal and regulatory restrictions -- deriving from the external
environment as well as from the legal structure and the business model
--- Content provided by FirstRanker.com ---
of the organisation6. Highly competitive environment
7. Large size
--- Content provided by FirstRanker.com ---
8. Relatively high importance to MNC
9. Low level of product diversification
--- Content provided by FirstRanker.com ---
10. Homogeneous product lines11. More experience in international business.
Factors that influencing decentralization of decision making:
--- Content provided by FirstRanker.com ---
1. Availability of experienced professionals
2. Stable environment
--- Content provided by FirstRanker.com ---
3. Small investment4. High level of product diversification
5. Low interdependence between the units
--- Content provided by FirstRanker.com ---
6. Heterogeneous product lines
Participative decision making in Multinational Corporations:
In almost all foreign countries, we are seeking more participation by the
--- Content provided by FirstRanker.com ---
employees in decision making. No longer is the employee accepting a passive
role of simply reacting to management decisions. What is now wanted is to
--- Content provided by FirstRanker.com ---
know what is being considered and for one`s views to be taken into account. Insome way, the employee wants to feel associated with the decision-making
process of the enterprise for which she or he works. What traditionally has been
--- Content provided by FirstRanker.com ---
reserved for unilateral decisions by management members is now being opened
to some degree for participation by all the employees or their representatives.
--- Content provided by FirstRanker.com ---
No longer accepted as a matter of course is for the manager alone to decide theworking hours, to determine how the work is organized , and to handle work
distribution. In short, a recasting of the employer-employee work relationship is
--- Content provided by FirstRanker.com ---
taking place in most foreign countries. The new relationships between employer
and employee have met with approval by many U.S workers who work for
--- Content provided by FirstRanker.com ---
foreign corporations. As one American auto worker employed by a Japanesefirm said, When something goes wrong, you`re not afraid to tell the foreman.
People used to try to hide their mistakes so they wouldn`t get fired.
--- Content provided by FirstRanker.com ---
Work councils, work committees, or similar bodies are the main means through
which the foreign employees participates, and the trend is toward widening and
--- Content provided by FirstRanker.com ---
strengthening this activity. Typically in many European countries the trend ofthese bodies appears to be toward sharing, not merely advising or suggesting in
the decision-making process on the matters of the economic and financial
--- Content provided by FirstRanker.com ---
operations. For U.S workers with foreign bosses, the paternalistic approach of
the company has been welcomed. Here it feels like family, said one U.S
--- Content provided by FirstRanker.com ---
worker. Here you`ve got a name,said another.Around the world there are a variety of degrees and the ways in which
employees participate in managerial decisions that affect them.Similarities and
--- Content provided by FirstRanker.com ---
dissimilarities exist even within a given country. The most different and
probably the most interesting in comparision to that of the United States is the
arrangement in Japan. There decision making is by consensus or ringisei, which
--- Content provided by FirstRanker.com ---
means reverential inquiry about a superior`s intentions. By nature, the
Japanese spend much time finding out what others are thinking and how they
--- Content provided by FirstRanker.com ---
feel about a issues.The prevailing belief is that the Japanese manager must knowhow subordinates feel about certain issue, otherwise he cannot maintain the
peace and harmony of the group .
--- Content provided by FirstRanker.com ---
A decision is always started by an employee at a low level in the
organization.This is justified by realizing that change within accompany should
--- Content provided by FirstRanker.com ---
come from those closest to the thing being changed;hence,change is elicitedfrom below . For example, an employee who has an idea or a problem prepares
an outline of that idea or problem, called the superior , and explains how it
--- Content provided by FirstRanker.com ---
should be used or will help in solving a problem.This contribution is circulated
to the various superiors in succession.The intent is to reach a consensus by
--- Content provided by FirstRanker.com ---
coordinating very closely the activities of each area affected by the issue.Thedecision reached ,usually after considerable discussion and exchange of
thoughts, in essence creates a commitment of all parties to the chosen
--- Content provided by FirstRanker.com ---
solution.To the Japanese this quality of commitment is vital-perhaps even more
important than the quality of the decision itself. Keep in mind that the Japanese
--- Content provided by FirstRanker.com ---
manager`s status is well defined,but the manager is not burdened with decisionmaking in the Western sense.Each manager plays a key role in shaping decisions
by encouraging the subordinate to develop the proposal until it has merit and is
--- Content provided by FirstRanker.com ---
worthy of referring to the next higher manager in the organization.
Decisions of considerable importance are analysed with extreme care, and the
--- Content provided by FirstRanker.com ---
effort is taken to ascertain the viewpoints of all who may be affected by them aswell as everyone in the company who may influence their outcome.The result is
a minimum of disagreement over decisions implemented. The superior does not
--- Content provided by FirstRanker.com ---
alter the decision but motivates and assists the writer of it to change and improve
it so that consensus can be reached. The initiator of a decision always carefully
checks it to make certain nothing in it will offend the superior or evoke outright
--- Content provided by FirstRanker.com ---
disapproval. Thus conflict is avoided.
The Japanese decision-making procedure is centuries old,yet it features modern
--- Content provided by FirstRanker.com ---
management techniques from the U.S viewpoint and is giving excellent resultsto Japanese industries. The approach stresses asking the right questions and
logically from this the right answers emerge. It is also claimed that formulating
--- Content provided by FirstRanker.com ---
the decisions after all have had their say is superior to making the decision at the
beginning and then striving to sell it to others.
--- Content provided by FirstRanker.com ---
Perhaps the hallmark of foreign-run business in U.S is the open communicationof workers with top management. A German manager of a U.S plant regularly
walks the production floor. Foremen and workers at a Japanese-owned company
--- Content provided by FirstRanker.com ---
hold 10- minute meetings twice a day and employees hear management re-
minute meetings twice a day and employees hear management reports on growth
--- Content provided by FirstRanker.com ---
twice a day.Nuturing the individual has paid off for those firms in low turnoverrates, improved productivity, and higher profits.
--- Content provided by FirstRanker.com ---
III D - HEADQUARTERS AND SUBSIDARY RELATIONSHIPS
IN INTERNATIONAL FIRMS
--- Content provided by FirstRanker.com ---
The success of an international firm can be greatly affected by the controltechniques they practices. To maintain proper control systems, an appropriate
organizational structure is essential. Along with identifying the appropriate
--- Content provided by FirstRanker.com ---
structure, headquarters management must decide whether the headquarters-
foreign subsidiaries relationship should be centralized or decentralized. In a
--- Content provided by FirstRanker.com ---
centralized system, most of the important decisions relative to local matters aremade by the headquarters management. In a decentralized system, managers at
the subsidiary are given the autonomy to make most of the important decisions
--- Content provided by FirstRanker.com ---
relative to local matters.When decision making is decentralized, judgments made by local managers may
--- Content provided by FirstRanker.com ---
sometimes have negative consequences for other subsidiaries and/or may not be
the best decision when overall firm`s objectives are considered. For instance, a
--- Content provided by FirstRanker.com ---
decision made by managers at the Riode Janeiro subsidiary to pay generousbenefits to their workers may demoralize workers in other subsidiaries if they
perceive their benefits to be comparatively unfair. Centralized decision making
--- Content provided by FirstRanker.com ---
would thus enable headquarters managers to consider the consequences of a
decision on all of the firm`s subsidiaries. Centralization, in this respect, would
--- Content provided by FirstRanker.com ---
be advantageous.HEADQUARTERS-FOREIGN SUBSIDIARY
--- Content provided by FirstRanker.com ---
GOVERNANCE MECHANISMS
i) Governance Mechanism:
--- Content provided by FirstRanker.com ---
Centralization.Formalization.
Normative Integration.
--- Content provided by FirstRanker.com ---
A contemporary idea on headquarters-subsidiary governance relationships
(HSRs) has been discussed by business professors Sumantra Ghoshal and Nitin
--- Content provided by FirstRanker.com ---
Nohria, from INSEAD, France, and Harvard Business School, respectively.They described the relationships in terms of three basic head-quarters?
subsidiary government mechanisms:
--- Content provided by FirstRanker.com ---
Centralization concerns to the role of formal authority and hierarchical
mechanism in the company`s decision making processes.
--- Content provided by FirstRanker.com ---
Formalization represents decision making through bureaucratic mechanismssuch as formal systems, established rules, and prescribed procedures; and
Normative Integration relies neither on direct headquarters involvement nor on
--- Content provided by FirstRanker.com ---
impersonal rules but on the socialization of managers into a set of shared goals,values, and beliefs that then shape their perspectives and behavior.
The following sections present two schemes that identify factors to help
--- Content provided by FirstRanker.com ---
determine the right headquarters-foreign subsidiary control relationship. The
first scheme posits proposes that certain situational factors influence the
--- Content provided by FirstRanker.com ---
relationship in all countries. The second proposes that certain factors influencethe relationship in all countries.
ii) SCHMES FOR CONTROL
--- Content provided by FirstRanker.com ---
National culture scheme
Situational scheme
--- Content provided by FirstRanker.com ---
The Natural Cultural Scheme
Cross-cultural researcher Geert Hofstede proposed a paradigm to study the
--- Content provided by FirstRanker.com ---
impact of national culture on individual behavior. He developed a typology
consisting of four national cultural dimensions by which a society can be
--- Content provided by FirstRanker.com ---
Classified as:1. Power distance,
2. Individualism,
--- Content provided by FirstRanker.com ---
3. Uncertainty avoidance,
4. Masculinity.
--- Content provided by FirstRanker.com ---
5. Confucianism.The ensuing section indicates whether the headquarters-subsidiary relationship
(HSR) with subsidiaries located in these cultures leans toward low and high
--- Content provided by FirstRanker.com ---
centralization (C), low or high formalization (F), or low or high normative
integration (NI). (Table III-1)
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
TABLE III-1Global Cultural Framework
--- Content provided by FirstRanker.com ---
CULTURAL DETERMINANTS
--- Content provided by FirstRanker.com ---
HEADQUQRTERS-FOREIGNSUBSIDARY
--- Content provided by FirstRanker.com ---
CONTROL RELATIONSHIP
Large power distance
--- Content provided by FirstRanker.com ---
HCSmall power distance
LC, HF, or HNI
--- Content provided by FirstRanker.com ---
High power distance
HC or HF
--- Content provided by FirstRanker.com ---
Low individualismLR,HNI
Strong uncertainty avoidance
--- Content provided by FirstRanker.com ---
HF OR HC
Weak uncertainty avoidance
--- Content provided by FirstRanker.com ---
LC or HNIConfucianism
LF,HC,HNI
--- Content provided by FirstRanker.com ---
High masculinity
HF
--- Content provided by FirstRanker.com ---
Low masculinityLC,HNI
--- Content provided by FirstRanker.com ---
C = Centralization, F = Formalization , NI = Normative Integration,
--- Content provided by FirstRanker.com ---
H = High, L = Low (Source : Empowerment in organisations ,Carl.A.Rodrigues)1) Power Distance
Power distance refers to the degree to which people in a society accept
--- Content provided by FirstRanker.com ---
centralized power and depend on supervisors for structure and direction.
i) Moderate-to-Large Power Distance:
Individuals in societies dominated by this dimension tend to accept centralized
--- Content provided by FirstRanker.com ---
power and depend heavily on superiors for direction. Therefore, an HSR leaning
toward high C probably would be preferred by subsidiary managers who are
--- Content provided by FirstRanker.com ---
dominated by this cultural dimension.ii) Moderate-to-Small Power Distance:
Individuals in societies dominated by this cultural dimension do not tolerate
--- Content provided by FirstRanker.com ---
highly centralized power and expect to be consulted, at least, in decision-
making. Furthermore, Hofstede remarked that status differences in these
--- Content provided by FirstRanker.com ---
countries are suspect. Thus, subsidiary managers who are dominated by thiscultural dimension probably would favor an HSR leaning toward low C, high
NI, or high F.
--- Content provided by FirstRanker.com ---
2) Individualism
i) Moderate-to-High Individualism:
--- Content provided by FirstRanker.com ---
Individuals in societies dominated by this dimension think in me terms andlook after primarily their own interests. Since these individuals often consider
their own objectives to be more important than the organization`s, the HSR that
--- Content provided by FirstRanker.com ---
involves in subsidiaries managed by people influenced by this cultural
dimension probably leans toward high C or high F.
--- Content provided by FirstRanker.com ---
ii) Moderate-to-low Individualism:Low individualism societies are tightly integrated and individuals belong to in-
groups from which they cannot detach themselves. People think in we` as
--- Content provided by FirstRanker.com ---
opposed to me terms and obtain satisfaction from a job well done by the
group. Individuals in these societies are controlled mainly by the group`s norms
--- Content provided by FirstRanker.com ---
and values. These people would therefore require less formal structure thanindividuals who think in me terms. An HSR leaning toward high NI would
thus fit these societies.
--- Content provided by FirstRanker.com ---
Finding by some researchers lend support to the above contentions. Theseresearchers concluded that control systems in the United States are designed
under the assumption that workers and management seek primary control over
--- Content provided by FirstRanker.com ---
their work environments. primary control is manifested when employees with
individualistic tendencies attempt to shape the existing social and behavioral
--- Content provided by FirstRanker.com ---
factors surrounding them, including co-workers, specific events, or theirenvironments, with the intention of increasing their rewards. Thus many
employees exhibit behaviors and establish goals that may diverge from those
--- Content provided by FirstRanker.com ---
desired by the organization. For these reasons, control systems consisting of
rules, standards, and norms of behavior are established to guide, motivate, and
--- Content provided by FirstRanker.com ---
evaluate employees` behavioral performance (high F).On the other hand,organizations in Japan (a low individualism culture) rely more on secondary
controls, controls that rely mostly on informal peer pressure (high NI). And
--- Content provided by FirstRanker.com ---
Japanese corporations with subsidiaries in the United Stats tend to give
American managers working for them little or no authority.
--- Content provided by FirstRanker.com ---
3) Uncertainty Avoidancei) Moderate-to-Strong Uncertainty Avoidance:
Individuals in these cultures feel uneasy in situations of uncertainty and
--- Content provided by FirstRanker.com ---
ambiguity and prefer structure and direction. Therefore, because it tends to
reduce uncertainty for individuals, managers of subsidiaries who are influenced
--- Content provided by FirstRanker.com ---
by this cultural dimension probably would prefer an HSR leaning toward high For high C. Hofstede has proposed that improving quality of life for employees in
these societies implies offering more security and perhaps more task structure on
--- Content provided by FirstRanker.com ---
the job.
ii )Moderate-to-Weak Uncertainty Avoidance:
--- Content provided by FirstRanker.com ---
Hofstede found that in countries dominated by a moderate-to-weak uncertaintyavoidance dimension, individuals tend to be relatively tolerant of uncertainty
and ambiguity; they do not require as much high C or high F as do people in
--- Content provided by FirstRanker.com ---
strong uncertainty avoidance cultures. Thus, an HSR leaning toward low C orhigh NI, since it provides more challenge than does high C and high F, probably
would be preferred by managers of subsidiaries who are dominated by this
--- Content provided by FirstRanker.com ---
cultural dimension.
For example, managers in Britain, a weak uncertainty avoidance culture, end to
--- Content provided by FirstRanker.com ---
value achievement and autonomy (low C or high NI behavior) and managers inFrance, a strong uncertainty avoidance society, value competent supervision,
sound company policies, fringe benefits, security, and comfortable working
--- Content provided by FirstRanker.com ---
conditions (high C and high F). French manages do not believe matrix
organizations , which tend to apply high NI-like behavior, are feasible; they
--- Content provided by FirstRanker.com ---
view them as violating the principle of unit of command.4) Confucianism:
--- Content provided by FirstRanker.com ---
Individuals in East Asian cultures (the People`s Republic of China, South Korea,
Japan, Hong Kong, and Singapore) are also influenced by the Confucian cultural
--- Content provided by FirstRanker.com ---
dimension. In essence, individuals in Confucian based organizations are forcedto adhere to rigid, informal group norms and values (high NI like relationship).
Since individuals are so strictly bound to group norms, organizations based on
--- Content provided by FirstRanker.com ---
the Confucian cultural dimension probably apply less formalization (low F) than
do organizations in the West. This contention is partially supported by research
--- Content provided by FirstRanker.com ---
findings that organizations in China, where the Confucian influence is stillstrong, tend to be far less formalized than Western organizations. There is
evidence that Confucian-based organizations apply high C. for example, South
--- Content provided by FirstRanker.com ---
Korean managers demonstrate the Confucian virtues of loyalty and obedience to
authorities and they tend not to adopt systems of shared management and power
--- Content provided by FirstRanker.com ---
equalization within organizations. Chinese subordinates have been found to bepassive, preferring that orders make decisions for them (high C).
5) Masculinity
--- Content provided by FirstRanker.com ---
i) Moderate-to-High Masculinity.Societies dominated by this dimension stress material success and assertiveness
and assign different roles to males and females. To review, males are expected
--- Content provided by FirstRanker.com ---
to carry out the competitive roles in the society; females are expected to care for
the nonmaterial quality of life. In strong masculine countries where people
--- Content provided by FirstRanker.com ---
perceive such behavior as being inequitable, an HSR leaning toward high F,emphasizing reduction of such social inequities would probably preferred.
ii) Moderate-to-Low Masculinity.
--- Content provided by FirstRanker.com ---
Hofstede also concluded that those nations dominated by a low masculine
cultural dimension stress interpersonal relationship, a concern for others, and the
--- Content provided by FirstRanker.com ---
overall quality of life, and define relatively overlapping social roles for malesand females. In these cultures, neither male nor female need be ambitious or
competitive; both may aspire to a life that does not assign great values to
--- Content provided by FirstRanker.com ---
material success and respects others. According to Hofstede, improved quality
of work life for individuals in these societies means offering opportunities for
--- Content provided by FirstRanker.com ---
developing relationships on the job, which is perhaps best accomplished throughlow C or high NI-like HSR. For example, people in Sweden, a low masculine
society, generally prefer organic (low C, NI-like) organizational structures and
--- Content provided by FirstRanker.com ---
they like to be involved in the decision-making process.
SITUATIONAL SCHEME
--- Content provided by FirstRanker.com ---
Headquarters-subsidiary control relationships not only influenced by thecultural factors but various other situational factors also plays a pivotal role The
following section describes those factors.
--- Content provided by FirstRanker.com ---
1. Size of the organization:
This has been found to be a factor in determining HRRs. Large?scale operations
--- Content provided by FirstRanker.com ---
have tend to apply structural relationships leaning toward high formalizationand small-scale organisations tend to apply a high normative integration or high
centralization relationship. How ever this factor is influenced by the
--- Content provided by FirstRanker.com ---
organization`s strategy. Some international business establish global strategy.2. Subsidiary's local context:
Local context of the subsidiary can be conceptualized based on the
--- Content provided by FirstRanker.com ---
environmental complexity and amount of local resources available to the
subsidiary. For different levels context a governing mechanism scheme is as
--- Content provided by FirstRanker.com ---
follows: Low environmental complexity and low levels of local resources dictatea high level of centralization and low levels of formalization and normative
integration. Low environmental complexity and high levels of resources dictate
--- Content provided by FirstRanker.com ---
a low levels of centralization and high levels of formalisation and normative
integration. High environment complexity and low resource levels dictate a
--- Content provided by FirstRanker.com ---
moderate level of centralization, a Low level of formalization, and high level ofnormative integration. High environment complexity and high resource level
indicate a low level of centralization, a moderate level of formalisation, and a
--- Content provided by FirstRanker.com ---
high level of normative integration.
3. Preference of the management:
--- Content provided by FirstRanker.com ---
Preference of the management towards the control of the subsidiary also formthe strategy. High centralization may be used to maintain strong control over
activities of the subsidiary. When the management prefer a strong organizational
--- Content provided by FirstRanker.com ---
stability high formalisation can be followed.
4. Communication:
--- Content provided by FirstRanker.com ---
The availability of internet, Web, and video-conferencing is forcing mayorganizations to rethink of their organization structure and control techniques.
As improvement in technology reduce communication and coordination costs,
--- Content provided by FirstRanker.com ---
the preferred way to make decisions moves in the following stages .When
communication costs are high, the best way to make decision is via independent
--- Content provided by FirstRanker.com ---
decentralized decision makers which means lower centralization. Whencommunication costs are less organizations can prefer highly normative
integration.
--- Content provided by FirstRanker.com ---
An effective global corporation needs to establish a balanced headquarters-subsidiary relationship and that balance can be attained through the
implementation of a global corporate culture and values.
--- Content provided by FirstRanker.com ---
Key Terms
Comparative Management: The study and analysis of management in different
--- Content provided by FirstRanker.com ---
environments and the reasons that enterprises show different results in variouscountries.
Centralization: Most of the important decisions relative to local matters are
--- Content provided by FirstRanker.com ---
made by the headquarters management rather than by managers in the local
subsidiary.
--- Content provided by FirstRanker.com ---
Locus of decision making: Refers to the degree to which the decision makingauthority is centralized or decentralized.
Formalization: Represents decision making through bureaucratic mechanism
--- Content provided by FirstRanker.com ---
such as formal system.
Multi cultural team: Teams whose members represent diverse views and
--- Content provided by FirstRanker.com ---
come from varied cultural backgrounds.Power Distance: Refers to the degree to which people in a society accept
centralized power and depend on supervisors for structure and direction.
--- Content provided by FirstRanker.com ---
Ringi: A group oriented participative decision making technique used in many
Japanese organizations
--- Content provided by FirstRanker.com ---
Questions for Practice1. Define comparative management? Explain its importance.
2. Explain the different methods of comparative management.
--- Content provided by FirstRanker.com ---
3. Explain the various features of the American management system.
4. Explain the focus of Japanese management system
5. Explain the merits and drawbacks of the functional organizational
--- Content provided by FirstRanker.com ---
structure.
6. Briefly discuss the merits of product organization structure.
--- Content provided by FirstRanker.com ---
7. What are the merits and drawbacks of matrix organization?8. Discuss the impact of modern technology on structuring organizations.
9. Which international organization structure allows local subsidiaries to
--- Content provided by FirstRanker.com ---
use discretion in developing products or services to fit local markets
and at the same time allows headquarters to coordinate activities around
--- Content provided by FirstRanker.com ---
the globe to capitalize on synergies and economies of scale?10. In what way do formalization, specialization, and centralization have
impact on MNC organization structures?
--- Content provided by FirstRanker.com ---
11. Which organizational structure enables organizations to minimize the
weakness of the other structures
--- Content provided by FirstRanker.com ---
12. Write a note on locus of decision making.13. Explain the centralized and decentralized headquarters-foreign
subsidiaries control relationships and some of the merits and drawbacks
--- Content provided by FirstRanker.com ---
14. Why are foreign subsidiaries that provide a wide range of products less
centrally controlled than those that provide a narrow range of products?
UNIT ? IV:
--- Content provided by FirstRanker.com ---
International Business Strategy: Creating strategy for international business;
Management of production, Services technology and operations; Marketing
--- Content provided by FirstRanker.com ---
financial, legal and political dimensions; Ethics and social responsibility ofbusiness. Strategic Alliances: Acquisitions and mergers; Management of joint
ventures and other international strategic alliances
--- Content provided by FirstRanker.com ---
Lesson 1:
--- Content provided by FirstRanker.com ---
International Business Strategy
--- Content provided by FirstRanker.com ---
Objectives:
--- Content provided by FirstRanker.com ---
After studying this lesson you should be able:
--- Content provided by FirstRanker.com ---
To provide basic idea about the international business strategy
To explain the different approaches to strategy formulation.
--- Content provided by FirstRanker.com ---
To indicate the different levels at which strategy is formulatedTo explain the nature of the different steps in the process of strategic
planning
--- Content provided by FirstRanker.com ---
To describe the features and design of an effective control system
--- Content provided by FirstRanker.com ---
Structure1.1 Introduction
1.2 Different Approaches to Strategy Formulations
--- Content provided by FirstRanker.com ---
1.3 Strategic Choices
1.4 Strategic Planning Process
1.5 Organizational Structure
--- Content provided by FirstRanker.com ---
1.6 Process Control
1.7 Summary
--- Content provided by FirstRanker.com ---
1.8 Glossary1.9 Self Assessment Questions
1.10 Further Readings
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
1.1 Introduction:International business operations are not at random. A proper strategy is
--- Content provided by FirstRanker.com ---
formulated, planning follows to define the means to attain the goal,
organisational structure provides a route for decision-making and the control
--- Content provided by FirstRanker.com ---
assesses the extent to which the goals have been achieved. The followingsections deals with these issues. Many international markets are now extremely
competitive due to the liberalization of the world trade and investment
--- Content provided by FirstRanker.com ---
environment. In industry after industry, capable competitors confront each other
around the globe. To be profitable in such as environment, a firm must both
--- Content provided by FirstRanker.com ---
reduce the costs of value creation and differentiate its product offering so thatconsumers value that product more and are willing to pay more for the product
than it costs to produce it. Thus, strategy is often concerned with identifying
--- Content provided by FirstRanker.com ---
and taking actions that will lower the costs of value creation and / or will
differentiate the firm`s product offering through superior design, quality,
--- Content provided by FirstRanker.com ---
service, functionality, and on.1.1.1. Profiting from global Expansion:
--- Content provided by FirstRanker.com ---
Expanding globally allows firms to increase their profitability in ways notavailable to purely domestic enterprises. Firms that operate internationally are
able to:
--- Content provided by FirstRanker.com ---
1. Realize location economies by dispersing individual value creation
--- Content provided by FirstRanker.com ---
activities to those locations around the globe where they can beperformed most efficiently and effectively.
2. Realize greater cost economies from experience effects by serving an
--- Content provided by FirstRanker.com ---
expanded global market from a central location, thereby reducing the
costs of value creation.
--- Content provided by FirstRanker.com ---
3. Earn a greater return from the firm`s distinctive skills or corecompetencies by leveraging those skills and applying them to new
geographic markets.
--- Content provided by FirstRanker.com ---
4. Earn a greater return by leveraging any valuable skills developed in
foreign operations and transferring them to other entities within the firm`s
--- Content provided by FirstRanker.com ---
global network of operations.However, a firm`s ability to increase its profitability by pursuing these strategies
is to some extent constrained by the need to customize its product offering,
--- Content provided by FirstRanker.com ---
marketing strategy, and business strategy to differing national conditions; that is,
by the imperative of localization.
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
1.2. Different Approaches to Strategy Formulation:
--- Content provided by FirstRanker.com ---
The strategy of a firm is of course to achieve superior performance (competitiveadvantage) on a sustainable basis. There is no single answer as to how this can
be achieved. Michael Porter is of the view that a firm`s competitive advantage
--- Content provided by FirstRanker.com ---
depends on the selection of the most appropriate generic strategy, whichincorporates three elements, namely, cost leadership, differentiation, and focus.
If the cost of a product is lower than the competitors`, the firm can maximise its
--- Content provided by FirstRanker.com ---
sale/profit. Similarly, if the product is unique, differentiated from the rivals`
product, and it meets consumers` preference, the firm will be able to maintain an
--- Content provided by FirstRanker.com ---
edge over its rivals. Again, if the firm has focus on a particular segment of themarket, either with a low-cost product or a differentiated product, the
concentrated effort will definitely confer a competitive advantage upon it.
--- Content provided by FirstRanker.com ---
Porter (1986, 1990) developed the generic strategy theory for international
--- Content provided by FirstRanker.com ---
business through the incorporation of the concept of configuration andcoordination. The concept of configuration is based on the value chain concept.
It shows whether it is better to concentrate the manufacturing activities in one or
--- Content provided by FirstRanker.com ---
two nations and cater to the outside demand through export, or to disperse the
manufacturing activities over a number of countries. However, Porter is of the
--- Content provided by FirstRanker.com ---
view that configuration alone does not assure competitive advantage unless anduntil the activities in different countries are properly coordinated. Prahalad and
Doz (1987) support this view and are of the opinion that a sound global
--- Content provided by FirstRanker.com ---
management requires (1) centralised management of the dispersed activities, (2)
coordination of R&D, pricing and intra-firm technology transfer, and (3) the
--- Content provided by FirstRanker.com ---
subsidiaries` ability to make decisions with respect to local issues.The other approach, which has been developed by Prahalad and Hamel (1990)
--- Content provided by FirstRanker.com ---
and Kay (1993) is known as competence-based strategy. It is the core
competence or the distinctive capability of the firm that puts it in a superior
--- Content provided by FirstRanker.com ---
position. Core competence can be possessed if the resources ? physical,financial, technological, and human ? are available at the least cost,
conveniently and, without interruption. Again, the existing core competence can
--- Content provided by FirstRanker.com ---
be strengthened and new core competence can be built up.The above views boil down to the simple fact that the international business
--- Content provided by FirstRanker.com ---
strategy of a firm manifests in, first, the development of core competency, which
helps the firm either to market an innovated / differentiated product or to reduce
--- Content provided by FirstRanker.com ---
the cost of the existing product so as to earn large profits; and, second,adaptation of the technology and product, which is known as local
customisation, to suit the local consumers in different markets, leading to large
--- Content provided by FirstRanker.com ---
profits. Normally, an international firm combines both these strategies.
However, either of the two strategies various from one case to the other. In one
--- Content provided by FirstRanker.com ---
case, development of the core competency gets greater emphasis; in the other,local customisation gets greater emphasis; in yet another case, both are given
equal importance.
--- Content provided by FirstRanker.com ---
1.2.1 Various Levels of Strategy Formulation
--- Content provided by FirstRanker.com ---
a) Strategy at the International Level:
--- Content provided by FirstRanker.com ---
Strategy at the international level depends on whether the structure of the
international firm is ethnocentric, or polycentric or geocentric.
--- Content provided by FirstRanker.com ---
b) Corporate level Strategy:
--- Content provided by FirstRanker.com ---
Corporate level strategy allows successful business lines to grow, unsuccessful
business lines to cut short their activities, and allows still others to maintain
--- Content provided by FirstRanker.com ---
stability.c) Business level Strategy:
--- Content provided by FirstRanker.com ---
Business level strategy is formulated for either minimising costs or for
differentiating the product by adding special features therein.
--- Content provided by FirstRanker.com ---
1.3 Strategic Choices:
--- Content provided by FirstRanker.com ---
Firms use four basic strategies to enter and compete in the international
environment: an international strategy, a multidomestic strategy, a global
--- Content provided by FirstRanker.com ---
strategy, and a transnational strategy. Figure 1.1 illustrates when each of these
strategies is most appropriate. In this section we describe each strategy, identify
--- Content provided by FirstRanker.com ---
when it is appropriate, and discuss the pros and cons of each. Each of thesestrategies has its advantages and disadvantages (Table 1.1). The appropriateness
of each strategy various with the extent of pressures for cost reductions and local
--- Content provided by FirstRanker.com ---
responsiveness.
--- Content provided by FirstRanker.com ---
1.3.1. International StrategyFirms that pursue an international strategy try to create value by transferring
--- Content provided by FirstRanker.com ---
valuable skills and products to foreign markets where indigenous competitors
lack those skills and products. Most international firms have created value by
--- Content provided by FirstRanker.com ---
transferring differentiated product offerings developed at home to new marketsoverseas. Accordingly, they rend to centralize product development functions at
home. (e.g. R&D). However, they also tend to establish manufacturing and
--- Content provided by FirstRanker.com ---
marketing functions in each major country in which they do business. But while
they may undertake some local customization of product offering and marketing
strategy, this tends to be limited. In most international firms, the head office
--- Content provided by FirstRanker.com ---
retains tight control over marketing and product strategy.
--- Content provided by FirstRanker.com ---
1.3.2. Multidomestic StrategyFirms pursuing a multidomestic strategy orient themselves toward achieving
--- Content provided by FirstRanker.com ---
maximum local responsiveness. They key distinguishing feature of
multidomestic firms is that they extensively customize both their product
--- Content provided by FirstRanker.com ---
offering and their marketing strategy to match different national conditions.Consistent with this, they also tend to establish a complete set of value creation
activities, including production, marketing and R&D, in each major national
--- Content provided by FirstRanker.com ---
market in which they do business. As a consequence, they are generally unable
to realize value from experience curve effects and location economies.
--- Content provided by FirstRanker.com ---
Accordingly, many multidomestic firms have a high cost structure. They alsotend to do a poor job of leveraging core competencies within the firm.
--- Content provided by FirstRanker.com ---
Figure 1.1
--- Content provided by FirstRanker.com ---
High
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
Global
Transnational
--- Content provided by FirstRanker.com ---
Strategy
Strategy
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
Cost Pressures
--- Content provided by FirstRanker.com ---
International
--- Content provided by FirstRanker.com ---
StrategyMultidomestic
--- Content provided by FirstRanker.com ---
Strategy
--- Content provided by FirstRanker.com ---
Low
--- Content provided by FirstRanker.com ---
Low
Press
--- Content provided by FirstRanker.com ---
ures for Local ResponsivenessHigh
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
1.3.3.Global Strategy
--- Content provided by FirstRanker.com ---
Firms that pursue a global strategy focus on increasing profitability by reaping
--- Content provided by FirstRanker.com ---
the cost reductions that come from experience curve effects and locationeconomies. That is, they are pursuing a low cost strategy. The production,
marketing, and R&D activities of firms pursuing a global strategy are
--- Content provided by FirstRanker.com ---
concentrated in a few favorable locations. Global firms tend not to customize
their product offering and marketing strategy to local conditions because
--- Content provided by FirstRanker.com ---
customization raises costs (it involves shorter production runs and theduplication of functions). Instead, global firms prefer to market a standardized
product worldwide so they can reap the maximum benefits from the economies
--- Content provided by FirstRanker.com ---
of scale that underlie the experience curve. They may also use their cost
advantage to support aggressive pricing in world markets.
--- Content provided by FirstRanker.com ---
1.3.4. Transnational Strategy
--- Content provided by FirstRanker.com ---
In today`s environment, competitive conditions are so intense that to survive inthe global marketplace, firms exploit experience-based cost economies and
location economies, they must transfer core competencies within the firm, and
--- Content provided by FirstRanker.com ---
they must do all of this while paying attention to pressure for local
responsiveness. They note that in the modern multinational enterprise, core
--- Content provided by FirstRanker.com ---
competencies do not just reside in the home country. Valuable skills candevelop in any of the firm`s worldwide operations. Thus, the flow of skills and
product offerings should not be all one way way, from home firm to foreign
--- Content provided by FirstRanker.com ---
subsidiary, as in the case of firms pursuing an international strategy. Rather, the
flow should also be from foreign subsidiary to home country and from foreign
--- Content provided by FirstRanker.com ---
subsidiary to foreign subsidiary-a process they refer to a global learning.Experts refer to the strategy pursued by firms that are trying to simultaneously
create value in these different ways a transnational strategy.
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
Table 1.1
The Advantages and Disadvantages of the Four Strategies
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
Strategy
Advantages
--- Content provided by FirstRanker.com ---
Disadvantages--- Content provided by FirstRanker.com ---
GlobalExploit experience curve effects
Lack of local responsiveness
--- Content provided by FirstRanker.com ---
Exploit location economies
--- Content provided by FirstRanker.com ---
InternationalTransfer core competencies to
Lack of local responsiveness
--- Content provided by FirstRanker.com ---
foreign markets
Inability to realise location
--- Content provided by FirstRanker.com ---
economiesFailure to exploit experience curve
effects
--- Content provided by FirstRanker.com ---
Multidomestic
Customize product offerings and
--- Content provided by FirstRanker.com ---
Inability to realize locationmarketing in accordance with local economies
responsiveness
--- Content provided by FirstRanker.com ---
Failure to exploit experience curve
effects
--- Content provided by FirstRanker.com ---
Failure to transfer corecompetencies to foreign markets
Transnational
--- Content provided by FirstRanker.com ---
Exploit experience curve effects
Difficult to implement due to
--- Content provided by FirstRanker.com ---
Exploit location economiesorganizational problems.
Customize product offerings and
--- Content provided by FirstRanker.com ---
marketing in accordance with local
responsiveness
--- Content provided by FirstRanker.com ---
Reap benefits of global learning--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
1.4 Strategic Planning Process:Strategic planning is a continuous process, it is not an end activity. However, for
operational purpose organizations define and describe strategic plans.
--- Content provided by FirstRanker.com ---
1.4.1 Steps in the Process of Strategic Planning :
--- Content provided by FirstRanker.com ---
There are different steps in the process of strategic planning, which are adopted
in sequence, although sometimes they occur simultaneously. The steps are:
--- Content provided by FirstRanker.com ---
1. Assessment of the external environment and internal resources.
--- Content provided by FirstRanker.com ---
2. Formulation of global strategy3. Development of global programme
--- Content provided by FirstRanker.com ---
Assessment of the external environment and the internal resources: The
assessment of the external environment has a greater relevance in case of an
--- Content provided by FirstRanker.com ---
international company as host countries present varying environments. Theassessment takes into consideration the present position and the future trends in
relation to the size of the market, consumption pattern in different markets, the
--- Content provided by FirstRanker.com ---
intensity of competition, and the business linkages in different markets.
--- Content provided by FirstRanker.com ---
Formulation of global strategy: This strategy involves the market as well asthe product. As far as the market strategy is concerned, a suitable market
representing a sufficiently large demand for the product or having the least
--- Content provided by FirstRanker.com ---
competition is selected. The ease with which the parent company can allocate
resources is yet another factor that influences market selection. Also, a foreign
market that has some kind of resemblance with its existing markets is preferred,
--- Content provided by FirstRanker.com ---
as in this case, it will be easier for the firm to cope with the market demand.
--- Content provided by FirstRanker.com ---
Development of global programme: This step includes planning, mainly withthe respect to the degree of product standardisation, marketing programme, and
location for production. Both standardisation of product and adaptation of
--- Content provided by FirstRanker.com ---
product have merits and demerits. Therefore, the firm needs to assess how
much adaptation / standardisation of the product can be recommended so as to
--- Content provided by FirstRanker.com ---
achieve economies of scale and at the same time attract the consumers` abroad.The entire process of international strategy can be better viewed through an
example of McDonald`s everywhere (Insight.1) how the multinational fast food
--- Content provided by FirstRanker.com ---
chain implementing global it`s strategy.
--- Content provided by FirstRanker.com ---
Insight.1
McDonald's everywhere
--- Content provided by FirstRanker.com ---
Established in 1955, McDonald`s faced a problem by the early 1980s: after three
decades of rapid growth, the U.S. fast-food market was beginning to show signs
--- Content provided by FirstRanker.com ---
of market saturation. McDonald`s response to the slowdown was to expandabroad rapidly. In 1980, 28 percent of the chain`s new McDonald`s restaurant
openings were abroad; in 1986 the figure was 40 percent, in 1990 it was close to
--- Content provided by FirstRanker.com ---
60 percent, and in 2000 it was almost 90 percent. Since the early 1980s, the
firm`s foreign revenues and profits have grown at 22 percent per year. By the
--- Content provided by FirstRanker.com ---
end of 2000, the firm had 28,707 restaurants in 120 countries outside the UnitedStates. They generated $21 billion (53 percent) of the firm`s $40 billion in
revenues.
--- Content provided by FirstRanker.com ---
McDonald`s shows no signs of slowing down. Management notes there is still
only one McDonald`s restaurant for every 500,000 people in the foreign
--- Content provided by FirstRanker.com ---
countries in which it currently does business. This compares to one McDonald`s
restaurant for every 25,000 people in the United States. Also, the firm currently
--- Content provided by FirstRanker.com ---
serves less than 1 percent of the world`s population. Plans call for this foreignexpansion to continue at a rapid rate. The firm opened more than 500
restaurants in Europe in 1999 and again in 2000, while the figures for Asia were
--- Content provided by FirstRanker.com ---
around 600. In 1997, McDonald`s said it would open 2,000 restaurants per year
for the foreseeable future, the majority of them outside the United States. This
--- Content provided by FirstRanker.com ---
included major expansion plans for Latin America, where the company plannedto invest $2 billion over the next few years.
--- Content provided by FirstRanker.com ---
One key to the firm`s successful foreign expansion is detailed planning. When
McDonald`s enters a foreign country, it does so only after careful preparation.
--- Content provided by FirstRanker.com ---
In what is a fairly typical pattern, before McDonald`s opened its first Polishrestaurant in 1992, the firm spent 18 months establishing essential contacts and
getting to know the local culture. Locations, real estate, construction, supply,
--- Content provided by FirstRanker.com ---
personnel, an legal and government relations were all worked out in advance. In
June 1992, a team of 50 employees from the United States, Russia, Germany,
--- Content provided by FirstRanker.com ---
and Great Britain went to Poland to help with the opening of the first fourrestaurants. A primary objective was to hire and train local personnel. By mid-
1994, all these employees except one had returned to their home country. Polish
--- Content provided by FirstRanker.com ---
nationals who had now been brought up to the skill level required to run a
McDonald`s operation replaced them.
--- Content provided by FirstRanker.com ---
Another key to the firm`s international strategy is the export of the management
skills that spurred its growth in the United States. McDonald`s U.S. success was
--- Content provided by FirstRanker.com ---
built on a formula of close relations with suppliers, nationwide marketing might,
tight control over store-level operating procedures, and a franchising system that
encourages entrepreneurial individual franchisees. Although this system has
--- Content provided by FirstRanker.com ---
worked flawlessly in the United State, some modifications must be made in
other countries. One big challenge has been to infuse each store with the same
--- Content provided by FirstRanker.com ---
gung-ho culture and standardized operating procedures that have been thehallmark of U.S. success. To aid in this task, McDonald`s has enlisted the help
of large partners through joint ventures in many countries. The partners play a
--- Content provided by FirstRanker.com ---
key role in learning and transplanting the organization`s values to local
employees.
--- Content provided by FirstRanker.com ---
Foreign partners have also played a key role in helping McDonald`s adapt its
marketing methods and menu to local conditions. Although U.S.-style fast food
--- Content provided by FirstRanker.com ---
remains the staple fare on the menu, local products have been added. In Brazil,
for example, McDonald`s sells a soft drink made from the guarana, an
--- Content provided by FirstRanker.com ---
Amazonian berry. Patrons of McDonald`s in Malaysia, Singapore, and Thailandsavor shakes flavored with durian, a foul-smelling (to U.S. tastes, at least) fruit
considered an aphrodisiac by the locals. In Arab countries, McDonald`s
--- Content provided by FirstRanker.com ---
restaurants maintain Halal menus, which signify compliance with Islamic laws
on food preparation, especially beef. In 1995, McDonald`s opened the first
--- Content provided by FirstRanker.com ---
kosher restaurant in suburban Jerusalem. The restaurant does not serve dairyproducts. And in India, the Big Mac is made with lamb and called the
Maharaja Mac.
--- Content provided by FirstRanker.com ---
McDonald`s biggest problem, however, has been to replicate its U.S. supply
--- Content provided by FirstRanker.com ---
chain in other countries. U.S. suppliers are fiercely loyal to McDonald`s, theymust be, because their fortunes are closely linked to those of McDonald`s.
McDonald`s maintains very rigorous specifications for all the raw ingredients it
--- Content provided by FirstRanker.com ---
uses-the key to its consistency and quality control. Outside the United States,
however, McDonald`s has found suppliers far less willing to make the
investments required to meet its specifications. In great Britain, for example,
--- Content provided by FirstRanker.com ---
McDonald`s had problems getting local bakeries to produce the hamburger bun.
After experiencing quality problems with two local bakeries, McDonald`s built
--- Content provided by FirstRanker.com ---
its own bakery to supply stores there. In a more extreme case, whenMcDonald`s decided to open a store in Russia, it found that local suppliers
lacked the capability to produce goods of the quality it demanded. The firm was
--- Content provided by FirstRanker.com ---
forced to vertically integrate through the local food industry on a vast scale,
importing potato seeds and bull semen and indirectly managing dairy farms,
--- Content provided by FirstRanker.com ---
cattle ranches, and vegetable plots. It also had to construct the world`s largestfood-processing plant, at a cost of $40 million. The restaurant itself cost only
$4.5 million.
--- Content provided by FirstRanker.com ---
Now that it has a successful foreign operation, McDonald`s is experiencing
--- Content provided by FirstRanker.com ---
benefits that go beyond the immediate financial ones. The firm increasingly isfinding that its foreign franchisees are a source for valuable new ideas. The
Dutch operation created a prefabricated modular store that can be moved over a
--- Content provided by FirstRanker.com ---
weekend and is now widely used to set up temporary restaurants at big outdoor
events. The Swedes came up with an enhanced meat freezer that is now used
--- Content provided by FirstRanker.com ---
firmwide. And satellite stores, or low overhead mini-McDonald`s, which arenow appearing in hospitals and sports arenas in the United States, were invented
in Singapore.
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
1.5 Organizational Structure:
--- Content provided by FirstRanker.com ---
The organisational structure facilitates the implementation of measures designed
through the planning process. When the involvement of a firm in international
--- Content provided by FirstRanker.com ---
business is only ad hoc and fortuitous, the domestic division looks after the
international business too, and as a result, the organisational structure of the
--- Content provided by FirstRanker.com ---
international firm is not different from that of a domestic company. But withgrowing export of a permanent character, an export department is added to the
marketing department. With massive growth in export, when the export
--- Content provided by FirstRanker.com ---
department proves incapable of handling export, an international division is
created independent of the domestic marketing department, although proper
--- Content provided by FirstRanker.com ---
coordination is maintained between the domestic division and the internationaldivision. However, when the firm begins international operation, the challenges
appear far greater. The organisational structure becomes global. The emphasis
--- Content provided by FirstRanker.com ---
is the on product structure, area structure, or still on the functional structure.
--- Content provided by FirstRanker.com ---
The growing complexities in the organisational structure do not end here. If,with growing international involvement, all the three structures-product, area,
and the function-need to be combined, the structure turns to be a global matrix
--- Content provided by FirstRanker.com ---
structure that permits different types of inter-linking between products and
areas. However, the organisational structure has also come to evolve in different
--- Content provided by FirstRanker.com ---
shapes in different sets of countries.1.6 Process of Control:
--- Content provided by FirstRanker.com ---
Lastly, the process of control involves examination of whether the set goals have
--- Content provided by FirstRanker.com ---
been achieved and also corrective measures in case of deviations from the setstandards, if any. An effective control system is based on correct and timely
information, which is judged against the set standards. It is difficult to set
--- Content provided by FirstRanker.com ---
standards in view of wide heterogeneity in the international environment.Nevertheless, the standard maintains a proper balance between the firm`s overall
view and host country variations.
--- Content provided by FirstRanker.com ---
There are various techniques for control. One is accounting and audit control,
--- Content provided by FirstRanker.com ---
used mainly for judging the financial performance. The other is control throughplans, policies, and procedures, where performance is compared with the actual
plans and policies. Procedures differ from one country to another and so they
--- Content provided by FirstRanker.com ---
come in the way of process of control. Cultural control is based on the concept
of socialisation where informal personal interaction is very significant. Again,
--- Content provided by FirstRanker.com ---
the process of control may be centralised or decentralised, or a mixture of thetwo known as a coordinated decentralisation approach.
--- Content provided by FirstRanker.com ---
1.7 Summary:
--- Content provided by FirstRanker.com ---
Strategy involves setting of goals. The ultimate goal is the maximisation ofcorporate wealth, which can be achieved through superior performance
(compared to the rivals) on a sustainable basis. There are different strategies to
--- Content provided by FirstRanker.com ---
put the firm in a superior position. Some of the more important are the strategy
of competitive positioning, competence-based strategy, and total global strategy.
--- Content provided by FirstRanker.com ---
The spectrum of strategy may be broad, covering production, financial,marketing, and other vital aspects. Strategy is formulated at different levels. At
the international level, it may be ethnocentric, polycentric, or geocentric
--- Content provided by FirstRanker.com ---
strategy. At the corporate level, it may be a growth strategy, retrenchment
strategy, stability strategy, or a combination of any two of these or more. At the
--- Content provided by FirstRanker.com ---
business level, it may be a cost-minimisation strategy or product differentiationstrategy, or both. At the department level, the strategy concerns both primary
and supportive activities. Planning shapes strategy and defines the means to
--- Content provided by FirstRanker.com ---
achieve goals. The process of planning has three sequential steps. The first isthe assessment of the external environment and internal resources. The second
is the formulation of global strategy, which involves identification of the market
--- Content provided by FirstRanker.com ---
and matching of the products with market-specific needs. The third step is to
develop a global programme that includes planning with respect to the degree of
--- Content provided by FirstRanker.com ---
product standardisation, marketing programme, and the location formanufacturing. The planning may be centralised. Alternatively, it may be
decentralised, leaving it to different strategic business units (SBUs). The choice
--- Content provided by FirstRanker.com ---
depends, among other things, upon the level of technology used, mobility of
funds and other factors of production, and the heterogeneity of host country
--- Content provided by FirstRanker.com ---
environment.--- Content provided by FirstRanker.com ---
1.8 Glossary:
--- Content provided by FirstRanker.com ---
Strategy: A strategy is a long term plan of action designed to achieve aparticular goal, as differentiated from tactics or immediate actions with
resources at hand. Originally confined to military matters, the word has become
--- Content provided by FirstRanker.com ---
commonly used in many disparate fields.
--- Content provided by FirstRanker.com ---
Strategic planning consists of the process of developing strategies to reach adefined objective. As we label a piece of planning "strategic" we expect it to
operate on the grand scale and to take in "the big picture" (in contradistinction to
--- Content provided by FirstRanker.com ---
"tactical" planning, which by definition has to focus more on the tactics of
individual detailed activities). "Long range" planning typically projects current
activities and programs into a revised view of the external world, thereby
--- Content provided by FirstRanker.com ---
describing results that will most likely occur. "Strategic" planning tries to
"create" more desirable future results by (a) influencing the outside world or (b)
--- Content provided by FirstRanker.com ---
adapting current programs and actions so as to have more favorable outcomes inthe external environment.
--- Content provided by FirstRanker.com ---
Purpose is deliberately thought-through goal-directedness. According to some
philosophies, purpose is central to a good human life. Helen Keller wrote that
--- Content provided by FirstRanker.com ---
happiness comes from "fidelity to a worthy purpose", and Ayn Rand wrote thatpurpose must be one of the three ruling values of human life (the others are
reason and self-esteem).
--- Content provided by FirstRanker.com ---
1.9 Self Assessment Questions:
--- Content provided by FirstRanker.com ---
1. What are the different approaches to strategy formulation? Explain its broad
spectrum.
--- Content provided by FirstRanker.com ---
2. The characteristics of strategy formulation at different levels are different
Comment.
--- Content provided by FirstRanker.com ---
3. What are the different steps in the process of strategic planing?4. What are the features of an effective control mechanism in international
business? Explain the techniques of control.
--- Content provided by FirstRanker.com ---
1.10 Further Readings:
--- Content provided by FirstRanker.com ---
11. Manab Adhikary, Global Business Management In an InternationalEconomic Environment (2001), Macmillan India Limited, New Delhi.
12. Sak Onkvisist., John J.Shaw., International Marketing Analysis and Strategy
--- Content provided by FirstRanker.com ---
(1997), Prentice-Hall of India, New Delhi.13. Warren J.Keegan, Global Marketing Management (1995), Prentice-Hall of
India, New Delhi.
--- Content provided by FirstRanker.com ---
14. Alan C Shapiro, Multinational Financial Management (2002), Prentice-Hall
of India, New Delhi.
--- Content provided by FirstRanker.com ---
15. Anant R.Negandhi, International Management (1987) Prentice-Hall of India,New Delhi.
16. Vyuptakesh Sharan, International Business, Concept, Environment and
--- Content provided by FirstRanker.com ---
strategy (2006), Dorling Kindersley (India) Pvt. Ltd, New Delhi
17. Charles W.L.Hill, International Business, Competing in the Global
--- Content provided by FirstRanker.com ---
Marketplace(2003), Tata Mc-Graw-HillPublishing Company Limited, NewDelhi.
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
Lesson 2:
International Management- Production, Technology and
--- Content provided by FirstRanker.com ---
OperationsObjectives:
--- Content provided by FirstRanker.com ---
After studying this lesson you should be able:
To observe the production management practices adopted by global
--- Content provided by FirstRanker.com ---
corporationsTo understand the technological developments and their influence on
operations management
--- Content provided by FirstRanker.com ---
To get more insights about international production practices through
examples of global corporations
--- Content provided by FirstRanker.com ---
Structure:1.38 Introduction
1.39 Location for Production
--- Content provided by FirstRanker.com ---
1.40 Technology
1.41 Make-or-buy Decisions
--- Content provided by FirstRanker.com ---
1.42 Materials Management1.43 International Services
1.44 Summary
--- Content provided by FirstRanker.com ---
1.45 Glossary
1.46 Self Assessment Questions
--- Content provided by FirstRanker.com ---
1.10Further Readings1.1 Introduction:
--- Content provided by FirstRanker.com ---
As trade barriers fall and global markets develop, many firms increasinglyconfront a set of interrelated issues. First, where in the world should productive
activities be located? Should they be concentrated in a single country, or should
--- Content provided by FirstRanker.com ---
they be dispersed around the globe, matching the type of activity with country
differences in factor costs, tariff barriers, political risks, and the like in order to
--- Content provided by FirstRanker.com ---
minimize costs and maximize value added? Second, what should be the long-term strategic role of foreign production sites? Should the firm abandon a
foreign site if factor costs change, moving production to another more favorable
--- Content provided by FirstRanker.com ---
location, or is there value to maintaining an operation at a given location even if
underlying economic conditions change? Third, should the firm own foreign
--- Content provided by FirstRanker.com ---
productive activities, or is it better to outsource those activities to independentvendors? Fourth, how should a globally dispersed supply chain be managed,
and what is the role of Internet-based information technology in the
--- Content provided by FirstRanker.com ---
management of global logistics? Fifth, should the firm manage global logistics
itself, or should it outsource the management to enterprises that specialize in this
--- Content provided by FirstRanker.com ---
activity? In the following sections we shall consider all these questions anddiscuss the various factors that influence decisions in this arena.
--- Content provided by FirstRanker.com ---
1.2 Location for Production:
An essential decision facing an international firm is where to locate its
--- Content provided by FirstRanker.com ---
manufacturing activities to achieve the goals of minimising costs and improvingproduct quality. For the firm contemplating international production, a number
of factors must be considered. The can be grouped under broad categories;
--- Content provided by FirstRanker.com ---
country factors, technological factors, and product factors.
--- Content provided by FirstRanker.com ---
a) Country Factors: Other things being equal, a firm should locate its variousmanufacturing activities where the economic, political, and cultural
conditions, including relative factor costs, are conducive to the performance
--- Content provided by FirstRanker.com ---
of those activities. Location economies have to be considered. Alsoimportant in some industries is the presence of global concentrations of
activities at certain locations. Location externalities include the presence of
--- Content provided by FirstRanker.com ---
an appropriately skilled labour pool and supporting industries can play an
important role in deciding where to locate manufacturing activities. Formal
--- Content provided by FirstRanker.com ---
and informal trade barriers obviously influence location decisions, as dotransportation costs and rules and regulations regarding foreign direct
investment. Adverse changes in exchange rates can quickly alter a country`s
--- Content provided by FirstRanker.com ---
attractiveness as a manufacturing base.
b) Technological Factors: The technology we re concerned with in this
--- Content provided by FirstRanker.com ---
subsection is manufacturing technology ? the technology that performsspecific manufacturing activities. The type of technology a firm uses in its
manufacturing can be pivotal in locations decisions. A number of
--- Content provided by FirstRanker.com ---
technological factors support the economic arguments for concentrating
manufacturing facilities in a few choice locations or even in a single
--- Content provided by FirstRanker.com ---
location. Other things being equal, when fixed costs are substantial, theminimum efficient scale of production is high, and/or flexible manufacturing
technologies are available, the arguments for concentrating production at a
--- Content provided by FirstRanker.com ---
few choice locations are strong. This is true even when substantial
differences in consumer tastes and preferences exist between national
--- Content provided by FirstRanker.com ---
markets, since flexible manufacturing technologies allow the firm tocustomize products to national differences at a single facility. Alternatively,
when fixed costs are low, the minimum efficient scale of production is low,
--- Content provided by FirstRanker.com ---
and flexible manufacturing technologies are not available, the arguments for
concentrating production at one or a few locations are not as compelling. In
--- Content provided by FirstRanker.com ---
such cases, it may make more sense to manufacture in each major market inwhich the firm is active if this helps the firm better respond to local
demands.
--- Content provided by FirstRanker.com ---
c) Product Factors: The product features affect location decisions. The first is
the product`s value?to-weight ratio because of its influence on transportation
--- Content provided by FirstRanker.com ---
costs. Many electronic components and pharmaceuticals have high value-to-
weight ratios; they are expensive and they do not weigh much. Other things
--- Content provided by FirstRanker.com ---
being equal, there is great pressure to manufacture these products in theoptimal location and to serve the world market from there. The opposite
holds for products with low value-to-weight ratios. The other product feature
--- Content provided by FirstRanker.com ---
that can influence location decisions is whether the product serves universal
needs, needs that are the same all over the world. Since there are few
--- Content provided by FirstRanker.com ---
national differences in consumer taste and preference for such products, theneed for local responsiveness is reduced. This increases the attractiveness of
concentrating manufacturing at an optimal location.
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
1.3 Technology:1.3.1 Nature of technology
Technology means the utilisation of the materials and processes necessary to
--- Content provided by FirstRanker.com ---
transform inputs into outputs. Understanding technology requires knowledge;
operating a technology requires skills. Technology is created by people and it
--- Content provided by FirstRanker.com ---
affects people; especially through the goods is produces and the workingconditions (extent of the division of labour, employee involvement in
operational decision making, use of discretion at work, etc.) it creates. Changes
--- Content provided by FirstRanker.com ---
in technology affect (i) physical devices (such as machines, tools, instruments
and equipment); and (ii) techniques and working methods (procedures, routines,
--- Content provided by FirstRanker.com ---
application of specific skills, etc.). Accordingly, technology usually influences:Employee training needs
The nature of employees tasks
--- Content provided by FirstRanker.com ---
Organisation structuresEmployee job satisfaction and attitudes towards work.
Management has to choose which particular devices and techniques are best for
--- Content provided by FirstRanker.com ---
improving efficiency and for achieving organizational goals.
1.3.2 Technology transfer
--- Content provided by FirstRanker.com ---
Technology transfer is the transmission of innovations arising in one firm orcountry to others. Innovations might involve new products, processes or
working methods, or the use of specialised know-how. In all cases knowledge
--- Content provided by FirstRanker.com ---
passes from the innovator to one or more recipients, who thus avoid the need to
conduct independent research, or to develop projects, or to test and evaluate the
--- Content provided by FirstRanker.com ---
outcomes of research. International businesses are a primary vehicle for thetransfer of technology between nations. Technology is a key factor in the
economic and social development of nations, so the importation of new
--- Content provided by FirstRanker.com ---
technology is actively encouraged by the government of many states. The
European Commission is also very keen to encourage technology transfer, in
--- Content provided by FirstRanker.com ---
order to prevent the cartelization` of technology within certain EU regions and /or nation states (Germany and France for instance). Note how the transfusion of
technology is frequently accompanied by an exchange of new management ideas
--- Content provided by FirstRanker.com ---
and methods, although some techniques might have to be simplified to make
them understandable to local workers.
--- Content provided by FirstRanker.com ---
Point-to-point technology transfer occurs when a single donor transfers a
technology to a single recipient, e.g. firm-to-firm or from one research institute
--- Content provided by FirstRanker.com ---
to another. Diffusion, conversely, refers to the situation where there are many
recipients all having easy access to the technology. Point-to-point technology
--- Content provided by FirstRanker.com ---
transfer agreements require bilateral negotiations between the partners, andnormally involve some contractual device for protecting the confidentiality of
the transferred knowledge. The term hard technology` is the management,
--- Content provided by FirstRanker.com ---
organisation and administration of technical processes. Typically theintellectual property embodied within hard technology can be legally protected.
Accompanying soft technology, however, is usually non-copyright and / or non-
--- Content provided by FirstRanker.com ---
patentable. It is essential to realise that modern industrial technology is multi-
dimensional and involves much more than patents, designs and the use of
--- Content provided by FirstRanker.com ---
machines and computers. Crucial aspects of today`s new technologies concernmanagement and support services, ongoing R&D and product development, and
the expertise surrounding production techniques and methods. Technology,
--- Content provided by FirstRanker.com ---
therefore, is a package of activities that might include a reinvestment study,
capital equipment, technical support services, the training of personnel, and the
--- Content provided by FirstRanker.com ---
implementation of quality control systems, as well as the provision of designs,drawings and materials specifications.
--- Content provided by FirstRanker.com ---
1.3.3 Key issues in technology transfer
The basic issues that need to be addressed by donor firms are how to transfer
--- Content provided by FirstRanker.com ---
technology to another country (via licensing, direct foreign investment, contractmanufacture under patent, etc.); whether to undertake research and technical
development in foreign locations; the choice of the technology that best it`s the
--- Content provided by FirstRanker.com ---
foreign environment; and how to maintain a technology-based competitive
advantage over time. The latter will involve (i) measures to protect trade secrets,
--- Content provided by FirstRanker.com ---
and (ii) ongoing R&D. Recipients of technology have to consider how best tointegrate new technologies into existing administrative structures and working
methods; the standards of skill required for their operation; the availability of
--- Content provided by FirstRanker.com ---
training facilities in the local area; and the extent of local grants and subsidies
for the introduction of new methods.
--- Content provided by FirstRanker.com ---
1.3.4 Reasons for technology transfer
Firms engage in technology transfer in order to :
--- Content provided by FirstRanker.com ---
Increase overall company profitability. Production may be cheaper abroad,and output does not have to be sent long distances to reach end consumers.
Gain a competitive edge in foreign markets through supplying technically
--- Content provided by FirstRanker.com ---
superior products (irrespective of short-run profitability considerations).
Obtain grants and subsidies from foreign governments. Note how certain
--- Content provided by FirstRanker.com ---
underdeveloped countries require MNCs to bring with them the latesttechnology as a condition of being allowed to operate within the local
market.
--- Content provided by FirstRanker.com ---
Overcome capacity limitations in the home country.
Exploit superior capital markets, access to skilled labour and other inputs in
--- Content provided by FirstRanker.com ---
foreign countries.Increase the competence and potential of foreign subsidiaries.
--- Content provided by FirstRanker.com ---
1.4. Make-or-Buy Decisions:
International businesses frequently face sourcing decisions, decisions about
--- Content provided by FirstRanker.com ---
whether they should make or buy the component parts that go into their finalproduct. Should the firm vertically integrate to manufacture its own component
parts or should it outsource them, or buy them from independent suppliers?
--- Content provided by FirstRanker.com ---
Make-or-buy decisions are important factors of many firm`s manufacturing
strategies.
--- Content provided by FirstRanker.com ---
Advantages of making inputs within the firm:- Full control over the quality and timing of supply
- Availability of input at lower cost
--- Content provided by FirstRanker.com ---
- Easy modification in design
- Maintenance of secrecy of technology
- Generation of profit through arbitrary pricing of inputs
--- Content provided by FirstRanker.com ---
Advantages of buying inputs from outside
- No additional investment for input manufacturing
--- Content provided by FirstRanker.com ---
- No need for acquiring technology required for input manufacturing,which may be inappropriate / obsolete
- Freedom to get inputs from the cheapest source
--- Content provided by FirstRanker.com ---
- Diversification of the sources of inputs leading to lower political and
exchange rate risk
--- Content provided by FirstRanker.com ---
- Operational flexibility in face of changing demand1.5. Material Management:
--- Content provided by FirstRanker.com ---
Materials management encompasses all the activities that move materials to a
manufacturing facility, through the manufacturing process, and out through a
--- Content provided by FirstRanker.com ---
distribution system to the end user. The materials management functionscomplicated in an international business by distance, time, exchange rates,
custom barriers, and other things. Just-in-time systems generate major cost
--- Content provided by FirstRanker.com ---
savings from reducing warehousing and inventory holding costs and from
reducing the need to write off excess inventory. In addition, JIT systems help the
--- Content provided by FirstRanker.com ---
firm spot defective parts and remove them from the manufacturing processquickly, hereby improving product quality. For a firm to establish a good
materials management function, it needs to legitimize materials management
--- Content provided by FirstRanker.com ---
within the organization. It can do this by giving materials management equal
footing with other functions.
--- Content provided by FirstRanker.com ---
1.6 International Services:
Although goods and services are more often complementary to each other, they
--- Content provided by FirstRanker.com ---
have different identifies. So the operations management in an internationalservice-providing firm is to some extent different. It is also different between a
service firm that is closely tagged with some manufacturing firms and an
--- Content provided by FirstRanker.com ---
independent service firm. There has been phenomenal growth in international
services such as banking and insurance, tourism related services, consultancy
--- Content provided by FirstRanker.com ---
and engineering services, and communication services. Factors responsible forgrowth are mostly the same as those applicable to manufacturing firms;
however, there are some additional factors.
--- Content provided by FirstRanker.com ---
Services providing firms have to face restrictive regulations in a number of
--- Content provided by FirstRanker.com ---
developing host countries; but the WTO has eased the problem by assuringmost-favoured-nations treatment for trade in services, by providing for
transparency in rules and regulations and by the free flow of payments in this
--- Content provided by FirstRanker.com ---
context. The operations management of service providing firm`s should stress,
among other things, a close relationship with consumers and flexibility in prices
--- Content provided by FirstRanker.com ---
as well as in the structure of operations. With the developments in informationcommunication technology, it is now possible to offshore a part of service
functions. It available cost advantage and is beneficial for both the home
--- Content provided by FirstRanker.com ---
country and the host country. Insight 1 describes the Make or Buy decisions at
the Boeing Company. Insight 2 throws light on how Dell Computers uses
--- Content provided by FirstRanker.com ---
information to reduce inventories.Insight 1
--- Content provided by FirstRanker.com ---
Make-or-Buy Decisions at the Boeing Company
The Boeing Company is the world`s largest manufacturer of commercial aircraft
--- Content provided by FirstRanker.com ---
with a 55 to 60 percent share of the global market. Despite its large marketshare, in recent years Boeing has found it tough going competitively. The
company`s problems are twofold. First, Boeing faces a very aggressive
--- Content provided by FirstRanker.com ---
competitor in Eurpoe`s Airbus Industrie. The dogfight between Boeing andAirbus for market share has enabled major airlines to play the two companies
off against each other in an attempt to bargain down the price for commercial jet
--- Content provided by FirstRanker.com ---
aircraft. Second, the airline business is quite cyclical and airlines sharply reduce
orders for new aircraft when their own business is in a downturn. This occurred
--- Content provided by FirstRanker.com ---
in the early 1990s and again in the early years of the new century. Duringdownturns, some of which can be extended, intense price competition often
occurs between Airbus and Boeing as they struggle to maintain market share and
--- Content provided by FirstRanker.com ---
order volume in the face of falling demand. Given these pricing pressures, the
only way that Boeing can maintain its profitability is to reduce its own
--- Content provided by FirstRanker.com ---
manufacturing costs. With this in mind, during the 1990s Boeing launched anongoing company wide review of its make-or-buy decisions. The objective was
to identify activities that could be outsourced to subcontractors, both in the
--- Content provided by FirstRanker.com ---
United States and abroad to drive down production costs.
--- Content provided by FirstRanker.com ---
When making outsourcing decisions, Boeing applies a number of
criteria. First, Boeing applies a number of criteria. First, Boeing looks at the
--- Content provided by FirstRanker.com ---
basic economics of the outsourcing decision. The central issue here is whether
an activity could be performed more cost-effectively by an outside manufacturer
--- Content provided by FirstRanker.com ---
or by Boeing. Second, Boeing considers the strategic risk associated withoutsourcing in activity. Boeing decided it would not outsource any activity that
it deemed to be part of its long-term competitive advantage. For example, the
--- Content provided by FirstRanker.com ---
company has decided not to outsource the production of wings because it
believed that doing so might give away valuable technology to potential
--- Content provided by FirstRanker.com ---
competitors. Third, Boeing looks at the operational risk associated withoutsourcing an activity. The basic objective is to make sure Boeing does not
become too department on a single outside supplier for critical components.
--- Content provided by FirstRanker.com ---
Boeing`s philosophy is to hedge operational risk by purchasing from two ormore suppliers. Finally, Boeing considers whether it makes sense to outsource
certain activities to a supplier in a given country to help secure orders for
--- Content provided by FirstRanker.com ---
commercial jet aircraft from that country. This practice is known as offsetting,
and it is common in many industries. For example, Boeing decided to outsource
--- Content provided by FirstRanker.com ---
the production of certain components to China. This decision was influenced byforecasts suggesting that the Chinese will purchase over $100 billion worth of
commercial jets over the next 20 years. Boeing`s hope is that pushing some
--- Content provided by FirstRanker.com ---
subcontracting work China`s way will help it gain a larger share of this market
than its global competitor, Airbus.
--- Content provided by FirstRanker.com ---
One of the first decisions to come out of this process was a move to
--- Content provided by FirstRanker.com ---
outsource the production of insulation blankets for 737 and 757 aircraft to
suppliers in Mexico. Insulation blankets are wrapped around the inside of the
--- Content provided by FirstRanker.com ---
fuselage of an aircraft to keep the interior warm at high altitudes. Boeing hastraditionally made these blankets in-house, but found that it could save $50
million per year by outsourcing production to a Mexican supplier. In total,
--- Content provided by FirstRanker.com ---
Boeing reckons that outsourcing cuts its annual cost structure by $500 million
per year.
--- Content provided by FirstRanker.com ---
Insight 2
Dell Computer ? Replacing Inventories with Information
--- Content provided by FirstRanker.com ---
Michael Dell started Dell Computer Corporation in 1984 when he was an
--- Content provided by FirstRanker.com ---
undergraduate student at the University of Texas. Sixteen years later Dell hadgrown to become one of the world`s great computer companies, with a leading
share in the personal computer and server businesses, and global sales of $32
--- Content provided by FirstRanker.com ---
billion, one-third of which are made outside the United States. To support itsglobal business, Dell has manufacturing sites in Brazil, Ireland, Malaysia, and
China, in addition to the United States. Its suppliers, more than half of which
--- Content provided by FirstRanker.com ---
are located outside the United States. Some 30 suppliers accounting for about
75 percent of Dell`s total purchases. Over 50 percent of its major suppliers are
--- Content provided by FirstRanker.com ---
in Asia.--- Content provided by FirstRanker.com ---
From inception, Dell`s business model was based on direct selling to
customers, cutting out wholesalers and retails. The o original thought was that
--- Content provided by FirstRanker.com ---
by cutting out the middleman in the distribution chain, Dell could offerconsumers lower prices. Initially, direct selling was achieved through mailings
and telephone contacts, but since the mid-1990s the majority of Dell`s sales
--- Content provided by FirstRanker.com ---
have been made over the Internet, and by 2000, some 80 percent of all sales
were made through this medium. Internet selling has enabled Dell to offer its
--- Content provided by FirstRanker.com ---
customers the ability to customize their orders, mixing and matching productfeatures such as microprocessors, memory, monitors, internal hard drives, CD
and DVD drives, keyboard and mouse format, and the like, to get the system
--- Content provided by FirstRanker.com ---
that best suits their particular requirements.
--- Content provided by FirstRanker.com ---
While the ability to customize products, when combined with low prices,
has made Dell very attractive to customers, the real power of the business model
--- Content provided by FirstRanker.com ---
is to be found in how Dell manages its global supply chain to minimize
inventory while building PCs to individual customer orders within three days.
--- Content provided by FirstRanker.com ---
Dell uses the Internet to feed real-time information about order flow to itssuppliers. Dell`s suppliers have up-to-the-minute information about demand
trends for the components they produce, along with volume expectations of the
--- Content provided by FirstRanker.com ---
next 4 to 12 weeks that are constantly updated as new information becomes
available. Dell`s suppliers use this information to adjust their own production
schedules on a real-time basis, producing just enough components for Dell`s
--- Content provided by FirstRanker.com ---
needs and shipping them by the most appropriate mode, typically truck or air
express so that they arrive just in time for production. This tight coordination is
--- Content provided by FirstRanker.com ---
being pushed back even further down the supply chain, with Dell sharing keydata with its supplier`s principal suppliers. For example, Selectron builds
motherboards for Dell that incorporate digital signal processing chips from
--- Content provided by FirstRanker.com ---
Texas Instruments. To better coordinate the supply chain, Dell passes
information to Texas Instruments in addition to Selectron, This allows Texas
--- Content provided by FirstRanker.com ---
Instrument to adjust its schedules to Selectron`s needs, which in turn adjusts itsschedule to order data from Dell.
--- Content provided by FirstRanker.com ---
Dell`s ultimate goal is to drive all inventories out of the supply chain
--- Content provided by FirstRanker.com ---
apart from that in transit between suppliers and Dell, effectively replacinginventory with information. Although Dell has not yet achieved this goal, the
firm has reduced inventory to the lowest level in the industry. Dell caries about
--- Content provided by FirstRanker.com ---
five days of inventory on hand, compared to 30, 45, or even 90 days` worth at
competitors such as Compaq Computer inventory, where component costs
--- Content provided by FirstRanker.com ---
account for 75 percent of revenues and typically fall by 1 percent per week dueto rapid obsolescence. For example, when larger, faster hard drives are
introduced, which occurs every three to six months, the value of previous-
--- Content provided by FirstRanker.com ---
generation hard drives is significantly reduced. So if Dell holds one week of
inventory, and a competitor holds four weeks, this translates immediately into 3
--- Content provided by FirstRanker.com ---
percent worth of component cost advantage to Dell, which can mean a 2 percentadvantage on the bottom line.
--- Content provided by FirstRanker.com ---
Dell`s Internet-based customer ordering and procurement systems have
--- Content provided by FirstRanker.com ---
also allowed the company to synchronize demand and supply to an extent thatfew other companies can. For example, if Del sees that it is running out of a
particular component, say 17-inch monitors from Sony, it can manipulate
--- Content provided by FirstRanker.com ---
demand by offering a 19-inch model at a lower price until Sony delivers more17-inch monitors. By taking such steps to fine-tune the balance between
demand and supply, Dell can meet customer`s expectations. Also balancing
--- Content provided by FirstRanker.com ---
supply and demand allows the company to minimize excess and obsolete
inventory. Dell writes off between 0.05 percent and 0.1 percent of total
--- Content provided by FirstRanker.com ---
materials costs in excess or obsolete inventory. Its competitors write offbetween 2 percent and 3 percent, which again gives Dell a significant cost
advantage.
--- Content provided by FirstRanker.com ---
1.7 Summary:
--- Content provided by FirstRanker.com ---
The operations strategy of an international firm is concerned primarily with thelocation of the manufacturing activities, inventory management, sourcing of the
inputs, and supportive logistics. Location may be centralised, reaping economies
--- Content provided by FirstRanker.com ---
of scale and some other benefits. It may be decentralised at the subsidiaries
level, keeping in view the specific demand of consumers. Again, the firm may
--- Content provided by FirstRanker.com ---
have a vertical set up, locating different activities of production in differentcountries. The decision depends on the size of the market; availability of inputs;
state of logistics; and political, legal, and socio-cultural environment. The
--- Content provided by FirstRanker.com ---
strategy aims at minimising cost, maintenance of quality, and at production
flexibility.
--- Content provided by FirstRanker.com ---
As regards inventory management, an international firm normally places orders
for a greater amount of stock than warranted by the economic order quantity.
--- Content provided by FirstRanker.com ---
This is known as stockpiling, and is done in order to avoid various risks in
international transactions. Similarly, the re-order point lies much earlier,
--- Content provided by FirstRanker.com ---
keeping in view the distance between the user and the supplier and theobstructions coming in the way. The JIT system of inventory management is
often applied. It saves carrying cost, but the risk of delayed transit of goods
--- Content provided by FirstRanker.com ---
cannot be easily avoided. Inputs are either sourced from another independentfirm or manufactured by the firm itself. The international manager takes the
make or buy decision only after weighing the cost and benefits of the two
--- Content provided by FirstRanker.com ---
alternatives. The procurement may be made through imports, through
procurement offices abroad, or through direct in vestment.
--- Content provided by FirstRanker.com ---
International logistics are concerned with the movement of inventory. However,
there are a couple of problems associated with logistics. One is of general
--- Content provided by FirstRanker.com ---
nature, and is common to all host countries. The other is specific, and varies
from one host country to another. The transportation issue dominates logistics
--- Content provided by FirstRanker.com ---
management. The transportation network should be well developed. The madeof transport should be chosen based on the cost, availability, and actual need.
Packaging and storage are other important elements of international logistics.
--- Content provided by FirstRanker.com ---
Packaging should consider cost and quality. Similarly, when warehouses are
created, their location, size, and the availability facilities are the main points for
--- Content provided by FirstRanker.com ---
consideration.--- Content provided by FirstRanker.com ---
1.8 Glossary:
--- Content provided by FirstRanker.com ---
Flexible manufacturing technology: Also known as lean production covers arange of manufacturing technologies designed to (1) reduce setup times for
complex equipment, (2) increase the utilization of individual machines through
--- Content provided by FirstRanker.com ---
better scheduling, and (3) improve quality control at all stages of the
manufacturing process. Flexible manufacturing technologies allow the company
to produce a wider variety of end products at a unit cost that at one time could
--- Content provided by FirstRanker.com ---
only be achieved through the mass production of a standardized output.
--- Content provided by FirstRanker.com ---
Minimum Efficient Scale: As plant output expands, unit costs decrease.However, beyond a certain level of output, few additional scale economies are
available. Thus, the Unit Cost Curve declines with output until a certain
--- Content provided by FirstRanker.com ---
output level is reached, at which point further increases in output realize little
reduction in unit costs. The level of output at which most plant-level scale
--- Content provided by FirstRanker.com ---
economies are exhausted is referred to as the minimum efficient scale of output.This is the scale of output a plant must operate at to realize all major plant-level
scale economies.
--- Content provided by FirstRanker.com ---
Logistics: is a process involving movement of inputs from supplier to the firm
--- Content provided by FirstRanker.com ---
and of the finished product from the firm to the market.JIT system: In Just In Time (JIT) system inputs reach the manufacturing
--- Content provided by FirstRanker.com ---
location just when they are required.
--- Content provided by FirstRanker.com ---
Make-or-Buy decision refers to procurement of inputs: from within thefirm/from outside sources.
Diffusion of technology means transfer of technology without much care to
--- Content provided by FirstRanker.com ---
maintain secrecy.
--- Content provided by FirstRanker.com ---
Technology Audit: Technology audit is the process of, identifying a particulartechnology, the firm`s capabilities to develop it, and the funds required
developing it.
--- Content provided by FirstRanker.com ---
Patent: Innovated technology can be protected through and Patent Trademark.
Patent rewards the innovator with temporary monopoly rights.
--- Content provided by FirstRanker.com ---
Trademark is a unique mark on the product that differentiates it from similar
--- Content provided by FirstRanker.com ---
products of rival firms.--- Content provided by FirstRanker.com ---
1.9 Self Assessment Questions:
--- Content provided by FirstRanker.com ---
1. What are the different options for the location of an international firm? Whatare the factors influencing location?
2. What are the major issues in Technology Management that an international
--- Content provided by FirstRanker.com ---
firm may confront?
3. Comment on the make or buy decision as far as sourcing of input is
--- Content provided by FirstRanker.com ---
concerned in an international firm.4. Is inventory management in an international firm different from that in a
domestic firm? Explain.
--- Content provided by FirstRanker.com ---
1.10 Further Readings:
--- Content provided by FirstRanker.com ---
18. Manab Adhikary, Global Business Management In an InternationalEconomic Environment (2001), Macmillan India Limited, New Delhi.
19. Vyuptakesh Sharan, International Business, Concept, Environment and
--- Content provided by FirstRanker.com ---
strategy (2006), Dorling Kindersley (India) Pvt. Ltd, New Delhi
20. Charles W.L.Hill, International Business, Competing in the Global
--- Content provided by FirstRanker.com ---
Marketplace (2003), Tata Mc-Graw-HillPublishing Company Limited, NewDelhi.
--- Content provided by FirstRanker.com ---
Lesson 3: ? International Business Strategy - Marketing and Financial
Dimensions
--- Content provided by FirstRanker.com ---
Objectives:After studying this lesson you should be able:
To understand issues related with marketing of goods and services globally
--- Content provided by FirstRanker.com ---
To know the international marketing strategies adopted by MNCs
To know the basic concepts of multinational financial management
--- Content provided by FirstRanker.com ---
Structure1.47 Introduction
1.48 International Marketing
--- Content provided by FirstRanker.com ---
1.49 International Finance
1.50 Summary
--- Content provided by FirstRanker.com ---
1.51 Glossary1.52 Self Assessment Questions
1.53 Further Readings
--- Content provided by FirstRanker.com ---
1.1 Introduction:
Global business management in today`s world is full of prospects as well as
--- Content provided by FirstRanker.com ---
problems. The parameters of global business management need to be evaluatedin their functional setting. Thus we can speak of international marketing,
international finance, international negotiations, international legality and ethics,
--- Content provided by FirstRanker.com ---
international management of staff across different culture. Given the perspective
of the emerging international business environment, the challenges of global
--- Content provided by FirstRanker.com ---
business management can be identified, analysed and appreciated. After all,business has to always operate under risks and uncertainty. Business risks are
numerous in number and various in form ? there are market risks, product risks,
--- Content provided by FirstRanker.com ---
process risks, technology risks, investment risks, etc. Country risk analysis is a
precondition for business strategy formulation. Some of these risk elements are
not calculable and the risks, which are undefined, constitute the element of
--- Content provided by FirstRanker.com ---
business uncertainty. Global business forecasting is an attempt to minimize and
control these risks and uncertainties involved in global business operations. The
--- Content provided by FirstRanker.com ---
following sections throws light on some of the important functional dimensionsof international business strategy.
1.2 International Marketing:
--- Content provided by FirstRanker.com ---
The world is getting smaller day by day. As trade barriers among nations get
reduced, communication, travel, and transport have made the world a smaller
--- Content provided by FirstRanker.com ---
place, customer needs across the world are getting homogenized. Globalmarketing is the only way to satisfy these needs. Global marketing differs from
export and inter-national marketing in terms of focus, goals, and content. In
--- Content provided by FirstRanker.com ---
global marketing, the firm`s focus is the world as a market place, thus diffusing
the difference between the home, domestic, or foreign markets. The goal is to
--- Content provided by FirstRanker.com ---
maximize efficiency and returns on investment in the world market and thestrategy is dictated by local country market conditions like customer
preferences, laws, and competition. In evolving a global marketing strategy the
--- Content provided by FirstRanker.com ---
firm has to consider alternatives like standardization (full or partial),
differentiation (full or partial), localization, and nichemanship. Lead market
--- Content provided by FirstRanker.com ---
model and insiderization are important tools for developing a global product.Headquarters should involve local management teams for an effective marketing
strategy and gaining higher market penetration in different country markets.
--- Content provided by FirstRanker.com ---
Exhibit 3.1 depicts the major decisions in international marketing.
Exhibit: 3.1
--- Content provided by FirstRanker.com ---
Major Decisions in International Marketing:Deciding
--- Content provided by FirstRanker.com ---
Deciding
Deciding how
--- Content provided by FirstRanker.com ---
Deciding on theDeciding on the
to enter the
--- Content provided by FirstRanker.com ---
marketing
marketing
--- Content provided by FirstRanker.com ---
whether towhich
market
--- Content provided by FirstRanker.com ---
program
organisation
--- Content provided by FirstRanker.com ---
go abroadmarkets to
enter
--- Content provided by FirstRanker.com ---
Companies cannot simply stay domestic and expect to maintain their markets.
--- Content provided by FirstRanker.com ---
Despite the many challenges in the international arena (shifting borders,
unstable
--- Content provided by FirstRanker.com ---
governments,foreign-exchange
problems,
--- Content provided by FirstRanker.com ---
corruption,
and
--- Content provided by FirstRanker.com ---
technological pirating), companies selling in global industries need tointernationalize their operations. In deciding to go abroad, a company needs to
define its international marketing objectives and policies. The company must
--- Content provided by FirstRanker.com ---
determine whether to market in a few countries or many countries. It must
decide which countries to consider. In general, the candidate countries should
--- Content provided by FirstRanker.com ---
be rated on three criteria: market attractiveness, risk, and competitive advantage.Once a company decides on a particular country, it must determine the best
--- Content provided by FirstRanker.com ---
mode of entry. Its broad choices are indirect exporting, direct exporting,
licensing, joint ventures, and direct investment. Each succeeding strategy
--- Content provided by FirstRanker.com ---
involves more commitment, risk, control, and profit potential. In deciding on themarketing program, a company must decide how much to adapt its marketing
mix (product, promotion, price, and place) to local conditions. The two ends of
--- Content provided by FirstRanker.com ---
the spectrum are standardized and adapted marketing mixes, with many steps in
between. At the product level, firms can pursue a strategy of straight extension,
--- Content provided by FirstRanker.com ---
product adaptation, or product invention. At the promotion level, firms maychoose communication adaptation or dual adaptation. Exhibit 3.2 depicts the
five international product and promotion strategies. At the price level, firms
--- Content provided by FirstRanker.com ---
may encounter price escalation and gray markets. At the distribution level,
firms need to take a whole-channel view of the challenge of distributing
--- Content provided by FirstRanker.com ---
products to the final users. In creating all elements of the marketing mix, firmsmust be aware of the cultural, social, political, technological, environmental, and
legal limitations they face in other countries. Depending on the level of
--- Content provided by FirstRanker.com ---
international involvement, companies manage their international marketingactivity in three ways: through export departments, international divisions, or a
global organization.
--- Content provided by FirstRanker.com ---
Exhibit 3.2
Five International Product and Promotion Strategies
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
Product
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
Do not changeAdapt
--- Content provided by FirstRanker.com ---
Develop New
--- Content provided by FirstRanker.com ---
Product
--- Content provided by FirstRanker.com ---
Product
--- Content provided by FirstRanker.com ---
Do not C Phraonduc
ge t
--- Content provided by FirstRanker.com ---
Promotion
ion
--- Content provided by FirstRanker.com ---
ot
om
--- Content provided by FirstRanker.com ---
rP Adapt Prom S
ot tr
--- Content provided by FirstRanker.com ---
ioain g
ht
--- Content provided by FirstRanker.com ---
Product
--- Content provided by FirstRanker.com ---
extensionadaptation
Product invention
--- Content provided by FirstRanker.com ---
Communication
Dual
--- Content provided by FirstRanker.com ---
adaptationadaptation
1.2.1. Global Competitive Strategy:
--- Content provided by FirstRanker.com ---
A global competitive marketing strategy is based on the strategic intent of a
global firm. Hamel and Prahlad in their article Do you really have a global
--- Content provided by FirstRanker.com ---
strategy` published in Harvard Business Review found that their sample firmshad three strategic intents, as mentioned below:
(a) building a global presence
--- Content provided by FirstRanker.com ---
(b) defending a domestic position
(c) overcoming national fragmentation
--- Content provided by FirstRanker.com ---
The authors studied the world television industry and found that Japanese firms
focused on building a global presence. US firms defend their domestic position
--- Content provided by FirstRanker.com ---
in the US market against the Japanese onslaught, and European firms fought toovercome national fragmentation. They also found that in each of these firms
the different strategies were like a loose brick, each of which helped them
--- Content provided by FirstRanker.com ---
achieve their goal. In developing a global competitive marketing strategy, a
firm needs to adopt an innovative approach to valuing the market share in
--- Content provided by FirstRanker.com ---
different countries. Competitiveness of a firm will vary in different markets.Several firms have become truly global organizations. People in different
--- Content provided by FirstRanker.com ---
countries are using more global brands than local brands. Some of the local
brands become global. Developing a global strategy is of paramount importance
--- Content provided by FirstRanker.com ---
to brand builders everywhere. For many companies, however, global brandinghas been both a blessing and a curse. A global branding program can lower
marketing costs, realize greater economies of scale in production, and provide a
--- Content provided by FirstRanker.com ---
long-term source of growth; but if not designed and implemented properly, it
may ignore important differences in consumer behaviour and/or the competitive
--- Content provided by FirstRanker.com ---
environment in the individual countries. How McDonald`s designing itsbusiness model in Indian context can be known through Insight 1. How local
celebrities from India became brand ambassadors to global companies can be
--- Content provided by FirstRanker.com ---
observed from Insight 2.
--- Content provided by FirstRanker.com ---
Insight 1
--- Content provided by FirstRanker.com ---
McDonald's gears up for home runAfter making its way to your hearts through your stomachs, fastfood major McDonald's is
--- Content provided by FirstRanker.com ---
now
planning
--- Content provided by FirstRanker.com ---
anotherstrategy
to
--- Content provided by FirstRanker.com ---
build
its
--- Content provided by FirstRanker.com ---
brandacross
India.
--- Content provided by FirstRanker.com ---
The company will soon have a national footprint for its McDelivery format. The quick
service restaurant (QSR) chain will be rolling out its home delivery format across the
--- Content provided by FirstRanker.com ---
country within the next few months. Soft-launched in '04, the company had maintained alow profile on the home delivery channel. "We were soft-pedalling it (the channel)
because we were deliberating on a uniform model for all our stores.
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
Insight 2
Local celebrities global connect
--- Content provided by FirstRanker.com ---
What's Saif Ali Khan doing on Mexican television? And why is Shah Rukh Khan wooing
--- Content provided by FirstRanker.com ---
super-rich Canadians? Or for that matter, why is Sania Mirza featuring in North American andEuropean tennis channels and what are Rahul Dravid posters doing in a non-cricketing nation
like the US? No, we aren't testing your trivia quotient. This is about desi celebs and their brand
muscle. Outside the country, Indian celebrities are finally coming of age in the world of
--- Content provided by FirstRanker.com ---
international advertising. There is an emerging trend where multinational brands which have
signed Indian brand ambassadors are now using them for international campaigns. Interestingly,
in some cases these brands are not targeting the NRI market alone. Sometimes the
--- Content provided by FirstRanker.com ---
commonalties between India and other international markets drive the celeb choice. TakeLenovo. The company signed on Saif Ali Khan recently as its brand ambassador and is using
him in Mexico as well as Latin America, apart from North America. Says Anirban Das Blah,
--- Content provided by FirstRanker.com ---
VP, Globosport, the sports and entertainment management company which manages Saif Ali
Khan, Lenovo asked for Saif for their brand promotions in Mexico. It even beats us why they
are using him but it is definitely proof that the Indian brand ambassador has grown. Miss India
--- Content provided by FirstRanker.com ---
aspirants who went on to win global pageants have been used for international campaigns in thepast, but now, a whole host of other Indian celebs are also being tapped. And it's not just
Bollywood all the way. MNCs are using Indian brand ambassadors for their brands in global
--- Content provided by FirstRanker.com ---
campaigns. Take the case of Rahul Dravid, the latest brand ambassador for Japanese watchmaker Citizen. He has signed a global endorsement contract with the brand which will see him
promote Citizen products not just in India but also in the US. According to Hideaki Nakazaki,
--- Content provided by FirstRanker.com ---
managing director of Citizen Watches India, Our brand managers in America would be usingRahul Dravid in ad campaigns prior to the upcoming cricket World Cup in the West Indies.
Citizen looks at the Indian diaspora as a sizeable market with high disposable income. The
--- Content provided by FirstRanker.com ---
trend of using Indian celebs abroad is also linked to the product category to which the brand
belongs. It is more common for luxury products like watches. So, Bollywood star Shah Rukh
--- Content provided by FirstRanker.com ---
Khan is a global brand ambassador for Tag Heuer. Shah Rukh Khan is a bigger star outside--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
1.3 International Finance:
--- Content provided by FirstRanker.com ---
The field of multinational business finance is somewhat a blend, which
combines elements of corporate finance with international economics. However,
--- Content provided by FirstRanker.com ---
it is not merely an extension of these fields using international examples. On thecontrary, it challenges some of the basic concepts of these fields. MNCs face
unique risks that do not hamper domestic firms as much. These risks are related
--- Content provided by FirstRanker.com ---
to foreign exchange risks and political risks. The following subsections deal
with some of the important factors, which influence international financial
--- Content provided by FirstRanker.com ---
strategy.1.3.1. Foreign exchange Risk: Foreign exchange risks for MNCs might raise
--- Content provided by FirstRanker.com ---
their cost of capital and lower their optimal debt ratios. Foreign exchange risks
cause MNCs to alter ? typically upward - their hurdle rates for projects located
in countries with volatile currencies and economies. MNCs encounter three
--- Content provided by FirstRanker.com ---
types of currency exposure: (1) transaction exposure; (2) operating exposure;
and (3) accounting (translation) exposure.
--- Content provided by FirstRanker.com ---
a) Transaction exposure measures gains or losses that arise from the settlement
of financial obligations whose terms are stated in a foreign currency.
--- Content provided by FirstRanker.com ---
Transaction exposure arises from (1) purchasing or selling on credit goods or
services whose prices are stated in foreign currencies; (2) borrowing or lending
--- Content provided by FirstRanker.com ---
funds when repayment is to be made in a foreign currency; (3) being a party toan unperformed forward foreign exchange contract; and (4) otherwise acquiring
assets or liabilities denominated in foreign currencies.
--- Content provided by FirstRanker.com ---
b) Operating exposure measures the change in value of the firm that results
--- Content provided by FirstRanker.com ---
from changes in future operating cash flows caused by an unexpected change inexchange rates. The objective of operating exposure management is to
anticipate and influence the effect of unexpected changes in exchange rates on a
--- Content provided by FirstRanker.com ---
firm`s future cash flow, rather than being forced into passive reaction to such
changes. This task can best be accomplished if a firm diversifies internationally
--- Content provided by FirstRanker.com ---
both its operations and its financing base.c) Accounting exposure results from translating foreign-currency-denominated
--- Content provided by FirstRanker.com ---
statements of foreign affiliates into the parent`s reporting currency so the parent
can prepare consolidated financial statements. Accounting exposure is the
--- Content provided by FirstRanker.com ---
potential for loss or gain from this translation process.1.3.1. Political Risk: MNCs face political risk premiums on their activities in
--- Content provided by FirstRanker.com ---
unstable or emerging overseas markets. Political risk premiums may increase thecost of debt and equity for MNCs resident in such markets. Most political risk
arises because of a conflict in goals between host governments and firms when
--- Content provided by FirstRanker.com ---
the normal functioning of governmental administrative and legislative process
leads to regulations that influence the well being of the firm. In recent years,
--- Content provided by FirstRanker.com ---
ethnic, religious, racial, and civic strife have added another dimension to thepolitical risks faced by MNCs. MNCs are usually welcome in host countries to
the extent that they transfer technology, market access, and investment capital.
--- Content provided by FirstRanker.com ---
The FDI decision results from a complex process involving strategic, behavioral,
and economic considerations.
--- Content provided by FirstRanker.com ---
1.3.3. International monetary system:
The international monetary system gives the structure within which foreign
--- Content provided by FirstRanker.com ---
exchange rates are determined, international trade and capital flows are
accommodated, and balance of payments adjustments made. It also includes all
--- Content provided by FirstRanker.com ---
the instruments, institutions, and agreements that link together the world`scurrency, money markets. Securities, real estate, and commodity markets.
Understanding contemporary currency regimes, shielding against the ill affects
--- Content provided by FirstRanker.com ---
of currency crises, knowing the derivative products, following hedging
technique, and observing the exchange rate changes forms the basic set of duties
--- Content provided by FirstRanker.com ---
of global manger.1.3.4. Interest rates
--- Content provided by FirstRanker.com ---
The increasing volatility of world interest rates, combined with the increasing
use of short-term and variable-rate debt by firms worldwide, has led many firms
--- Content provided by FirstRanker.com ---
to actively manage their interest rate risks. The primary sources of interest raterisk to a multinational non-financial firm are short-term borrowing and
investing, as well as long-term sources of debt. The techniques and instruments
--- Content provided by FirstRanker.com ---
used in interest rate risk-management in many ways resemble those used incurrency risk-management: the old tried-and-true methods of lending and
borrowing combined with the new methods of option-based derivatives. The
--- Content provided by FirstRanker.com ---
primary instruments and techniques used for interest rate risk-management
include forward rate agreements (FRAs), forward swaps, interest rate futures,
--- Content provided by FirstRanker.com ---
and interest rate and currency swaps. The interest rate and currency swapmarkets allow firms that have limited access to specific and interest rate
structures to gain access at relatively low costs. This access in turn allows these
--- Content provided by FirstRanker.com ---
firms to manage their currency and interest rate risks more effectively.
--- Content provided by FirstRanker.com ---
1.3.5. Market Imperfections:Market imperfections provide the rationale for the continued prosperity of
MNCs. This rationale allows MNCs to make abnormal profits and to reduce risk
--- Content provided by FirstRanker.com ---
through diversification. Capital market segmentation is a financial market
imperfection caused by government constraints and investor perceptions. The
--- Content provided by FirstRanker.com ---
most important imperfections are (1) asymmetric information: (2) transactioncosts; (3) foreign exchange risk; (4) takeover defenses; (5) small-country bias:
(6) political risk; and (7) regulatory barriers.
--- Content provided by FirstRanker.com ---
MNCs with their superior information tries to encash market imperfections.
--- Content provided by FirstRanker.com ---
They use arbitrage as a means to achieve profit. Arbitrage has traditionally beendefined as the purchase of securities or commodities on one market for
immediate resale on another in order to profit from a price discrepancy.
--- Content provided by FirstRanker.com ---
However, in recent years arbitrage has been used to describe a broader range of
activities. Tax arbitrage, for example, involves the shifting of gains or losses
--- Content provided by FirstRanker.com ---
from one tax jurisdiction to another in order to profit from differences in taxrates. In a broader context, risk arbitrage, or speculation, describes the process
that leads to equality of risk-adjusted returns on different securities, unless
--- Content provided by FirstRanker.com ---
market imperfections that hinder this adjustment process exist. In fact, it is theprocess of arbitrage that ensures market efficiency. MNCs constantly seek
opportunities at global level.
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
1.3.7. Capital Budgeting Decision- Adjusting for Risk in Foreign
--- Content provided by FirstRanker.com ---
Investments:
--- Content provided by FirstRanker.com ---
Capital budgeting for foreign projects involves many complexities that do not
exist in domestic projects. A foreign project should be judged on its net present
--- Content provided by FirstRanker.com ---
value from the viewpoint of funds that can be freely remitted to the parent.
Comparison of a project`s net present value to similar projects in the host
--- Content provided by FirstRanker.com ---
country is useful for evaluating expected performance relative to potential.Rates of return were calculated from both the projects` viewpoint and the
parent`s viewpoint. Once the most likely outcome has been determined, a
--- Content provided by FirstRanker.com ---
sensitivity analysis is normally undertaken. Foreign project returns are
particularly sensitive to changes in assumptions about exchange rate
--- Content provided by FirstRanker.com ---
developments, political risk, and the way the repatriation of funds is structured.--- Content provided by FirstRanker.com ---
A MNC undertaking foreign direct investment (FDI) must determine the cost of
funds and the required returns on the investment. The MNC must weigh the
--- Content provided by FirstRanker.com ---
expected cash flow returns and business prospects against the possibilities ofpolitical disruption or intervention, political and economic actions that
undermine the business environment, or restrictions and regulations on the
--- Content provided by FirstRanker.com ---
activities of foreign MNCs operating in the country. Risks associated withforeign investments are inherently subjective, qualitative not quantitative.
Shareholders, however, expect the management of the MNC to assess the risks,
--- Content provided by FirstRanker.com ---
make informed and consistent judgements, and manage them responsibly.
Traditional definitions of risk emphasize the potential for loss, a form of one-
--- Content provided by FirstRanker.com ---
sided risk. For a MNC, examples of these one-sided risks include the risk ofexpropriation and the risk of funds blockages. Other risks, however, are
definitively two-sided in character. The most obvious one for MNCs is foreign
--- Content provided by FirstRanker.com ---
exchange risk. The foreign risks of a project from the viewpoint of the parent
company include the risk of host government interference-political risk; the
--- Content provided by FirstRanker.com ---
ability to exercise effective control over the foreign affiliate within the country`slegal environment-governance risk; the ability to move capital freely and
efficiently in and out of the host country-transfer risk; and the value of the
--- Content provided by FirstRanker.com ---
local currency cash flows generated and remitted to the parent in parent currency
terms-foreign exchange risk. These risks from the parent perspective are
--- Content provided by FirstRanker.com ---
collectively referred to as country risk.1.3.8. Tax Planning:
--- Content provided by FirstRanker.com ---
Tax planning for multinational operations is a complex technical subject that
requires the inputs of experienced tax and legal counsel in both parent and host
--- Content provided by FirstRanker.com ---
countries. Nevertheless, the financial manager of a MNC should be acquaintedwith the national tax environments in the host countries in which the firm
operates. This environment includes the role of local income taxes, value-added
--- Content provided by FirstRanker.com ---
taxes, and other indirect taxes, and the less tangible aspects of local tax morality.
The financial executive must also understand how the parent country taxes
--- Content provided by FirstRanker.com ---
foreign-source income in order to organize efficiently for foreign operations.Important considerations include how the parent`s country views tax neutrality
as well as how it treats tax deferral, foreign tax credits, and intercompany
--- Content provided by FirstRanker.com ---
transactions. Bilateral tax treaties may also influence the way foreign operationsare structured. Finally, the financial manager must choose the specific
organization form that would be optimal for each foreign location as well as for
--- Content provided by FirstRanker.com ---
the group as a whole. This activity typically involves choosing the branch or
corporate form of organization. It also might require use of one or more special-
--- Content provided by FirstRanker.com ---
purpose corporations or tax-haven affiliates.By shifting profits from high-tax to lower-tax nations, the MNC can reduce its
--- Content provided by FirstRanker.com ---
global tax payments. Similarly, the MNC`s ability to transfer funds among its
several units may allow it to circumvent currency controls and other regulations
--- Content provided by FirstRanker.com ---
and to tap previously inaccessible investment and financing opportunities.However, since most of the gains derive from the MNC`s skill at raking
advantage of openings in tax laws or regulatory barriers, governments do not
--- Content provided by FirstRanker.com ---
always appreciate the MNC`s capabilities and global profit-maximizing
behaviour. Thus, controversy has accompanied the international orientation of
--- Content provided by FirstRanker.com ---
the multinational corporation.1.4 Summary:
--- Content provided by FirstRanker.com ---
Most companies would prefer to remain domestic if their domestic market were
large enough. Managers would not need to learn other languages and laws, deal
--- Content provided by FirstRanker.com ---
with volatile currencies, face political and legal uncertainties, or redesign theirproducts to suit different customer needs and expectations. Yet several factors
are drawing more and more companies into the international arena. Because of
--- Content provided by FirstRanker.com ---
the competing advantages and risks, companies often do not act until some event
thrusts them into the international arena. Someone ? a domestic exporter, a
--- Content provided by FirstRanker.com ---
foreign importer, a foreign government ? solicits the company to sell abroad, orthe company is saddled with overcapacity and must find additional markets for
its goods. The business organizations have to decide whether to go abroad or
--- Content provided by FirstRanker.com ---
not. If yes then they have to decide which markets to enter. Then they have todecide how to enter the market. After that, the crucial issue is about deciding the
marketing program. Then they have to decide about the structure of marketing
--- Content provided by FirstRanker.com ---
organization. MNCs have to plan several issues before they finalise finance
strategy. Developments in global financial markets, introduction of new
--- Content provided by FirstRanker.com ---
financial securities, changes in regulatory framework, interlinkages of variousfinancial markets throws up a challenge on global financial manager. Both
international finance and international marketing functions are crucial for the
--- Content provided by FirstRanker.com ---
success of global business organizations.
--- Content provided by FirstRanker.com ---
1.5 Glossary:
Operating exposure: The potential for a change in expected cash flows, and
--- Content provided by FirstRanker.com ---
thus in value, of a foreign affiliate as a result of an unexpected change in
exchange rates. Also called economic exposure.
--- Content provided by FirstRanker.com ---
Revaluation: A rise in the foreign currency that is pegged to other currencies orgold. Also called appreciation`.
Transaction exposure: The potential for a change in the value of outstanding
--- Content provided by FirstRanker.com ---
financial obligations entered into prior to a change in exchange rates but not due
to be settled until after the exchange rates change.
--- Content provided by FirstRanker.com ---
Transfer Pricing: The setting of prices to be charged by one unit (such as aforeign affiliate) of a multiunit corporation to another unit (such as the parent
corporation) for goods or services sold between such related units.
--- Content provided by FirstRanker.com ---
Translation exposure: This is also called accounting exposure`. The potential
for an accounting ? derived change in owners` equity resulting from exchange
--- Content provided by FirstRanker.com ---
rate changes and the need to restate financial statements of foreign affiliates inthe single currency of the parent corporation so as to create a consolidated
financial statement.
--- Content provided by FirstRanker.com ---
Tax haven: A nation with moderate level of taxation and / or liberal taxincentives for undertaking specific activities such as exporting.
--- Content provided by FirstRanker.com ---
1.6 Self Assessment Questions:
1. What are the objectives of global competitive marketing strategy?
--- Content provided by FirstRanker.com ---
2. Describe various product and promotion strategies of internationalmarketing.
3. Describe the importance of international finance and list out various factors
--- Content provided by FirstRanker.com ---
to be considered while framing it.
4. What type of currency exposures normally a multinational corporation may
--- Content provided by FirstRanker.com ---
face?1.7 Further Readings:
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
21. Sak Onkvisist., John J.Shaw., International Marketing Analysis and Strategy
--- Content provided by FirstRanker.com ---
(1997), Prentice-Hall of India, New Delhi.
22. Warren J.Keegan, Global Marketing Management (1995), Prentice-Hall of
--- Content provided by FirstRanker.com ---
India, New Delhi.23. Alan C Shapiro, Multinational Financial Management (2002), Prentice-Hall
of India, New Delhi.
--- Content provided by FirstRanker.com ---
24. Vyuptakesh Sharan, International Business, Concept, Environment and
strategy (2006), Dorling Kindersley (India) Pvt. Ltd, New Delhi
--- Content provided by FirstRanker.com ---
25. Charles W.L.Hill, International Business, Competing in the GlobalMarketplace (2003), Tata Mc-Graw-HillPublishing Company Limited, New
Delhi.
--- Content provided by FirstRanker.com ---
Lesson 4:
--- Content provided by FirstRanker.com ---
International Business Strategy ? Legal, Political, Ethical and SocialResponsibility Dimensions
Objectives:
--- Content provided by FirstRanker.com ---
After studying this lesson you should be able:
To provide basic ideas and insights about the international business practices
--- Content provided by FirstRanker.com ---
To observe the legal issues involved in international businessTo understand the political issues having bearing on international business
strategy
--- Content provided by FirstRanker.com ---
To know the importance of ethical process in business decision making
To appreciate the importance of corporate social responsibility in changing
--- Content provided by FirstRanker.com ---
business arena.Structure
--- Content provided by FirstRanker.com ---
1.54 Introduction
1.55 Legal Issues in International Business
--- Content provided by FirstRanker.com ---
1.56 Political issues in International Business1.57 Ethical Issues
1.58 Social Responsibility of Global Business Firms
--- Content provided by FirstRanker.com ---
1.59 Summary
1.60 Glossary
--- Content provided by FirstRanker.com ---
1.61 Self Assessment Questions1.62 Further Readings
--- Content provided by FirstRanker.com ---
1.1 Introduction:
In a world in which change is the rule and not the exception, the key to
international competitiveness is the ability of management to adjust to change
--- Content provided by FirstRanker.com ---
and volatility at an ever faster rate. In the words of General Electric former
Chairman Jack Welch, I`m not here to predict the world. I`m here to be sure I`
--- Content provided by FirstRanker.com ---
ve got a company that is strong enough to respond to whatever happens.The rapid pace of change means that the new global manager needs detailed
--- Content provided by FirstRanker.com ---
knowledge of his or her own operation. The global manager must know how to
make the product, where the raw materials and parts come from, how they get
--- Content provided by FirstRanker.com ---
there, the alternatives, where the funds come from, and what their changingrelative value does to his or her bottom line. He or she must also understand the
political and economic choices facing key nations and how these choices will
--- Content provided by FirstRanker.com ---
affect the outcomes of his or her decisions. In making decisions for the global
company, managers search their array of plants in various nations for the most
--- Content provided by FirstRanker.com ---
cost-effective mix of supplies, components, transport, and funds. All this is donewith the constant awareness that the choices change and have to be made again
and again. The problem of constant change disturbs some managers. It always
--- Content provided by FirstRanker.com ---
has. But today`s global managers have to anticipate it, understand it, deal with it,
and turn it to their company`s advantage. The payoff to thinking globally is a
--- Content provided by FirstRanker.com ---
quality of decision making that enhances the firm`s prospects for survival,growth, and profitability in the evolving world economy. Understanding legal,
political, ethical and social issues of international business helps global business
--- Content provided by FirstRanker.com ---
firm in strategizing its business policy. In the following sections an attempt is
made to describe these factors.
--- Content provided by FirstRanker.com ---
1.2. Legal Issues in International Business:
This section examines the various legal issues to the conduct of international
--- Content provided by FirstRanker.com ---
business activities. Because of the variety of legal systems and the different
interpretations and enforcement mechanisms, the discussion must, of necessity,
be some-what general. Based on the same rationale, it is impossible for the top
--- Content provided by FirstRanker.com ---
management and legal staff at corporate headquarters to completely master the
knowledge of foreign law on their own. To appreciate the problem and subtlety
--- Content provided by FirstRanker.com ---
of foreign law, it is clearly necessary to consult local attorneys to find out how acompany`s operation may be constrained by particular laws. To deal with
problems related to bribery, incorporation, counterfeiting, and infringement, the
--- Content provided by FirstRanker.com ---
services of local attorneys are essential. Just as essential is the cooperation of the
governments of both the host and home countries.
--- Content provided by FirstRanker.com ---
All countries regulate trade and commerce with other countries and control theaccess of foreigners to national resources. Each country has its own unique
system of law, regulation, and custom that impacts the ability of the global
--- Content provided by FirstRanker.com ---
marketer to address market opportunities in a country. There are rules for
exporting and importing goods, people, money, and experience across national
--- Content provided by FirstRanker.com ---
boundaries. In addition there are industrial and consumer healthy and safetystandards and regulations as well as packaging labeling and advertising and
promotion regulations. The global marketer must operate in conformance with
--- Content provided by FirstRanker.com ---
each of these unique sets of national constraints. Frequently these constraints are
ambiguous and they are always undergoing change.
--- Content provided by FirstRanker.com ---
The legal environment is complex and dynamic, with different countries
claiming jurisdiction (or a lack of jurisdiction) over business operations. The
--- Content provided by FirstRanker.com ---
interaction among domestic, foreign, and international legal environments
creates new obstacles as well as new opportunities. A host country may use an
--- Content provided by FirstRanker.com ---
MNC`s subsidiary in its country as a method of influencing the MNC andsubsequently its home country`s policies. Likewise, the home country may
instruct the parent company to dictate its foreign subsidiary`s activities. It is
--- Content provided by FirstRanker.com ---
thus not uncommon to find a situation in which the firm is being pressured in
opposing directions by two governments. Still the MNC can use its global
network to counter such a threat by shifting or threatening to shift the affected
--- Content provided by FirstRanker.com ---
operations to other countries, thus lessening the governments` influence on its
behavior. It is this countervailing power that allows the company to have a great
--- Content provided by FirstRanker.com ---
deal of freedom in adjusting its business strategies. It is important to keep inmind that legal contracts and agreements can only be as good as the parties who
create them and the countries that enforce them. Therefore, a contract cannot be
--- Content provided by FirstRanker.com ---
used as a substitute for trust and understanding between parties or careful
screening of business partners.
--- Content provided by FirstRanker.com ---
1.3.Political issues in International Business:
The international manager`s political environment is complex and difficult
--- Content provided by FirstRanker.com ---
because of the interaction among domestic, foreign, and international politics. If
a product is imported or produced overseas, political groups and labor
--- Content provided by FirstRanker.com ---
organizations accuse the marketer of taking jobs away from people in the homecountry. On the other hand, foreign governments are not always receptive to
overseas capital and investment be cause of suspicions about the marketer`s
--- Content provided by FirstRanker.com ---
motives and commitment. When both the host country and the home country
have different political and national interests, their conflicting policies can
--- Content provided by FirstRanker.com ---
complicate the problem further. Because of the diversity of political andeconomic systems, governments develop varying philosophies. In some
circumstances, their political motives overshadow their economic logic. The
--- Content provided by FirstRanker.com ---
result is often that political risks ? such as expropriation, nationalization, and
restrictions ? are created against exports and/or imports and are likely inevitable.
--- Content provided by FirstRanker.com ---
Exhibit 3.1 illustrates micro and macro decomposition of Political risk.Exhibit 3.1
--- Content provided by FirstRanker.com ---
Micro-Macro Decompositions of political RiskPolitical Risk
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
Macro Risk
Micro Risk
--- Content provided by FirstRanker.com ---
(Affects all foreign
--- Content provided by FirstRanker.com ---
(Affects specificfirms)
firms or Industries)
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
Expropriation
Ethnic Strife
--- Content provided by FirstRanker.com ---
Goal Conflict
Corruption
--- Content provided by FirstRanker.com ---
(Directed
(Foreign firms
--- Content provided by FirstRanker.com ---
(Reasonable
(a way of life
--- Content provided by FirstRanker.com ---
toward
are only
--- Content provided by FirstRanker.com ---
goals of
in many
--- Content provided by FirstRanker.com ---
ownership ofbystanders but
government and
--- Content provided by FirstRanker.com ---
countries)
--- Content provided by FirstRanker.com ---
foreign firms)get hurt)
firms diverge)
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
International business decisions are thus affected by political considerations.When investing in a foreign country, companies must be sensitive to that
country`s political concerns. Because of the dynamic nature of politics in
--- Content provided by FirstRanker.com ---
general, companies should prepare a contingency plan to copy with changes that
occur in the political environment. To minimize political risk, companies
--- Content provided by FirstRanker.com ---
should attempt to accommodate the host country`s national interests bystimulating the economy, employing nationals, sharing business ownership with
local firms, and being civic-oriented. On the other hand, to protect their own
--- Content provided by FirstRanker.com ---
economic interests companies should maintain political neutrality, quietly lobby
for their goals, and shift risks to a third party through the purchase of political
--- Content provided by FirstRanker.com ---
insurance. Finally, a company should institute a monitoring system that allowsit to systematically and routinely evaluate the political situation. Some
companies view politics as an obstacle to their effort to enter foreign markets
--- Content provided by FirstRanker.com ---
and as a barrier to the efficient use of resources. For other companies, politicalproblems, instead of being perceived as entry barriers, are seen as challenges
and opportunities. According to firms with the more optimistic view, political
--- Content provided by FirstRanker.com ---
situations are merely environmental conditions that can be overcome and
managed. Political risks, through skillful adaptation and control, can thus be
--- Content provided by FirstRanker.com ---
reduced or neutralized.There are a number of political risks with which marketers must contend.
--- Content provided by FirstRanker.com ---
Hazards based on a host government`s action include confiscation,
expropriation, nationalization, and domestication. Such actions are more likely
--- Content provided by FirstRanker.com ---
to be levied against foreign investments, though local firm` properties are nottotally immune. Confiscation is the process of a government`s taking ownership
of a property without compensation. Expropriation differs somewhat from
--- Content provided by FirstRanker.com ---
confiscation in that there is some compensation, though not necessarily just
compensation. More often than not, a company whose property is being
--- Content provided by FirstRanker.com ---
expropriated agrees to sell its operations ? not by choice but rather because ofsome explicit or implied coercion. After property has been confiscated or
expropriated, it can be either nationalized or domesticated. Nationalization
--- Content provided by FirstRanker.com ---
involves government ownership, and it is the government that operates the
business being taken over. In the case of domestication, foreign companies
--- Content provided by FirstRanker.com ---
relinquish control and ownership, either completely or partially, to the nationals.The result is that private entities are allowed to operate the confiscated or
expropriated property.
--- Content provided by FirstRanker.com ---
1.4 Ethical Issues:
--- Content provided by FirstRanker.com ---
Public confidence in business ethics has declined. Many critics say that we livein the time of the ethics crisis. As a result, many experts are calling for a
broader examination of business ethics. Because most business decisions have
--- Content provided by FirstRanker.com ---
an ethical component (i.e., they affect the intentions of others), managers mustadd ethics to their understanding of organizations. Many companies have made a
commitment to ethics in business. Many decisions that managers make require
--- Content provided by FirstRanker.com ---
them to consider who may be affected-in terms of the result as well as the
process. The term ethics refers to rules or principles that define right and wrong
--- Content provided by FirstRanker.com ---
conduct. Whether a manager acts ethically or unethically is the result of acomplex interaction between the manager`s stage of moral development, his or
her individual characteristics, the organization`s structural design, the
--- Content provided by FirstRanker.com ---
organization`s culture, and the intensity of the ethical issue. A comprehensive
ethics program would include selection to weed out ethically undesirable job
--- Content provided by FirstRanker.com ---
applicants, a code of ethics and decision rules, a commitment by topmanagement, clear and realistic job goals, ethics training, comprehensive
performance appraisals, independent social audits, and formal protective
--- Content provided by FirstRanker.com ---
mechanisms. Consciously or unconsciously, we engage in some kind of ethical
reasoning every day of our lives. To improve our ethical reasoning, we must
--- Content provided by FirstRanker.com ---
analyze it explicitly and practice it daily. The key terms of the ethical languageare values, rights, duties, rules, and human relationships.
--- Content provided by FirstRanker.com ---
1.4.1. Four Different Views of Ethics:
--- Content provided by FirstRanker.com ---
There are four different perspectives on business ethics. They are:a) Utilitarian view of ethics: Decisions are made solely on the basis of their
outcomes or consequences.
--- Content provided by FirstRanker.com ---
b) Rights view of ethics: Decisions are concerned with respecting and
protecting basic rights of individuals.
--- Content provided by FirstRanker.com ---
c) Theory of justice view of ethics: Decision makers seek to impose andenforce rules fairly and impartially.
d) Integrative social contracts theory: A view that proposes decisions should
--- Content provided by FirstRanker.com ---
be based on empirical (What is) and normative (What should be) factors. Itrecognizes the implicit contracts between organizations and the ethical
standards of the community within which they operate.
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
1.4.2. Four levels of ethical questions in business
We cannot avoid ethical issues in business any more than we can avoid them in
--- Content provided by FirstRanker.com ---
other areas of our lives. In business, most ethical questions fall into one or more
of four categories: societal, stakeholder, internal policy, or personal.
--- Content provided by FirstRanker.com ---
A) Societal. At the societal level, we ask questions about the basic institutions
in a society. Issues like racism, apartheid, terrorism, hunger, poverty, and
--- Content provided by FirstRanker.com ---
illiteracy raises several ethical questions. For example,
Is it ethically correct to have a social system in which a group of people is
--- Content provided by FirstRanker.com ---
systematically denied basic rights?Is capitalism a just system for allocating resources?
What role should the government play in regulating the marketplace?
--- Content provided by FirstRanker.com ---
Should we tolerate gross inequalities of wealth, status, and power?
Societal-level questions usually represent an ongoing debate among major
--- Content provided by FirstRanker.com ---
competing institutions. As managers and individuals, each of us can try to shapethat debate.
--- Content provided by FirstRanker.com ---
B) Stakeholder. The second kind of ethical questions concern stakeholders
like suppliers, customers, shareholders, and the rest. Here we ask questions
about how a company should deal with the external groups affected by its
--- Content provided by FirstRanker.com ---
decisions, as well as how stakeholders should deal with the company. There are
many stakeholder issues. Insider trading is one; another is a company`s
--- Content provided by FirstRanker.com ---
obligation to inform its customers about the potential dangers of its products.What obligations does a company have to its suppliers? To the communities
where it operates? To its stockholders? How should we attempt to decide such
--- Content provided by FirstRanker.com ---
matters?
--- Content provided by FirstRanker.com ---
C) Internal Policy A third category of ethics might be called internal policy.Here we ask questions about the nature of a company`s relations with its
employees. What kind of employment contract is fair? What are the mutual
--- Content provided by FirstRanker.com ---
obligations of managers and workers? What rights do employees have? These
questions, too, pervade the workday of a manager. Layoffs, benefits, work rules,
--- Content provided by FirstRanker.com ---
motivation, and leadership are all ethical concerns here.D) Personal Here we ask questions about how people should treat one another
within an organization. Should we be honest with one another, whatever the
--- Content provided by FirstRanker.com ---
consequences? What obligations do we have- both as human beings and as
workers who fill specific work roles- to our bosses, our employees, and our
--- Content provided by FirstRanker.com ---
peers? These questions deal with the day-to-day issues of life in anyorganization. Behind them lie two broader issues: Do we have the right to look
at other people primarily as means to our ends? Can we avoid doing so?
--- Content provided by FirstRanker.com ---
The following are questions for examining the ethics of a business decision.
--- Content provided by FirstRanker.com ---
1. Have you defined the problem accurately?2. How would you define the problem if you stood on the other side of the
fence?
--- Content provided by FirstRanker.com ---
3. How did this situation occur in the first place?
4. To whom and to what do you give your loyalty as a person and as a member
of the corporation?
--- Content provided by FirstRanker.com ---
5. What is your intention in making this decision?
6. How does this intention compare with the probable results?
--- Content provided by FirstRanker.com ---
7. Whom could your decision or action injure?8. Can you discuss the problem with the affected parties before you make your
decisions?
--- Content provided by FirstRanker.com ---
9. Are you confident that your decision will be as valid over a long period of
time as it seems now?
--- Content provided by FirstRanker.com ---
10. Could you disclose without qualm your decision or action to your boss, yourCEO, the board of directors, your family, society as a whole?
11. What is the symbolic potential of your action if understood? If
--- Content provided by FirstRanker.com ---
misunderstood?
12. Under what conditions would you allow exceptions to your stand?
--- Content provided by FirstRanker.com ---
These questions help business leaders to seek answers regarding values,
purpose, and goals of business. The answers will provide clarity and sense of
--- Content provided by FirstRanker.com ---
direction. Majority of organizations are now explicitly stating their code of
conduct, and designing ethical standards and committed towards ethical
--- Content provided by FirstRanker.com ---
practices to suit global standards. Hewlett Packard`s commitment to ethicalstandards can be observed from Insight 1. It can be observed from Insight 2 how
Chennai`s leading construction company has proved that ethical business is
--- Content provided by FirstRanker.com ---
profitable.
Insight 1
--- Content provided by FirstRanker.com ---
We are committed to uncompromising integrityAt HP we are guided by enduring values that stretch back to our roots -- values
--- Content provided by FirstRanker.com ---
that reflect basic, fundamental ideas about who we are. Ideas like these:there is no substitute for personal and professional integrity;
doing well and doing good can go hand in hand; and
--- Content provided by FirstRanker.com ---
trust and respect have always been the cornerstones of our success.
The open doors to our offices reflect the ethical, transparent business practices at
--- Content provided by FirstRanker.com ---
every level of the company. They also help foster the open communication thatfuels our creativity and camaraderie. We strive to be a company that manages by
inspiration, not fear; by sharing information, not guarding it; by empowering
--- Content provided by FirstRanker.com ---
people to make decisions; and by unleashing people's talents for the common
good. As a business we must remain profitable to remain viable. But profitable
--- Content provided by FirstRanker.com ---
operations are not our only concern. At HP we seek uncompromising integritythrough what each individual can contribute -- to our customers, our co-
workers, our company and our communities. Our business success is dependent
--- Content provided by FirstRanker.com ---
on trusting relationships. Our reputation is founded on the personal integrity of
the company's personnel and our dedication to our principles of:
--- Content provided by FirstRanker.com ---
Honesty in communicating within the company and with our business
partners, suppliers and customers, while at the same time protecting the
--- Content provided by FirstRanker.com ---
company's confidential information and trade secrets
Excellence in our products and services, by striving to provide high-
--- Content provided by FirstRanker.com ---
quality products and services to our customersResponsibility for our words and actions
Compassion in our relationships with our employees and the
--- Content provided by FirstRanker.com ---
communities affected by our business
Citizenship in our observance of all the laws of any country in which we
do business, respect for environmental concerns and our service to the
--- Content provided by FirstRanker.com ---
community by improving and enriching community life.
Fairness to our fellow employees, stakeholders, business partners,
--- Content provided by FirstRanker.com ---
customers and suppliers through adherence to all applicable laws,regulations and policies, and a high standard of behavior.
Respect for our fellow employees, stakeholders, business partners,
--- Content provided by FirstRanker.com ---
customers and suppliers while showing willingness to solicit their
opinions and value their feedback
--- Content provided by FirstRanker.com ---
Insight 2
--- Content provided by FirstRanker.com ---
Ethical business the Alacrity way
--- Content provided by FirstRanker.com ---
Alacrity is the undisputed leader amongst apartment construction companies inChennai. It`s got to that position, with a turnover of more than Rs 100 crore,
without ever having paid a bribe or dealt in black money or any other illegal
--- Content provided by FirstRanker.com ---
operation. In India at least, a company that has proved that it is possible to do
ethical business and still be a commercial success, is an exception. Launched in
--- Content provided by FirstRanker.com ---
1978, Alacrity is owned by its employees. The undertaking is based on thevalues of honesty, commitment and accountability. Today the company is the
undisputed leader not only in the fields of construction but also energy
--- Content provided by FirstRanker.com ---
management, health and education in Chennai. Alacrity has changed the rules of
construction in this city. The company represents a house of trust for the
--- Content provided by FirstRanker.com ---
common man. More than 60 per cent of the respondents in a recent marketsurvey in Chennai named Alacrity as their most preferred company. The
company has constructed more than 30 per cent of Chennai`s apartments,
--- Content provided by FirstRanker.com ---
effectively minimising the problem of housing in this metropolis. Moreover,each housing project undertaken by this company subscribes to the rules of the
Director of Development Control, the nodal government agency. Recalling the
--- Content provided by FirstRanker.com ---
nascent stages of this undertaking, Amol Karnad, chairman of the Alacrity group
of companies, says, The central idea of starting this venture was to bring about
--- Content provided by FirstRanker.com ---
a merger between the quality of social life and individual life. Not beingsatisfied only with ethical business, this company has also provided employment
opportunities and fair wages for a migrant labour force, thereby showing that its
--- Content provided by FirstRanker.com ---
concern transcends class barriers. Although there have been problems by way of
political pressure and acute competition, the organisation has been successful in
--- Content provided by FirstRanker.com ---
persisting with its values of discipline, renewal and commitment. Says acustomer who has benefited from the Alacrity experience, When you are
investing the savings of your life, you need a builder you can trust and we have
--- Content provided by FirstRanker.com ---
found one in Alacrity. Alacrity has effectively proved that value-based
management does not curb profits and that economic growth and social
--- Content provided by FirstRanker.com ---
development can go together--- Content provided by FirstRanker.com ---
1.5 Social Responsibility:
The classic statement of corporate social responsibility was created by Andrew
--- Content provided by FirstRanker.com ---
Carnegie in his The Gospel of Wealth (1899). Carnegie`s gospel was based onthe charity principle (Society`s more fortunate members are obligated to help the
less fortunate) and the stewardship principle (the rich are the caretakers of
--- Content provided by FirstRanker.com ---
wealth and public property). Carnegie was a noted philanthropist and his
philosophy inspired a concern for corporate social responsibility between the
--- Content provided by FirstRanker.com ---
1930s and 1960s. The drawbacks of Carnegie`s gospel were that it preservedthe status quo and protected business from other forms of pressure, and that the
term social responsibility was so vague that it left too much to individual
--- Content provided by FirstRanker.com ---
discretion. In the 1970s and 1980s, the developments of a number of economicforces led to reexamine the notion of corporate social responsibility. Many
experts like Friedman believe that if businesses were to survive, they must be
--- Content provided by FirstRanker.com ---
relived of inappropriate social responsibilities and allowed to get back to basics:
making money. A business`s primary responsibility is to maximize profits. A
--- Content provided by FirstRanker.com ---
company`s contribution to the general welfare should be the efficient productionof goods and services. Social problems should be left to concerned individuals
and government agencies.
--- Content provided by FirstRanker.com ---
Keith Davis has said that there is an iron law of responsibility which states that
--- Content provided by FirstRanker.com ---
in the long run those who do not use power in a manner that society considersresponsible will tend to loose it. So it may be that it is in the enlightened self-
interest of organizations to be socially responsible ? or at least responsive to
--- Content provided by FirstRanker.com ---
social forces. Many organizations are now designing their business models
taking into consideration of emerging social context.
--- Content provided by FirstRanker.com ---
Corporate social responsibility (CSR) is an expression used to describe what
some see as a company`s obligation to be sensitive to the needs of all of the
--- Content provided by FirstRanker.com ---
stakeholders in its business operations. A company`s stakeholders are all those
who are influenced by, or can influence, a company`s decisions and actions.
--- Content provided by FirstRanker.com ---
These can include (but are not limited to): employees, customers, suppliers,community organizations, subsidiaries and affiliates, joint venture partners, local
neighborhoods, investors, and shareholders (or a sole owner). CSR is closely
--- Content provided by FirstRanker.com ---
linked with the principles of "Sustainable Development in proposing that
enterprises should be obliged to make decisions based not only on the
--- Content provided by FirstRanker.com ---
financial/economic factors but also on the social and environmentalconsequences of their activities.
--- Content provided by FirstRanker.com ---
Arguments For and Against Social Responsibility:Arguments For: The major arguments supporting businesses being socially
responsible are;
--- Content provided by FirstRanker.com ---
1. Public expectations. Social expectations of business have increased
--- Content provided by FirstRanker.com ---
dramatically since the 1960s. Public opinion now supports businesspursuing social as well as economic goals.
2. Long-run profits. Socially responsible businesses tend to have more secure
--- Content provided by FirstRanker.com ---
long-run profits. This is the normal result of the better community relations
and improved business image that responsible behavior brings.
--- Content provided by FirstRanker.com ---
3. Ethical obligation. A business firm can and should have a social conscience.Business should be socially responsible because responsible actions are right
for their own sake.
--- Content provided by FirstRanker.com ---
4. Public image. Firms seek to enhance their public image to get increased
sales, better employees, access to financing, and other benefits. Since the
--- Content provided by FirstRanker.com ---
public considers social goals important, business can create a favorablepublic image by pursuing social goals.
5. Better environment. Business involvement can help solve difficult social
--- Content provided by FirstRanker.com ---
problems, helping create a better quality of life and a more desirable
community in which to attract and keep skilled employees.
--- Content provided by FirstRanker.com ---
6. Discouragement of further government regulation. Government regulationadds economic costs and restricts management`s decision flexibility. By
becoming socially responsible, business can expect less government
--- Content provided by FirstRanker.com ---
regulation.
7. Balance of responsibility and power. Business holds a large amount of
--- Content provided by FirstRanker.com ---
power in society. An equally large amount of responsibility is required tobalance against it. When power is significantly greater than responsibility,
the imbalance encourages irresponsible behavior that works against the
--- Content provided by FirstRanker.com ---
public good.8. Stockholder interests. Social responsibility will improve a business`s stock
price in the long run. The stock market will view the socially responsible
--- Content provided by FirstRanker.com ---
company as less risky and open to public criticism. Therefore, it will award
its stock a higher price-earnings ratio.
--- Content provided by FirstRanker.com ---
9. Possession of resources. Business organizations have the financialresources, technical experts, and managerial talent to support public and
charitable projects that need assistance.
--- Content provided by FirstRanker.com ---
10. Superiority of prevention over cures. Social problems must be addressed at
some time. Business should act before these problems become more serious
--- Content provided by FirstRanker.com ---
and costly to correct, taking management`s energy away from accomplishingits goal of producing goods and services.
--- Content provided by FirstRanker.com ---
Arguments Against:
--- Content provided by FirstRanker.com ---
1. Violation of profit maximization. This is the essence of the classicalviewpoint. Business is being socially responsible when it attends strictly to
its economic interests and leaves other activities to other institutions.
--- Content provided by FirstRanker.com ---
2. Dilution of purpose. The pursuit of social goals dilutes business`s primary
purpose: economic productivity. Society may suffer if both economic and
--- Content provided by FirstRanker.com ---
social goals are poorly accomplished.3. Costs. Many socially responsible activities don`t cover their costs.
Someone has to pay these costs. Business must absorb the costs or pass
--- Content provided by FirstRanker.com ---
them on to consumers through higher prices.
4. Too much power. Business is already one of the most powerful sectors of
our society. If it pursues social goals, it would have even more power.
--- Content provided by FirstRanker.com ---
Society has given business enough power.
5. Lack of skills. The outlook and abilities of business leaders are oriented
--- Content provided by FirstRanker.com ---
primarily toward economics. Businesspeople are poorly qualified to addresssocial issues.
6. Lack of accountability. Political representatives pursue social goals and are
--- Content provided by FirstRanker.com ---
held accountable for their actions. Such is not the case with business
leaders. There are no direct lines of social accountability from the business
--- Content provided by FirstRanker.com ---
sector to the public.7. Lack of broad public support. There is no broad mandate or outcry from
society for business to become involved in social issues. The public is
--- Content provided by FirstRanker.com ---
divided on the issue of business`s social responsibility. In fact, it is a topic
that typically generates heated debate. Actions taken under such divided
--- Content provided by FirstRanker.com ---
support are likely to fail.Despite the arguments against for businesses being socially responsible,
--- Content provided by FirstRanker.com ---
many firms globally embracing the Corporate Social Responsibility
philosophy with open mind. Nowadays, individuals like Warren Buffet, Bill
--- Content provided by FirstRanker.com ---
Gates leading philanthropic movements by sharing their personal wealth tothe social causes. Insight 3 highlights how LG Electronics as a global
corporation fulfills its corporate social responsibilities. Insight 4 throws light
--- Content provided by FirstRanker.com ---
on how IT major Infosys putting public good ahead of private good. Insight
5 gives an idea how pharma company Cipla combines its business goals
--- Content provided by FirstRanker.com ---
with social goals.Insight 3
--- Content provided by FirstRanker.com ---
LG ElectronicsAs a global corporation, LG Electronics diligently and passionately fulfills its
--- Content provided by FirstRanker.com ---
corporate social responsibilities. Not only does the company donate money
toward these goals, but it also participates in voluntary social activities, inspiring
--- Content provided by FirstRanker.com ---
people in need the world over to pursue their hopes and dreams. LG Electronicstakes part in these corporate activities with the primary goal of serving society.
Since its inception, LG Electronics has strived to create a society in which
--- Content provided by FirstRanker.com ---
people enjoy happiness and comfort, and has been at the forefront of Korea`s
electronics industry. As a global corporation, LG Electronics is now
--- Content provided by FirstRanker.com ---
endeavoring to do its part all over the world, as a global corporate citizen.LG Electronics has set an example at home and abroad, giving generously to its
--- Content provided by FirstRanker.com ---
neighbors and others in need. Currently LG Electronics` executives offer one
percent of their monthly salaries, and other employees offer one percent of their
--- Content provided by FirstRanker.com ---
performance incentives, to give something back to societies around the world.The company then matches these monthly contributions and donates the entirety
as corporate social contribution funds. Since 1958, LG Electronics and its
--- Content provided by FirstRanker.com ---
overseas subsidiaries have endeavored to serve communities all over the world
through participating in various voluntary social activities. In addition, in
--- Content provided by FirstRanker.com ---
performing its duties as a corporate citizen, LG Electronics` corporatebusiness activities enrich worldwide economic development. LG Electronics, as
a global corporate citizen, is committed to giving hope to neighboring
--- Content provided by FirstRanker.com ---
communities and inspiring them to purse their visions, as members of society,
with courage and pride.
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
Insight 4
--- Content provided by FirstRanker.com ---
Infosys believes in putting public good before private goodUnless you create wealth by legal means, you cannot distribute it. And without
--- Content provided by FirstRanker.com ---
the two, you do not have progress, says N R Narayanamurthy of the celebrated
and very successful Indian IT company Infosys. Putting public good ahead of
--- Content provided by FirstRanker.com ---
private good in every decision you make will, in fact, result in enriching theprivate good. To distribute its substantial wealth and formalise its social
support initiatives, Narayanamurthy and his wife Sudha set up the Infosys
--- Content provided by FirstRanker.com ---
Foundation in March 1997, which receives 1 per cent of all the company`s after-
tax profits. All financial assistance to the needy is given in the form of a rule-
--- Content provided by FirstRanker.com ---
based distribution of money.The Infosys Foundation supports disadvantaged people directly or through
--- Content provided by FirstRanker.com ---
organisations. The Foundation prefers to work through smaller organisations and
donate in kind rather than cash. For instance, recently it gave books in Kannada
--- Content provided by FirstRanker.com ---
worth Rs 10,000 to a village library, so that it could help strengthen the locallanguage. In the field of education the Foundation has instituted 26 scholarships
for PhD scholars in 13 prestigious institutions. It has also anchored the Train the
--- Content provided by FirstRanker.com ---
Trainee programme in which computer science students from engineering
colleges are exposed to the latest IT trends. The Foundation has also played an
--- Content provided by FirstRanker.com ---
important role in setting up science centres and libraries and to date 1001libraries have been inaugurated with assistance from this Foundation. Infosys
Technologies has rationalised the Foundation`s distribution of funds. Money is
--- Content provided by FirstRanker.com ---
distributed according to the ratio of its employees in the four states where it has
offices: Karnataka gets 70 per cent, Maharashtra 15 per cent, Orissa 5 per cent
--- Content provided by FirstRanker.com ---
and Tamil Nadu 10 per cent. The Infosys Foundation is committed to giving 30per cent of its funds to old people, the destitute and the handicapped, 15 per cent
for rural development, 30 per cent for the education of talented but poor
--- Content provided by FirstRanker.com ---
children, 15 per cent for cultural activities and 10 per cent for healthcare, both invillages and cities.
--- Content provided by FirstRanker.com ---
Each applicant is selected after the Foundation has met the person or a company
executive has visited the applying institution, so that the bona fides of the
--- Content provided by FirstRanker.com ---
applicant are verified. Infosys also asks that the organisations it supports do notdiscriminate against people according to caste or creed. The company`s policies
of transparent accounting and its socially-relevant HR policies are extended to
--- Content provided by FirstRanker.com ---
the management of the Foundation.
Insight 5
--- Content provided by FirstRanker.com ---
Cipla prompts a worldwide slide in the price of anti-HIV drugsThe Indian pharmaceutical`s move has made anti-HIV drugs more accessible to
patients
--- Content provided by FirstRanker.com ---
According to the National Aids Control Organisation (NACO), the total number
of HIV patients in India is about 3.7 million, of which 5 lakh have AIDS.
--- Content provided by FirstRanker.com ---
Unofficial sources place the figures much higher. The threat of AIDS in India isaggravated by highly-priced medicines as well as the lack of a concrete medical
strategy. However, Cipla, an Indian generic drug manufacturing firm founded in
--- Content provided by FirstRanker.com ---
1935, offered to slash prices of three anti-HIV drugs in February 2001. Cipla has
offered to sell a cocktail of three anti-HIV drugs, Stavudine, Lamivudine and
--- Content provided by FirstRanker.com ---
Nevirapine, to the Nobel Prize-winning voluntary agency Medicine SansFrontieres (MSF) at a rate of $350, and at $600 per patient per year to other
NGOs over the world. In the international market the price of these triple
--- Content provided by FirstRanker.com ---
combination anti-retroviral drugs ranges from $1,000-15,000. With the Cipla
offer, prices have tumbled to $750. This has not only made the drugs accessible
--- Content provided by FirstRanker.com ---
to a wider range of people but it has also forced other pharmaceutical houses tolower their prices. Cipla`s offer has triggered a movement towards reduced drug
prices amongst drug manufacturing giants like GlaxoSmithKline and Merck and
--- Content provided by FirstRanker.com ---
Abbot. Although Cipla`s offer remains unmatched in the international market,two Indian firms, Hetero and Aurobindo, have also made offers at a price lower
than Cipla`s. While Hetero has offered a package for $347, Aurobindo has
--- Content provided by FirstRanker.com ---
promised the cocktail at $297. MSF, an organisation that has tremendous work
experience in the field of providing emergency medical provisions all over the
--- Content provided by FirstRanker.com ---
world, is positive about the Cipla offer. The offer not only matches priceexpectations, but has redefined the entire concept of HIV care. Recently, MSF
has started using drugs obtained from Cipla in its AIDS treatment project in
--- Content provided by FirstRanker.com ---
Cambodia and ten other countries. However, MSF feels that even at such
reduced rates, the drugs would be unaffordable to the majority in the developing
--- Content provided by FirstRanker.com ---
world. Corporate houses must actively help in combating the disease--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
1.6 Summary:
--- Content provided by FirstRanker.com ---
Global strategic planning is more complex than purely domestic planning.
Global firms face multiple political, economical, legal, social, and cultural
--- Content provided by FirstRanker.com ---
environments as well as various rates of changes within each of them.Interactions between the national and foreign environment are complex, because
of national sovereignty issues and widely differing economic and social
--- Content provided by FirstRanker.com ---
conditions. Geographic separation, cultural and national differences, and
variations in business practices all tend to make communication and control
--- Content provided by FirstRanker.com ---
efforts between headquarters and overseas affiliates difficult. Global firms faceextreme competition, because of differences in industry structures. Global firms
are restricted in their selection of competitive strategies by various regional
--- Content provided by FirstRanker.com ---
blocs and economic integrations, such as the European Economic Community,
the European Free Trade Area, and the Latin American Free Trade Area. MNCs
--- Content provided by FirstRanker.com ---
must understand how to adapt to the local needs of host countries. Political,legal, ethical issues influence their performance in this changing business world.
Resurgence of enviromentalism, increasing buying power, and the globalization
--- Content provided by FirstRanker.com ---
of business are driving businesses to adopt Corporate Social Responsibilityframework. Do well by doing good is the accepted mantra of global firms.
--- Content provided by FirstRanker.com ---
1.7 Glossary:
Code of ethics: A formal statement of an organization`s primary values and the
--- Content provided by FirstRanker.com ---
ethical rules it expects its employees to follow.Corporate social responsiveness: A theory of social responsibility that focuses
on how companies respond to issues, rather than trying to determine their
--- Content provided by FirstRanker.com ---
ultimate social responsibility.
Ethics: The study of rights and of who is-or should be-benefited or harmed by
--- Content provided by FirstRanker.com ---
an action.Enlightened self-interest: Organizations' realization that it is in their own
best interest to act in ways that the community considers socially
--- Content provided by FirstRanker.com ---
responsible.
Expropriation: Official government seizure of private property, recognized by
--- Content provided by FirstRanker.com ---
international law as the right of any sovereign state provided expropriatedowners are given prompt compensation and fair market value in convertible
currencies.
--- Content provided by FirstRanker.com ---
Political Risk: The possibility that political events in a particular country will
have an influence on the economic well being of firms in that country.
--- Content provided by FirstRanker.com ---
Social audit: Report describing a company`s activities in a given areas of socialinterest, such as environmental protection, workplace safety, or community
involvement.
--- Content provided by FirstRanker.com ---
1.8 Self Assessment Questions:
--- Content provided by FirstRanker.com ---
5. Explain how the legal environment can have an impact on an MNC`s
business strategy.
--- Content provided by FirstRanker.com ---
6. Explain the multiplicity of political environments. Describe confiscation,expropriation, nationalization, and domestication.
7. Which of the four views on business ethics is most popular among business
--- Content provided by FirstRanker.com ---
people? Why?
8. Why is the social responsibility of business receiving so much attention
--- Content provided by FirstRanker.com ---
these days?9. The business of business is business Critically evaluate this statement.
--- Content provided by FirstRanker.com ---
1.9 Further Readings:
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
26. Vyuptakesh Sharan, International Business, Concept, Environment and
--- Content provided by FirstRanker.com ---
strategy (2006), Dorling Kindersley (India) Pvt. Ltd, New Delhi27. Charles W.L.Hill, International Business, Competing in the Global
Marketplace (2003), Tata Mc-Graw-HillPublishing Company Limited, New
--- Content provided by FirstRanker.com ---
Delhi.
28. Stephen P. Robbins, Mary Coulter. Management (2000), Prentice-Hall of
--- Content provided by FirstRanker.com ---
India, New Delhi.29. James A F Stoner, R Edward Freeman, Daniel R Gilbert, Jr, Management
(2002), Prentice-Hall of India, New Delhi.
--- Content provided by FirstRanker.com ---
UNIT ? IV: Strategic Alliances: Acquisitions and mergers; Management ofjoint ventures and other international strategic alliances.
Lesson 5:
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
International Business ? Strategic AlliancesObjectives:
--- Content provided by FirstRanker.com ---
After studying this lesson you should be able:
To understand mergers and acquisitions (M&A) as a means of corporate
--- Content provided by FirstRanker.com ---
restructuring processTo know about joint ventures and how they are useful to pursue global
strategies
--- Content provided by FirstRanker.com ---
To understand different corporate restructuring methods
To see through examples how Indian companies are actively involved in
--- Content provided by FirstRanker.com ---
international dealsStructure
--- Content provided by FirstRanker.com ---
1.63 Introduction
1.64 Mergers & Acquisitions
--- Content provided by FirstRanker.com ---
1.65 Joint Ventures1.66 Other Restructuring Methods
1.67 Summary
--- Content provided by FirstRanker.com ---
1.68 Glossary
1.69 Self Assessment Questions
--- Content provided by FirstRanker.com ---
1.70 Further Readings1.1.Introduction:
--- Content provided by FirstRanker.com ---
Mergers and acquisitions (M&A) and corporate restructuring are a big part ofthe corporate finance world. Every day, Wall Street investment bankers arrange
M&A transactions, which bring separate companies together to form larger
--- Content provided by FirstRanker.com ---
ones. When they're not creating big companies from smaller ones, corporate
finance deals do the reverse and break up companies through spinoffs, carve-
--- Content provided by FirstRanker.com ---
outs or tracking stocks. Not surprisingly, these actions often make the news.Deals can be worth hundreds of millions, or even billions of dollars. They can
dictate the fortunes of the companies involved for years to come. For a CEO,
--- Content provided by FirstRanker.com ---
leading an M&A can represent the highlight of a whole career. And it is no
wonder we hear about so many of these transactions; they happen all the time.
--- Content provided by FirstRanker.com ---
Next time you open the newspaper`s business section, odds are good that at leastone headline will announce some kind of M&A transaction. Mergers and
acquisitions, joint ventures and other restructuring methods are becoming
--- Content provided by FirstRanker.com ---
common in global business world. In the following sections we discuss mergers
and acquisitions, joint ventures and other corporate restructuring methods
--- Content provided by FirstRanker.com ---
through examples.1.2 Mergers & Acquisitions:
--- Content provided by FirstRanker.com ---
One plus one makes three: this equation is the special alchemy of a merger or an
acquisition. The key principle behind buying a company is to create shareholder
--- Content provided by FirstRanker.com ---
value over and above that of the sum of the two companies. Two companiestogether are more valuable than two separate companies - at least, that's the
reasoning
--- Content provided by FirstRanker.com ---
behind
M&A.
--- Content provided by FirstRanker.com ---
This rationale is particularly alluring to companies when times are tough. Strongcompanies will act to buy other companies to create a more competitive, cost-
efficient company. The companies will come together hoping to gain a greater
--- Content provided by FirstRanker.com ---
market share or to achieve greater efficiency. Because of these potential
benefits, target companies will often agree to be purchased when they know they
cannot survive alone.
--- Content provided by FirstRanker.com ---
1.2.1 Distinction between Mergers and Acquisitions
--- Content provided by FirstRanker.com ---
Although they are often uttered in the same breath and used as though they weresynonymous, the terms merger and acquisition mean slightly different things.
When one company takes over another and clearly established itself as the new
--- Content provided by FirstRanker.com ---
owner, the purchase is called an acquisition. From a legal point of view, the
target company ceases to exist, the buyer "swallows" the business and the
--- Content provided by FirstRanker.com ---
buyer's stock continues to be traded. In the pure sense of the term, a mergerhappens when two firms, often of about the same size, agree to go forward as a
single new company rather than remain separately owned and operated. This
--- Content provided by FirstRanker.com ---
kind of action is more precisely referred to as a "merger of equals." Both
companies' stocks are surrendered and new company stock is issued in its place.
--- Content provided by FirstRanker.com ---
For example, both Daimler-Benz and Chrysler ceased to exist when the twofirms merged, and a new company, DaimlerChrysler, was created. In practice,
however, actual mergers of equals don't happen very often. Usually, one
--- Content provided by FirstRanker.com ---
company will buy another and, as part of the deal's terms, simply allow the
acquired firm to proclaim that the action is a merger of equals, even if it's
--- Content provided by FirstRanker.com ---
technically an acquisition. Being bought out often carries negative connotations,therefore, by describing the deal as a merger, deal makers and top managers try
to make the takeover more palatable. A purchase deal will also be called a
--- Content provided by FirstRanker.com ---
merger when both CEOs agree that joining together is in the best interest of both
of their companies. But when the deal is unfriendly - that is, when the target
--- Content provided by FirstRanker.com ---
company does not want to be purchased - it is always regarded as an acquisition.Whether a purchase is considered a merger or an acquisition really depends on
whether the purchase is friendly or hostile and how it is announced. In other
--- Content provided by FirstRanker.com ---
words, the real difference lies in how the purchase is communicated to and
received by the target company's board of directors, employees and
shareholders.
--- Content provided by FirstRanker.com ---
1.2.2. Synergy:
--- Content provided by FirstRanker.com ---
Synergy is the magic force that allows for enhanced cost efficiencies of the newbusiness. Synergy takes the form of revenue enhancement and cost savings. By
merging, the companies hope to benefit from the following:
--- Content provided by FirstRanker.com ---
a) Staff reductions - As every employee knows, mergers tend to mean job
--- Content provided by FirstRanker.com ---
losses. Consider all the money saved from reducing the number of staffmembers from accounting, marketing and other departments. Job cuts will
also include the former CEO, who typically leaves with a compensation
--- Content provided by FirstRanker.com ---
package.
b) Economies of scale - Yes, size matters. Whether it's purchasing stationery or
--- Content provided by FirstRanker.com ---
a new corporate IT system, a bigger company placing the orders can savemore on costs. Mergers also translate into improved purchasing power to
buy equipment or office supplies - when placing larger orders, companies
--- Content provided by FirstRanker.com ---
have a greater ability to negotiate prices with their suppliers.
c) Acquiring new technology - To stay competitive, companies need to stay
--- Content provided by FirstRanker.com ---
on top of technological developments and their business applications. Bybuying a smaller company with unique technologies, a large company can
maintain or develop a competitive edge.
--- Content provided by FirstRanker.com ---
d) Improved market reach and industry visibility - Companies buy
companies to reach new markets and grow revenues and earnings. A merge
--- Content provided by FirstRanker.com ---
may expand two companies' marketing and distribution, giving them newsales opportunities. A merger can also improve a company's standing in the
investment community: bigger firms often have an easier time raising capital
--- Content provided by FirstRanker.com ---
than smaller ones.That said, achieving synergy is easier said than done - it is not automatically
--- Content provided by FirstRanker.com ---
realized once two companies merge. Sure, there ought to be economies of scale
when two businesses are combined, but sometimes a merger does just the
--- Content provided by FirstRanker.com ---
opposite. In many cases, one and one add up to less than two. Sadly, synergyopportunities may exist only in the minds of the corporate leaders and the deal
makers. Where there is no value to be created, the CEO and investment bankers
--- Content provided by FirstRanker.com ---
- who have much to gain from a successful M&A deal - will try to create an
image of enhanced value. The market, however, eventually sees through this and
--- Content provided by FirstRanker.com ---
penalizes the company by assigning it a discounted share price.1.2.3. Varieties of Mergers:
--- Content provided by FirstRanker.com ---
From the perspective of business structures, there is a whole host of different
mergers. Here are a few types, distinguished by the relationship between the two
--- Content provided by FirstRanker.com ---
companies that are merging:a) Horizontal merger - Two companies that are in direct competition and
share the same product lines and markets.
--- Content provided by FirstRanker.com ---
b) Vertical merger - A customer and company or a supplier and company.
Think of a cone supplier merging with an ice cream maker.
--- Content provided by FirstRanker.com ---
c) Market-extension merger - Two companies that sell the same products indifferent markets.
d) Product-extension merger - Two companies selling different but related
--- Content provided by FirstRanker.com ---
products in the same market.
e) Conglomeration- Two companies that have no common business areas.
There are two types of mergers that are distinguished by how the merger is
--- Content provided by FirstRanker.com ---
financed. Each has certain implications for the companies involved and for
investors:
--- Content provided by FirstRanker.com ---
f) Purchase Mergers - As the name suggests, this kind of merger occurs whenone company purchases another. The purchase is made with cash or through
the issue of some kind of debt instrument; the sale is taxable. Acquiring
--- Content provided by FirstRanker.com ---
companies often prefer this type of merger because it can provide them with
a tax benefit. Acquired assets can be written-up to the actual purchase price,
--- Content provided by FirstRanker.com ---
and the difference between the book value and the purchase price of theassets can depreciate annually, reducing taxes payable by the acquiring
company. We will discuss this further in part four of this tutorial.
--- Content provided by FirstRanker.com ---
g) Consolidation Mergers - With this merger, a brand new company is formed
--- Content provided by FirstRanker.com ---
and both companies are bought and combined under the new entity. The taxterms are the same as those of a purchase merger.
1.2.4. Acquisitions:
--- Content provided by FirstRanker.com ---
As you can see, an acquisition may be only slightly different from a merger. In
fact, it may be different in name only. Like mergers, acquisitions are actions
--- Content provided by FirstRanker.com ---
through which companies seek economies of scale, efficiencies and enhancedmarket visibility. Unlike all mergers, all acquisitions involve one firm
purchasing another - there is no exchange of stock or consolidation as a new
--- Content provided by FirstRanker.com ---
company. Acquisitions are often congenial, and all parties feel satisfied with the
deal. Other times, acquisitions are more hostile. In an acquisition, as in some of
--- Content provided by FirstRanker.com ---
the merger deals we discuss above, a company can buy another company withcash, stock or a combination of the two. Another possibility, which is common
in smaller deals, is for one company to acquire all the assets of another
--- Content provided by FirstRanker.com ---
company. Company X buys all of Company Y's assets for cash, which means
that Company Y will have only cash (and debt, if they had debt before). Of
course, Company Y becomes merely a shell and will eventually liquidate or
--- Content provided by FirstRanker.com ---
enter another area of business. Another type of acquisition is a reverse merger,
a deal that enables a private company to get publicly-listed in a relatively short
--- Content provided by FirstRanker.com ---
time period. A reverse merger occurs when a private company that has strongprospects and is eager to raise financing buys a publicly-listed shell company,
usually one with no business and limited assets. The private company reverse
--- Content provided by FirstRanker.com ---
merges into the public company, and together they become an entirely new
public corporation with tradable shares. Regardless of their category or
--- Content provided by FirstRanker.com ---
structure, all mergers and acquisitions have one common goal: they are allmeant to create synergy that makes the value of the combined companies greater
than the sum of the two parts. The success of a merger or acquisition depends on
--- Content provided by FirstRanker.com ---
whether
this
--- Content provided by FirstRanker.com ---
synergyis
achieved.
--- Content provided by FirstRanker.com ---
1.2.5. Mergers and Acquisitions: Why They Can Fail
--- Content provided by FirstRanker.com ---
It's no secret that plenty of mergers don't work. Those who advocate mergerswill argue that the merger will cut costs or boost revenues by more than enough
to justify the price premium. It can sound so simple: just combine computer
--- Content provided by FirstRanker.com ---
systems, merge a few departments, use sheer size to force down the price of
supplies and the merged giant should be more profitable than its parts. In theory,
--- Content provided by FirstRanker.com ---
1+1 = 3 sounds great, but in practice, things can go awry. Historical trends showthat roughly two thirds of big mergers will disappoint on their own terms, which
means they will lose value on the stock market. The motivations that drive
--- Content provided by FirstRanker.com ---
mergers can be flawed and efficiencies from economies of scale may prove
elusive. In many cases, the problems associated with trying to make merged
--- Content provided by FirstRanker.com ---
companies work are all too concrete. Also, mergers are often attempt to imitate:somebody else has done a big merger, which prompts other top executives to
follow suit. A merger may often have more to do with glory-seeking than
--- Content provided by FirstRanker.com ---
business strategy. The executive ego, which is boosted by buying the
competition, is a major force in M&A, especially when combined with the
influences from the bankers, lawyers and other assorted advisers who can earn
--- Content provided by FirstRanker.com ---
big fees from clients engaged in mergers. Most CEOs get to where they are
because they want to be the biggest and the best, and many top executives get a
--- Content provided by FirstRanker.com ---
big bonus for merger deals, no matter what happens to the share price later. Onthe other side of the coin, mergers can be driven by generalized fear.
Globalization, the arrival of new technological developments or a fast-changing
--- Content provided by FirstRanker.com ---
economic landscape that makes the outlook uncertain are all factors that can
create a strong incentive for defensive mergers. Sometimes the management
--- Content provided by FirstRanker.com ---
team feels they have no choice and must acquire a rival before being acquired.The idea is that only big players will survive a more competitive world. Coping
with a merger can make top managers spread their time too thinly and neglect
--- Content provided by FirstRanker.com ---
their core business, spelling doom. Too often, potential difficulties seem trivial
to managers caught up in the thrill of the big deal. The chances for success are
--- Content provided by FirstRanker.com ---
further hampered if the corporate cultures of the companies are very different.When a company is acquired, the decision is typically based on product or
market synergies, but cultural differences are often ignored. It's a mistake to
--- Content provided by FirstRanker.com ---
assume that personnel issues are easily overcome. For example, employees at a
target company might be accustomed to easy access to top management, flexible
--- Content provided by FirstRanker.com ---
work schedules or even a relaxed dress code. These aspects of a workingenvironment may not seem significant, but if new management removes them,
the result can be resentment and shrinking productivity. More insight into the
--- Content provided by FirstRanker.com ---
failure of mergers is found in the highly acclaimed study from McKinsey, a
global consultancy. The study concludes that companies often focus too intently
--- Content provided by FirstRanker.com ---
on cutting costs following mergers, while revenues, and ultimately, profits,suffer. Merging companies can focus on integration and cost-cutting so much
that they neglect day-to-day business, thereby prompting nervous customers to
--- Content provided by FirstRanker.com ---
flee. This loss of revenue momentum is one reason so many mergers fail to
create value for shareholders. But remember that not all mergers fail. Size and
global reach can be advantageous, and strong managers can often squeeze
--- Content provided by FirstRanker.com ---
greater efficiency out of badly run rivals. Nevertheless, the promises made by
deal makers demand the careful scrutiny of investors. The success of mergers
--- Content provided by FirstRanker.com ---
depends on how realistic the deal makers are and how well they can integratetwo companies while maintaining day-to-day operations.
--- Content provided by FirstRanker.com ---
Walt Disney a major company in global entertainment industry is all set to
acquire Hungama TV of UTV in India. (Insight 1). Sasken Communication
--- Content provided by FirstRanker.com ---
Technologies has acquired Finland-based Botnia Hightech recently (Insight 2).--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
Insight 1Walt Disney to buy out Hungama TV
--- Content provided by FirstRanker.com ---
Walt Disney, which has two kids` channels in India ? Toon Disney and the
Disney Channel ? is all set to acquire UTV`s sole television channel, Hungama
--- Content provided by FirstRanker.com ---
TV. Disney will shell out US$ 30.5 million (approximately Rs 137.25 crore) forHungama. In addition, Disney has bought a 14.9 per cent stake in the parent
company, UTV Software, which is worth US$ 14 million (approximately Rs 63
--- Content provided by FirstRanker.com ---
crore). In total, Disney has invested around Rs 200 crore in the Indian television
software company. According to Rajat Jain, managing director, Walt Disney,
--- Content provided by FirstRanker.com ---
India, this deal is part of the company`s long-term expansion plans in India. Afew months ago when agencyfaqs (media house) had asked Ronnie Screwvala,
CEO of UTV, if he would be ready to sell off Hungama TV if he was offered a
--- Content provided by FirstRanker.com ---
hefty price, he had replied that they were trying to build an overall integratedbusiness model. So, building a brand for two years and then selling it off didn`t
make sense. However, in the last two years, Hungama TV has evolved as a
--- Content provided by FirstRanker.com ---
strong brand and Jain of Disney is looking forward to strengthen Disney`s
network
--- Content provided by FirstRanker.com ---
inIndia
with
--- Content provided by FirstRanker.com ---
its
acquisition.
--- Content provided by FirstRanker.com ---
When quizzed about what would be the new colours for Hungama TV under thenew banner, Jain said that it would be premature to comment on this. The
channel has successfully created a distinct identity for itself in the kids` genre
--- Content provided by FirstRanker.com ---
and it will take at least four-five months before we decide how to rejuvenate it
while maintaining its core strengths. While Disney and Toon Disney are
--- Content provided by FirstRanker.com ---
believed to be more international in their programming, Hungama has alwayshad an Indian flavour to it. After all, it was the only local kids` entertainment
channel. Walt Disney plans to continue with the distinct identity that Hungama
--- Content provided by FirstRanker.com ---
has carved for itself. Disney has a lot of expectations from this acquisition.
Hungama TV will strengthen the current bouquet of channels under Walt
--- Content provided by FirstRanker.com ---
Disney, said Jain. The stake in UTV is also significant for Disney`s plans inIndia and, as Jain pointed out, this strategic partnership between the two groups
will see lots of opportunities for synergy between the two brands. When asked if
--- Content provided by FirstRanker.com ---
UTV`s animation division will provide content for Disney both in India as well
as internationally, Jain did not rule out the possibility, but said that they would
--- Content provided by FirstRanker.com ---
consider it now that they are formally associated with UTV.--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
Insight 2
Sasken buys Finland Company for Rs 210 crores
--- Content provided by FirstRanker.com ---
Making its first overseas acquisitions, Sasken Communication Technologies, theBangalore-headquartered provider of software services and products for telecom
sector announced in June 2006 that it has acquired 100% of Finland-based
--- Content provided by FirstRanker.com ---
Botnia Hightech for E35.5m (Rs 210.3 crore) in an all cash deal. Theacquisition, which is expected to close by August 2006-end will be funded by
Sasken through a combination of internal accrual and other sources. It has
--- Content provided by FirstRanker.com ---
already received the board approval to raise $50m (Rs 225 crore), which could
be
--- Content provided by FirstRanker.com ---
eitherthrough
the
--- Content provided by FirstRanker.com ---
debt
or
--- Content provided by FirstRanker.com ---
equityroute.
Botnia, which started its operations in 1989 is a provider of hardware, software,
--- Content provided by FirstRanker.com ---
mechanical design and testing services. Sasken through this acquisition gets 230
people including a development centre in Finland. Botnia and its two
--- Content provided by FirstRanker.com ---
subsidiaries had revenues of E17.7m (Rs 104 crore) with a net profit of E2.9m(Rs 17 crore) for the year ended April 30, `06. Neeta Revankar, CFO, Sasken,
said the valuation of Botnia was two times its revenue and 12.2 times its
--- Content provided by FirstRanker.com ---
EBITDA. Sasken CEO Rajiv C Mody said, This acquisition takes us into the
unchartered territory and helps us to provide end-to-end solutions. Botnia,
--- Content provided by FirstRanker.com ---
whose margins are in line with Sasken, will operate as a subsidiary and itsdevelopment centre in Finland will be the global centre of excellence for
hardware and mechanical design. Sasken COO Prabhas Kumar said the Botnia
--- Content provided by FirstRanker.com ---
acquisition will provide it the scale to target large projects as well as address the
European
--- Content provided by FirstRanker.com ---
market.He said the integration process of both the companies are already on and from
September 1, it will have to market strategies jointly. Ms Revankar said this
--- Content provided by FirstRanker.com ---
acquisition is expected to be EPS accretive though its margins might take a hit in
the short-term and the situation is expected to change in Q3 of the current fiscal,
--- Content provided by FirstRanker.com ---
when its product-related activity gains momentum. Currently, Sasken generated96% of its revenues from services and the remaining from products. For Q1 of
FY07, Sasken reported revenues of Rs 91.1 crore and a net profit of Rs 8.6
--- Content provided by FirstRanker.com ---
crore, while recording an annual growth of 40% in services. It expects handsets
containing Sasken IP to start shipping from November 2006, fuelling its
products segments.
--- Content provided by FirstRanker.com ---
1.3 Joint Ventures:
--- Content provided by FirstRanker.com ---
A joint venture is a legal organization that takes the form of a short-termpartnership in which the persons jointly undertake a transaction for mutual
profit. Generally each person contributes assets and share risks. Like a
--- Content provided by FirstRanker.com ---
partnership, joint ventures can involve any type of business transaction and the
"persons" involved can be individuals, groups of individuals, companies, or
--- Content provided by FirstRanker.com ---
corporations. Joint ventures are also widely used by companies to gain entranceinto foreign markets. Foreign companies form joint ventures with domestic
companies already present in markets the foreign companies would like to enter.
--- Content provided by FirstRanker.com ---
The foreign companies generally bring new technologies and business practices
into the joint venture, while the domestic companies already have the
--- Content provided by FirstRanker.com ---
relationships and requisite governmental documents within the country alongwith being entrenched in the domestic industry. As there are good business and
accounting reasons to create a joint venture (JV) with a company that has
--- Content provided by FirstRanker.com ---
complementary capabilities and resources, such as distribution channels,
technology, or finance, joint ventures are becoming an increasingly common
--- Content provided by FirstRanker.com ---
way for companies to form strategic alliances. In a joint venture, two or more"parent" companies agree to share capital, technology, human resources, risks
and rewards in a formation of a new entity under shared control.
--- Content provided by FirstRanker.com ---
1.3.1.Factors to be considered before a Joint Venture is formed:
a) Screening of prospective partners: All parties must screen other partners
--- Content provided by FirstRanker.com ---
before they venture into deal;b) Business Plan: Joint development of a detailed business plan and
shortlisting a set of prospective partners based on their contribution to
--- Content provided by FirstRanker.com ---
developing a business plan;c) Due diligence: checking the credentials of the other party ("trust and
verify" - trust the information you receive from the prospective partner, but
--- Content provided by FirstRanker.com ---
it's good business practice to verify the facts through interviews with third
parties);
--- Content provided by FirstRanker.com ---
d) Exit strategy: Development of an exit strategy and terms of dissolution ofthe joint venture;
e) Organization structure: most appropriate structure (e.g. most joint ventures
--- Content provided by FirstRanker.com ---
involving fast growing companies are structured as strategic corporate
partnerships);
--- Content provided by FirstRanker.com ---
f) Allocations: special allocations of income, gain, loss or deduction to bemade among the partners;
g) Compensation: compensation to the members that provide services to form
--- Content provided by FirstRanker.com ---
joint venture;
--- Content provided by FirstRanker.com ---
1.3.2Benefits of Joint ventures:a) Provide companies with the opportunity to obtain new capacity and
expertise;
--- Content provided by FirstRanker.com ---
b) Allow companies to enter into related businesses or new geographic markets
or obtain new technological knowledge;
--- Content provided by FirstRanker.com ---
c) Have a relatively short life span (5-7 years) and therefore do not represent along-term commitment;
d) In the era of divesture and consolidation, offer a creative way for companies
--- Content provided by FirstRanker.com ---
to exit from non-core businesses: companies can gradually separate a
business from the rest of the organization, and ultimately, sell it to the other
parent company (approximately. 80% of all joint ventures end in a sale by
--- Content provided by FirstRanker.com ---
one partner to the other).
--- Content provided by FirstRanker.com ---
Insight 3 and Insight 4 throws light on how Indian Auto majors forming jointventures to pursue their global strategies.
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
Insight 3
Tatas, Fiat strike 50:50 JV to make cars, engines
--- Content provided by FirstRanker.com ---
In a long-awaited move, Tata Motors chairman Ratan Tata and Fiat SpA
chairman Sergio Marchionne have decided to shift gears and strengthen a
--- Content provided by FirstRanker.com ---
relationship which had begun with a low-key distribution tie-up last year. In
June 2006 the companies announced that they had signed a new MoU, which
--- Content provided by FirstRanker.com ---
commits the two to a 50:50 joint venture in India. Tata Motors and Fiat nowplan to use Fiat`s existing facility in Ranjangaon, near Pune, to manufacture
passenger cars from both stables as well as engines and transmissions. The deal
--- Content provided by FirstRanker.com ---
will also enable India`s biggest auto maker to gain an entry into Latin America
for its utility vehicles and pickups. Under the terms of the MoU, Fiat will
--- Content provided by FirstRanker.com ---
manufacture its two future launches, the B segment Grande Punto and a new Csegment premium sedan, at the Ranjangaon facility. It will also make its small
multijet diesel engine there, which will be fitted into a yet-to-be disclosed Tata
--- Content provided by FirstRanker.com ---
Motors product. It is not clear what products Tata Motors will be manufacturing
at the facility, though sources said that the facility would give them more
--- Content provided by FirstRanker.com ---
flexibility. Fiat and Tata have also signed a 60-day study aimed at exploring thepossibility of using Fiat`s production facility in Cordoba, Argentina to
manufacture and sell Tata Motors` utility vehicles and pickups in Latin America.
--- Content provided by FirstRanker.com ---
The joint venture will give the Fiat group, which has worked up huge
accumulated losses though its 100% subsidiary Fiat India in its first ten years of
operation, a much-desired foothold in the Indian passenger car market. Its Indian
--- Content provided by FirstRanker.com ---
operations had spun out of control, after a string of marketing and distribution
glitches. The high cost of operating the Kurla facility also hurt its overall
--- Content provided by FirstRanker.com ---
performance. In his earlier visit to India, Mr Marchionne had admitted that thedebacle in India had been a humbling experience for the European carmaker,
forcing it to look for a local partner with necessary market expertise.
--- Content provided by FirstRanker.com ---
Tata Motors and Fiat signed a distribution agreement in January `06, by which
they established a chain of joint dealerships. Fiat had begun hawking its
--- Content provided by FirstRanker.com ---
hatchback Palio and its sedan Petra through the co-branded dealerships. Thedistribution tie-up, which may have helped Fiat regain some amount of
consumer confidence, was seen as a run-up to a more comprehensive
--- Content provided by FirstRanker.com ---
arrangement between the two. On Tuesday, the Italian major provided some
early evidence that its overall global strategy of entering into strategic alliances
--- Content provided by FirstRanker.com ---
with other global auto companies like Ford, Suzuki and Peugeot was working.Backed by strong sales of its hatchback Punto, Fiat reported a 56% jump in its
second-quarter profits, clearly signalling that it could be finally emerging out of
--- Content provided by FirstRanker.com ---
the
woods.
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
Insight 4
Bajaj Auto sets up assembling unit in Indonesia
--- Content provided by FirstRanker.com ---
Bajaj Auto will set up a joint venture in Indonesia, for which it has got necessaryapproval from the Indonesian Government, said executive director of the
company Sanjiv Bajaj said. The approval to set up the assembling unit, at a cost
--- Content provided by FirstRanker.com ---
of 50 million dollars, was received a month ago and the JV would be called P T
Bajaj Auto Indonesia, Bajaj told reporters. Initially, 12.5 million dollars would
--- Content provided by FirstRanker.com ---
be invested in the JV, he said, adding that the Indonesian partner Doentorawould
hold
--- Content provided by FirstRanker.com ---
afive
per
--- Content provided by FirstRanker.com ---
cent
stake.
--- Content provided by FirstRanker.com ---
Bajaj Auto would hold 95 per cent stake in the JV. Work at the unit would beginfrom next month for three-wheelers and three months later, Pulsar motorcycles
would be introduced in Indonesia, Bajaj said. Annual output from the facility for
--- Content provided by FirstRanker.com ---
three-wheelers is expected to be 10,000 units and for two-wheelers, it would be
about one lakh units. The completely knocked down units (CKDUs) would be
--- Content provided by FirstRanker.com ---
shifted to Indonesia. The distribution and marketing facilities for the JV inIndonesia are being worked upon, he said. Critical components would be
sourced from India while the bulky ones would come from other places, Bajaj
--- Content provided by FirstRanker.com ---
said. Four weeks ago, around 400 CKDUs of Boxer S 100 cc motor- cycles were
shipped to Nigeria and were sold within a span of ten days, he said, adding by
--- Content provided by FirstRanker.com ---
the end of the last quarter of the current fiscal, Pulsars would enter the Iranmarket and CNG-powered three-wheelers would make a foray into Jakarta.
Bajaj Auto Managing Director Rajiv Bajaj said the company would launch 80
--- Content provided by FirstRanker.com ---
three-wheelers in Pune, which would have direct fuel injection engines and also
be fitted with catalytic convertors. The company would study the response of the
--- Content provided by FirstRanker.com ---
customers and work towards raising fuel efficiency of this model by 30 per centand lowering its emission level by 50 per cent, he said. They would be
manufactured at Bajaj Auto's Chakan facility in the outskirts of Pune.
--- Content provided by FirstRanker.com ---
1.4 Other Restructuring Methods:
--- Content provided by FirstRanker.com ---
There are several restructuring methods: doing an outright sell-off, doing anequity carve-out, spinning off a unit to existing shareholders or issuing tracking
stock. Each has advantages and disadvantages for companies and investors. All
--- Content provided by FirstRanker.com ---
of these deals are quite complex.
a) Sell-Offs
--- Content provided by FirstRanker.com ---
A sell-off, also known as a divestiture, is the outright sale of a companysubsidiary. Normally, sell-offs are done because the subsidiary doesn't fit into
the parent company's core strategy. The market may be undervaluing the
--- Content provided by FirstRanker.com ---
combined businesses due to a lack of synergy between the parent and subsidiary.As a result, management and the board decide that the subsidiary is better off
under different ownership. Besides getting rid of an unwanted subsidiary, sell-
--- Content provided by FirstRanker.com ---
offs also raise cash, which can be used to pay off debt. In the late 1980s and
early 1990s, corporate raiders would use debt to finance acquisitions. Then, after
--- Content provided by FirstRanker.com ---
making a purchase they would sell-off its subsidiaries to raise cash to service thedebt. The raiders' method certainly makes sense if the sum of the parts is greater
than the whole. When it isn't, deals are unsuccessful.
--- Content provided by FirstRanker.com ---
b) Equity Carve-Outs
--- Content provided by FirstRanker.com ---
More and more companies are using equity carve-outs to boost shareholdervalue. A parent firm makes a subsidiary public through an initial public offering
(IPO) of shares, amounting to a partial sell-off. A new publicly listed company
--- Content provided by FirstRanker.com ---
is created, but the parent keeps a controlling stake in the newly traded
subsidiary. A carve-out is a strategic avenue a parent firm may take when one of
--- Content provided by FirstRanker.com ---
its subsidiaries is growing faster and carrying higher valuations than otherbusinesses owned by the parent. A carve-out generates cash because shares in
the subsidiary are sold to the public, but the issue also unlocks the value of the
--- Content provided by FirstRanker.com ---
subsidiary unit and enhances the parent's shareholder value. The new legal
entity of a carve-out has a separate board, but in most carve-outs, the parent
--- Content provided by FirstRanker.com ---
retains some control. In these cases, some portion of the parent firm's board ofdirectors may be shared. Since the parent has a controlling stake, meaning both
firms have common shareholders, the connection between the two will likely be
--- Content provided by FirstRanker.com ---
strong. That said, sometimes companies carve-out a subsidiary not because it's
doing well, but because it is a burden. Such an intention won't lead to a
--- Content provided by FirstRanker.com ---
successful result, especially if a carved-out subsidiary is too loaded with debt, orhad trouble even when it was a part of the parent and is lacking an established
track record for growing revenues and profits. Carve-outs can also create
--- Content provided by FirstRanker.com ---
unexpected friction between the parent and subsidiary. Problems can arise asmanagers of the carved-out company must be accountable to their public
shareholders as well as the owners of the parent company. This can create
--- Content provided by FirstRanker.com ---
divided loyalties.
c) Spinoffs
--- Content provided by FirstRanker.com ---
A spinoff occurs when a subsidiary becomes an independent entity. The parentfirm distributes shares of the subsidiary to its shareholders through a stock
dividend. Since this transaction is a dividend distribution, no cash is generated.
--- Content provided by FirstRanker.com ---
Thus, spinoffs are unlikely to be used when a firm needs to finance growth or
deals. Like the carve-out, the subsidiary becomes a separate legal entity with a
--- Content provided by FirstRanker.com ---
distinctmanagement
and
--- Content provided by FirstRanker.com ---
board.
Like carve-outs, spinoffs are usually about separating a healthy operation. In
--- Content provided by FirstRanker.com ---
most cases, spinoffs unlock hidden shareholder value. For the parent company, itsharpens management focus. For the spinoff company, management doesn't
have to compete for the parent's attention and capital. Once they are set free,
--- Content provided by FirstRanker.com ---
managers can explore new opportunities. Investors, however, should beware of
throw-away subsidiaries the parent created to separate legal liability or to off-
--- Content provided by FirstRanker.com ---
load debt. Once spinoff shares are issued to parent company shareholders, someshareholders may be tempted to quickly dump these shares on the market,
depressing the share valuation.
--- Content provided by FirstRanker.com ---
d) Tracking Stock
--- Content provided by FirstRanker.com ---
A tracking stock is a special type of stock issued by a publicly held company totrack the value of one segment of that company. The stock allows the different
segments of the company to be valued differently by investors. Let's say a slow-
--- Content provided by FirstRanker.com ---
growth company trading at a low price-earnings ratio (P/E ratio) happens to
have a fast growing business unit. The company might issue a tracking stock so
the market can value the new business separately from the old one and at a
--- Content provided by FirstRanker.com ---
significantly
higher
--- Content provided by FirstRanker.com ---
P/Erating.
Why would a firm issue a tracking stock rather than spinning-off or carving-out
--- Content provided by FirstRanker.com ---
its fast growth business for shareholders? The company retains control over the
subsidiary; the two businesses can continue to enjoy synergies and share
--- Content provided by FirstRanker.com ---
marketing, administrative support functions, a headquarters and so on. Finally,and most importantly, if the tracking stock climbs in value, the parent company
can use the tracking stock it owns to make acquisitions. Still, shareholders need
--- Content provided by FirstRanker.com ---
to remember that tracking stocks are class B, meaning they don't grant
shareholders the same voting rights as those of the main stock. Each share of
--- Content provided by FirstRanker.com ---
tracking stock may have only a half or a quarter of a vote. In rare cases, holdersof tracking stock have no vote at all.
--- Content provided by FirstRanker.com ---
Insight 5 highlights how Indian companies in recent past stepped up their
international foray through different strategic routes. Insight 6 throws light on
--- Content provided by FirstRanker.com ---
how Pfizer earmarking considerable money for making strategic deals in thecoming future. Insight 7 discuses the tie-up proposal between Renault and
General Motors.
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
Insight 5
Companies take the integration route to success
--- Content provided by FirstRanker.com ---
There`s no doubt that India has made the cut in global business and will be themain driver of the Asian century. But, to be a powerhouse, you need to
dominate, and that`s precisely what Indian companies are doing now. They are
--- Content provided by FirstRanker.com ---
integrating vertically, and in the process, scooping up some foreign companies
as well. The strategy is simple: become a dominant player in your sector, and
--- Content provided by FirstRanker.com ---
thentake
on
--- Content provided by FirstRanker.com ---
the
world.
--- Content provided by FirstRanker.com ---
From raw material to retailing, Indian business groups are creating fully-integrated businesses in their respective sectors. Over the past year, corporates
that have started creating future business power-houses through acquisitions
--- Content provided by FirstRanker.com ---
include Videocon (electronics), GHCL (home textiles), Bilt (paper) and RajeshExports (gold jewellery). Significantly, all these companies have at least one
global face for their fully-integrated businesses. In a few cases, they are in the
--- Content provided by FirstRanker.com ---
process of creating the world`s first fully-integrated business in their sectors.
They, therefore, get to con-trol a big chunk of margins through production and
--- Content provided by FirstRanker.com ---
retail cycle in their sectors. Take Videocon, which was primarily a consumerdurable maker till two years ago. It entered the electronic component business
big time by acquiring Thomson`s global picture tube business. It is an added ad-
--- Content provided by FirstRanker.com ---
vantage that it also makes glass that goes into the making of picture tubes, the
single biggest component of TV. So from sand, which is used to make glass, to
--- Content provided by FirstRanker.com ---
tubes to TV, and finally, retail, which the group has entered the over past year, itcompletes a fully-integrated global operation in the electronics business. The
Videocon Group`s Next branded stores already form the largest electronics retail
--- Content provided by FirstRanker.com ---
chain in India in terms of number of outlets. Another such case is GHCL, a
small-time soda ash and textile manu-facturer that hit big league as the world`s
--- Content provided by FirstRanker.com ---
first fully-integrated global player in the home textile business. Its operationsspan from spinning and weaving to having international home textile brands.
Now, with its latest acquisition in the UK, it`s a specialised home textile retail
--- Content provided by FirstRanker.com ---
chain. GHCL is not stopping at Rosebys, the UK-based chain it has ac-quired,
and is scouting for other retail chains in Europe. Says Nikhil Sen, who looks
--- Content provided by FirstRanker.com ---
after corporate finance and strategy at GHCL, The overall strategy is builtaround creating a fully-integrated home textile business. The Gautam Thapar-
led Bilt is also headed in a similar direction. The paper manufacturer now has
--- Content provided by FirstRanker.com ---
international plantation rights, pulp mills in India and abroad, apart from core
paper manufacturing business
--- Content provided by FirstRanker.com ---
Insight 6
Pfizer to earmark $17 bn for deals
--- Content provided by FirstRanker.com ---
Pfizer, the world`s largest drugmarker, yesterday detailed plans to spend $17billion in 30 months on acquisitions, using its financial muscle to buy products
and companies to help boost growth. The group also aimed to reasure investors,
--- Content provided by FirstRanker.com ---
saying its size and financial flexibility would help it overcome challenges.
Pfizer faces patent expiries on a series of big drugs, new generic competition,
--- Content provided by FirstRanker.com ---
market pricing pressures, and questions that its sheer scale could keep it fromposition consistently high profit growth. Its share price has flirted with eight-
year lows. The company side it was seeking smaller acquisitions, primarily new
--- Content provided by FirstRanker.com ---
drug candidates or technology, and was not looking for a big merger because it
felt its global reach and infrastructure was sufficient. Hank McKinnell, chairman
--- Content provided by FirstRanker.com ---
and chief executive, said: We`re looking in a universe that tends to be about $1billion-$4 billion in cost. We don`t see much benefit to us with a big
acquisition.
--- Content provided by FirstRanker.com ---
Pfizer has taken steps to boost its value. It recently agreed to sell its consumer
--- Content provided by FirstRanker.com ---
products business to Johnson & Johnson for $16.6 billion, has employed anaggressive share buy-back scheme and increased the dividend. Pfizer`s
acquisition warchest will be half of the $34 billion expected from the
--- Content provided by FirstRanker.com ---
combination of the $13.5 billion after-tax proceeds of the consumer products
sale, and its projected cashflow.
--- Content provided by FirstRanker.com ---
Pfizer also boosted its share repurchaseplans to a $17 billion stock buy-back over this year and next. Its shares rose 2
per cent to $23.79 in New York trading. Investors were relieved yesterday with
--- Content provided by FirstRanker.com ---
Pfizer`s second-quarter results, which were helped by an aggressive cost-cutting
plan, and strong sales of critical durgs Lipitor, cholesterol reducer, and painkiller
--- Content provided by FirstRanker.com ---
Celebrex. Excluding one-time items, second quarter net income rose 10 percent to $3.66 billion. Sales increased 3 per cent to $11.7 billion. Lipitor and
Celebrex are key components in Pfizer`s plan to reignite sales and profit growth
--- Content provided by FirstRanker.com ---
next year.Lipitor, the world`s biggest-selling drug, is under threat from
generic competition following the June patent expiry of its competitor Zocor,
--- Content provided by FirstRanker.com ---
made by Merck. The momentum allowed Pfizer to raise its profit forecast this
year to $2 per share or 7 cents higher than its previous estimate.
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
Insight 7
Renault to take up GM tie-up proposal
--- Content provided by FirstRanker.com ---
An audacious plan for a tie-up between General Motors and Renault that would
create a $100bn global auto giant was set to come before the board of the French
--- Content provided by FirstRanker.com ---
carmaker. GM`s most high-profile investor, billionaire Kirk Kerkorian, urgedthe US company to consider a three-way partnership with Renault and its partner
Nissan. Renault and Nissan CEO Carlos Ghosn has said that the board and
--- Content provided by FirstRanker.com ---
management of GM would need to fully support the project before any study of
the plan could take place. Nissan said after its board meeting that its directors
--- Content provided by FirstRanker.com ---
had approved exploratory talks and charged Mr Ghosn with leading thediscussions. A tie-up would put the Brazilian-born French executive of
Lebanese parents at the helm of a global auto group that will be breathing down
--- Content provided by FirstRanker.com ---
the neck of Japan`s Toyota, which has a market value of some $190 bn.
But analysts doubted that the deal would benefit Renault, which has a
--- Content provided by FirstRanker.com ---
controlling 44% stake in Nissan, because of the risk involved just as the Frenchcompany has embarked on a recovery plan drawn up by Ghosn after he turned
Nissan
--- Content provided by FirstRanker.com ---
around.
--- Content provided by FirstRanker.com ---
Mr Ghosn has expressed interest in acquiring a stake of up to 20% in the world`slargest automaker at a dinner several days ago with Kerkorian, a source familiar
with the situation said on Friday. Kerkorian owns 9.9% of GM. GM shares rose
--- Content provided by FirstRanker.com ---
as much as 8.5% on Friday on Kerkorian`s proposal and prospects of a speedier
turnaround at the struggling US automaker. Analysts estimate that the stake
could cost Renault about E2.6bn ($3.3bn). Renault already owns the Romanian
--- Content provided by FirstRanker.com ---
Dacia brand and has a stake in Samsung Motors of Korea. GM is the maker of
Cadillac, Corvette, Saab, Hummer, Opel/Vauxhall and Chevrolet cars. We
--- Content provided by FirstRanker.com ---
struggle to see short-to medium-term synergies for both sides, DresdnerKleinwort credit analyst Christophe Boulanger said in a note to clients on
Monday. Boulanger said a 10% GM stake would cost Renault about E1.3bn
--- Content provided by FirstRanker.com ---
($1.66bn), which would likely trigger at least a one-notch credit rating cut to the
BBB level with all three rating agencies, and a potential negative outlook given
--- Content provided by FirstRanker.com ---
the challenges to make a three-way partnership work. The cost of insuringRenault`s debt against default rose on Monday, reflecting the worries about the
impact of any deal on Renault`s credit rating. CM-CIC Securities analyst Pierre-
--- Content provided by FirstRanker.com ---
Yves Quemener said Renault could easily finance such a stake but added the
gains
--- Content provided by FirstRanker.com ---
ofa
three-way
--- Content provided by FirstRanker.com ---
tie-up
for
--- Content provided by FirstRanker.com ---
Renaultwere
limited.
--- Content provided by FirstRanker.com ---
We would like to simply stress that the challenges could offset the advantages
in a period where Renault is restructuring, Quemener said. The Kerkorian
--- Content provided by FirstRanker.com ---
suggestion about a GM stake came after media speculation that Ford had wantedGhosn
to
--- Content provided by FirstRanker.com ---
jump
ship.
--- Content provided by FirstRanker.com ---
At UBS, an analyst said that while a tie-up with GM would give the alliance themuch discussed third leg, it would also create problems. Renault-Nissan
already has all of the purchasing and engineering scale it can possibly use.
--- Content provided by FirstRanker.com ---
Investing in GM would see management distracted for years. GM faces a
difficult legacy, labor, brand and distribution challenges that may not be solved
--- Content provided by FirstRanker.com ---
by target-setting management, UBS said, adding that the 2.6 billion eurosneeded to buy 20 percent in GM could be financed by Renault itself if it sold its
stake
--- Content provided by FirstRanker.com ---
in
truck
--- Content provided by FirstRanker.com ---
makerVolvo
(VOLVb.ST).
--- Content provided by FirstRanker.com ---
Bruno Lapierre of CA Cheuvreux said a tie-up would work against the interests
of Renault shareholders for the next three years at least. Renault is at the start
of an ambitious plan that requires many cultural changes within the group and
--- Content provided by FirstRanker.com ---
dearly needs Mr Ghosn`s management expertise in this process, he said.
--- Content provided by FirstRanker.com ---
1.5 SummaryOne size doesn't fit all. Many companies find that the best way to get ahead is to
expand ownership boundaries through mergers and acquisitions. For others,
--- Content provided by FirstRanker.com ---
separating the public ownership of a subsidiary or business segment offers more
advantages. At least in theory, mergers create synergies and economies of scale,
--- Content provided by FirstRanker.com ---
expanding operations and cutting costs. Investors can take comfort in the ideathat
a
--- Content provided by FirstRanker.com ---
merger
will
--- Content provided by FirstRanker.com ---
deliverenhanced
market
--- Content provided by FirstRanker.com ---
power.
By contrast, de-merged companies often enjoy improved operating performance
--- Content provided by FirstRanker.com ---
thanks to redesigned management incentives. Additional capital can fund growthorganically or through acquisition. Meanwhile, investors benefit from the
improved information flow from de-merged companies. M&A comes in all
--- Content provided by FirstRanker.com ---
shapes and sizes, and investors need to consider the complex issues involved in
M&A. The most beneficial form of equity structure involves a complete analysis
--- Content provided by FirstRanker.com ---
ofthe
costs
--- Content provided by FirstRanker.com ---
and
benefits
--- Content provided by FirstRanker.com ---
associatedwith
the
--- Content provided by FirstRanker.com ---
deals.
Mergers and acquisitions, Joint ventures, Tie-ups, and other forms of strategic
--- Content provided by FirstRanker.com ---
alliances give flexibility to corporate managers in restructuring their businessportfolio.
--- Content provided by FirstRanker.com ---
1.6 Glossary:
Strategic Alliance: An arrangement between two companies who have decided
to share resources in a specific project. A strategic alliance is less involved than
--- Content provided by FirstRanker.com ---
a joint venture where two companies typically pool resources in creating a
separate entity.
--- Content provided by FirstRanker.com ---
Consortium: A group made up of two or more individuals, companies orgovernments that work together toward achieving a chosen objective. Each
entity within the consortium is only responsible to the group in respect to the
--- Content provided by FirstRanker.com ---
obligations that are set out in the consortium's contract.
Keiretsu: A Japanese term describing a loose conglomeration of firms sharing
--- Content provided by FirstRanker.com ---
one or more common denominators. The companies don't necessarily need toown equity in each other. This term has been in the news every now and then,
especially when they talk about Silicon Valley. One example would be the close
--- Content provided by FirstRanker.com ---
relationship between AOL and Sun Micro. The two firms don't have ownership
in each other, but they work closely on various projects
--- Content provided by FirstRanker.com ---
1.7 Self Assessment Questions1. Describe Mergers and Acquisitions. List out the types of mergers.
2. What are the advantages of mergers and acquisitions? Why normally
--- Content provided by FirstRanker.com ---
mergers fail?
3. Define Joint Venture. What factors to be considered before forming joint
--- Content provided by FirstRanker.com ---
venture?4. List out various methods of corporate restructuring.
5. Illustrate how Indian corporate firms are venturing for global deals with
--- Content provided by FirstRanker.com ---
examples.
1.8 Further Readings
--- Content provided by FirstRanker.com ---
30. Vyuptakesh Sharan, International Business, Concept, Environment andstrategy (2006), Dorling Kindersley (India) Pvt. Ltd, New Delhi
31. Charles W.L.Hill, International Business, Competing in the Global
--- Content provided by FirstRanker.com ---
Marketplace (2003), Tata Mc-Graw-HillPublishing Company Limited, NewDelhi.
UNIT-V
--- Content provided by FirstRanker.com ---
LESSON - IINTERNATIONAL MERGERS AND ACQUISIONS
--- Content provided by FirstRanker.com ---
LESSON OUTLINE
--- Content provided by FirstRanker.com ---
Introduction
--- Content provided by FirstRanker.com ---
Classification of Cross-
Border M&As.
--- Content provided by FirstRanker.com ---
Why do firms engage in
Cross-Border M&As?
--- Content provided by FirstRanker.com ---
Motivations for Conducting
--- Content provided by FirstRanker.com ---
M&As.Technology and M&A
--- Content provided by FirstRanker.com ---
Changes in the Policy and
--- Content provided by FirstRanker.com ---
RegulatoryEnvironment
Policies on FDI and Cross-
--- Content provided by FirstRanker.com ---
border M&AsTows Matrix.
--- Content provided by FirstRanker.com ---
LEARNING OBJECTIVES
--- Content provided by FirstRanker.com ---
After reading the lesson youshould able to
--- Content provided by FirstRanker.com ---
Understand
--- Content provided by FirstRanker.com ---
whatis
--- Content provided by FirstRanker.com ---
International M&A.
Acquaint with the motivation
--- Content provided by FirstRanker.com ---
for International M&A.Explain
the
--- Content provided by FirstRanker.com ---
Role
of
--- Content provided by FirstRanker.com ---
Technology in M&A.Discuss the changing policy
and the Cross-Border M&A.
--- Content provided by FirstRanker.com ---
Analyze the concept of
TOWS Matrix.
Introduction
--- Content provided by FirstRanker.com ---
Prior to the 1980`s merger and acquisitions, simply meant that one
--- Content provided by FirstRanker.com ---
company would attempt to take over another by gaining enough of its commonstock to gain control. In the simplest sense, merger means two companies
becoming one with the acquire being in the commanding position, the
--- Content provided by FirstRanker.com ---
Government only became involved if the deal was deemed inimical to
competition on if the potential acquirer was foreign, seeking control of a
--- Content provided by FirstRanker.com ---
company or industry deemed vital to the national defense.--- Content provided by FirstRanker.com ---
After introduction of Globalization, Liberalization, the term, Merger of
Acquisition` became very popular. Merger and Acquisition, which had taken
--- Content provided by FirstRanker.com ---
place here and there with in the national frontiers, crossed national borders and ithas been taking more in numbers between the countries now. Merger &
Acquisition, which takes place between two companies of the two countries, is
--- Content provided by FirstRanker.com ---
called International Merger (or) Cross-Border Merger and Acquisition.
--- Content provided by FirstRanker.com ---
Significance of International M&AInternational Merger and Acquisition are playing an increasingly
--- Content provided by FirstRanker.com ---
important role in the growth of international production. A firm can undertake
FDI in a host country in of two ways: Greenfield investment in either a new
--- Content provided by FirstRanker.com ---
facility, or acquiring or merging with an existing local firm. The local firm maybe privately or state owned privatizations involving foreign investors count as
cross-border M&As, which entail a change in the control of the merged or
--- Content provided by FirstRanker.com ---
acquired firm. In a cross-border merger, the assets and operations of two firms
belonging to two different countries are combined to establish a new legal
--- Content provided by FirstRanker.com ---
entity. In a cross-border acquisition, the control of assets and operations istransferred from a local to a foreign company, the former becoming an affiliate
of the latter.
--- Content provided by FirstRanker.com ---
To the extent that both Greenfield investment and cross-border M&As
place host country assets under the governance of TNCs and, hence, contribute
--- Content provided by FirstRanker.com ---
to the growth of an international production system-there is no reason to
distinguish between them. Both involve management control of a resident entity
--- Content provided by FirstRanker.com ---
in one country by an enterprise resident in another. To the extent, however, thatthe assets placed under TNC control are newly created in the case of cross-
border M&As, then there is reason to consider them separately. The normal
--- Content provided by FirstRanker.com ---
definitions of FDI, and existing, assets are transferred from one owner to
another in the case of cross-border M&As, then there is reason to consider them
--- Content provided by FirstRanker.com ---
separately. The normal definitions of FDI apply to entry through M&As aswell. The country of the acquirer or purchaser is the home country and the
country of the target or acquired firm is the host country. In mergers, the
--- Content provided by FirstRanker.com ---
headquarters of the new firm can be in both countries (e.g. the Netherlands and
the United Kingdom, in the case of Royal Dutch/Shell) or in one (the United
--- Content provided by FirstRanker.com ---
Kingdom, in the case of BP-Amoco; Germany, in the case of Daimler-Chrysler).Acquisitions can be minority (foreign interest of 10 to 49 per cent of a firm`s
voting shares), majority (foreign interest of 50-99 per cent), or full or outright
--- Content provided by FirstRanker.com ---
acquisitions (foreign interest of 100 per cent). Acquisitions involving less than
10 per cent constitute portfolio investment. However, the distinction between
--- Content provided by FirstRanker.com ---
portfolio and direct investments is not always obvious. While FDI involves along-term relationship reflecting an investor`s lasting interest in a foreign
company, portfolio acquisitions can also involve management control, e.g. if
--- Content provided by FirstRanker.com ---
there are accompanying no equity arrangements, especially where non-
institutional investors are involved.
--- Content provided by FirstRanker.com ---
Classification of International M&As .
1.
--- Content provided by FirstRanker.com ---
Horizontal M&As (between competing firms in the same industry).
They have grown rapidly recently because of the global restructuring of many
industries in response to technological change and liberalization. By
--- Content provided by FirstRanker.com ---
consolidating their resources, the merging firms aim to achieve synergies (the
value of their combined assets exceeds the sum of their taken separately) and
--- Content provided by FirstRanker.com ---
often greater market power. Typical industries in which such M&As occur arepharmaceuticals, automobiles, petroleum and, increasingly, several services
industries.
--- Content provided by FirstRanker.com ---
2.
--- Content provided by FirstRanker.com ---
Vertical M&As (between firms in client-supplier or buyer-sellerrelationships). Typically they seek to reduce uncertainly and transaction costs as
regards forward and backward linkages in the production chain, and to benefit
--- Content provided by FirstRanker.com ---
from economies of scope. M&As between parts and components makers and
components makers and their clients (such as final elections or automobile in
--- Content provided by FirstRanker.com ---
unrelated activities). They seek to diversify risk and deepen economies ofscope.
--- Content provided by FirstRanker.com ---
3.
Conglomerate M&As (between companies in unrelated activities). They
--- Content provided by FirstRanker.com ---
seek to diversify risk and deepen economies of scope.--- Content provided by FirstRanker.com ---
The balance between these types of M&As has been changing over time.
The importance of horizontal M&As has risen somewhat over the years. In
--- Content provided by FirstRanker.com ---
1999, 70 per cent of the value of cross-border M&As were horizontal comparedto 59 per cent years ago. Vertical M&As have been on the rise since the mis-
1992s, but staying well below 10 per cent. In the late-1980s M&A boom,
--- Content provided by FirstRanker.com ---
conglomerate M&As were very popular, but they have diminished in importance
as firms have tended increasingly to focus on their core business to cope with
--- Content provided by FirstRanker.com ---
intensifying international competition. They declined from a high of 42 per centin 1991 to 27 per cent in 1999.
--- Content provided by FirstRanker.com ---
Another classification of International M&As.1.
M&As can be driven primarily by short-term financial gains, rather than
--- Content provided by FirstRanker.com ---
strategic or economic motivations such as the search for efficiency. Typical
examples include deals where buy out firms and venture capital companies
--- Content provided by FirstRanker.com ---
acquires other firms.2.
--- Content provided by FirstRanker.com ---
Friendly M&As can be distinguished from those that are hostile. In
friendly M&As, the board of a target firm agrees to the transaction. Hostile
--- Content provided by FirstRanker.com ---
M&As are undertaken against the wishes of the target firms, i.e. the boards ofthe latter reject takeover/merger offers. Regardless of whether hostile M&As
involve bidding by several prospective acquirers, the price premium tends to be
--- Content provided by FirstRanker.com ---
higher than in friendly transactions. The overwhelming to data from Thomson
Financial Securities Data Company, there were only 30 hostile takeovers out of
--- Content provided by FirstRanker.com ---
17,000 M&As between domestic firms. Hostile cross-border M&As that werecompleted accounted for less than 5 per cent of the total value and less than 0.2
per cent of the total number of M&As during the 1990s. In fact, according to
--- Content provided by FirstRanker.com ---
the same source, 1999 saw only 10 hostile cross-border cases out of a total of
some 6,200 all in developed countries. But some, such as the takeover of
--- Content provided by FirstRanker.com ---
Mannesmann by Vodafone Air Touch that succeeded in 2000, involve high-profile battles. Over the period 1987-1999, out of the 104 hostile cross-border
M & As, 100 targeted developed country firms, four targeted developing
--- Content provided by FirstRanker.com ---
country firms, while none targeted firms in Central and Eastern Europe.
--- Content provided by FirstRanker.com ---
Why Do Firms engage in International M&As?Why are firms increasingly engaging in cross-border M&As when
--- Content provided by FirstRanker.com ---
undertaking FDI? Although cross-border M&As represent one mode of FDI
entry into foreign locations, the received literature international production can
--- Content provided by FirstRanker.com ---
only party explain this phenomenon. Indeed, the OLI paradigm the mostprominent explanation of FDI does not distinguish between different modes of
entry and was formulated primarily in reference to Greenfield FDI. Thus, it is
--- Content provided by FirstRanker.com ---
useful to consider first the basis reasons for M&As in general, and for cross-border M&As in particular.
--- Content provided by FirstRanker.com ---
1.
Motivations for Conducting M&As
--- Content provided by FirstRanker.com ---
The following will explain why firms may prefer to grow via M&As rather
than through organic growth.
--- Content provided by FirstRanker.com ---
Reaching Desired Goal
--- Content provided by FirstRanker.com ---
Speed in crucial M&As often represent the fastest means of reaching the
desired goals when expanding domestically or internationally. For example,
--- Content provided by FirstRanker.com ---
when time to market is vital, the takeover of an existing firm in a new market
with an established distribution system is far more preferable to developing a
--- Content provided by FirstRanker.com ---
new local distribution and marketing organization. For a latecomer to a marketor a or a new field of technology, M&As can provide a way to catch up rapidly.
Enhanced competition and shorter product life cycled accentuate the necessity
--- Content provided by FirstRanker.com ---
for firms to respond quickly to opportunities in the economic environment,
preferably before competitors move.
--- Content provided by FirstRanker.com ---
Quest for Strategic Assets.
--- Content provided by FirstRanker.com ---
The second main motivation for firms to merge with or acquire an existing
company, rather than to grow organically, is the quest for strategic assets, such
--- Content provided by FirstRanker.com ---
as R&D or technical know-how, patents, brand names, the possession of localpermits and licenses, and supplier or distribution networks. Ready made access
to proprietary assets can be important because, by definition, they are not
--- Content provided by FirstRanker.com ---
available elsewhere in the market and they take time to develop.
Search for New Markets.
--- Content provided by FirstRanker.com ---
The search for new markets and market power is a constant concern for
firms. Through M&As, firms can quickly access new market opportunities and
--- Content provided by FirstRanker.com ---
develop critical mass without adding additional capacity to an industry. Bytaking over an existing company, immediate access to a local network of
suppliers, clients and skills can be obtained. This motivation is of particular
--- Content provided by FirstRanker.com ---
importance for cross-border M&As a the need for knowledge about local
conditions increases when leaving the home market. Beyond this, and
--- Content provided by FirstRanker.com ---
especially in markets characterized by oligopoly, M&As can also be motivatedby the pursuit for market power and market dominance.
--- Content provided by FirstRanker.com ---
Anticipated efficiency gains.
--- Content provided by FirstRanker.com ---
Anticipated efficiency gains through synergies are probably the mot citedjustification for M&As. Synergies can be static (cost reduction or revenue
enhancement at a given point in time) or dynamic (e.g. innovation-enhancing)
--- Content provided by FirstRanker.com ---
in character. Examples of the former kind of synergies include the pooling of
management resources (one head office instead of two), revenue enhancement
--- Content provided by FirstRanker.com ---
by using each other` marketing and distribution networks, purchasing synergies(greater bargaining power), economies of scale in production leading to cost
reductions, and the avoidance of duplication of production, R&D or other
--- Content provided by FirstRanker.com ---
activities. Dynamic synergies may involve the matching of complementary
resources and skills to enhance a firm`s innovatory capabilities with long-term
--- Content provided by FirstRanker.com ---
positive effects on sales, market shares and profits. The search for staticsynergies may be particularly important in industries characterized by increased
competitive pressure, falling prices and excess capacity, such as in the
--- Content provided by FirstRanker.com ---
automotive and defense industries. Meanwhile, dynamic synergies may be
crucial in industries experiencing fast technological change and that are
--- Content provided by FirstRanker.com ---
innovation driven, such as in information technology and pharmaceuticals. Theefficiency-through-synergy motive is present for both domestic and cross-border
M&As.
--- Content provided by FirstRanker.com ---
Greater Size.
--- Content provided by FirstRanker.com ---
In a globalizing economy, greater size, can be a crucial parameter,
particularly in operations requiring economies of scale, large expenditures for
--- Content provided by FirstRanker.com ---
R&D and the expansion of distribution networks for example. Size in itself canalso make it more difficult to be taken over and, therefore, can have a protective`
function. Large size can furthermore create financial, managerial and
--- Content provided by FirstRanker.com ---
operational synergies that reduce the operational vulnerability of firms. Sheer
size normally means lower-cost access to ingestible funds as there are
--- Content provided by FirstRanker.com ---
economies of scale in capital raising. Information asymmetries betweencorporate insiders and investors can make internal financing more favorable.
Another advantage of size is that larger firms with multiple operations across
--- Content provided by FirstRanker.com ---
geographical locations and segments can have an advantage in the collection and
adoption of new information and innovation. The size motive can apply to both
--- Content provided by FirstRanker.com ---
domestic and cross-border M&As.Risk reduction.
--- Content provided by FirstRanker.com ---
A fifth driver behind M&As is the desire for risk reduction (operational
--- Content provided by FirstRanker.com ---
risks, foreign exchange risks, etc.,) through product or geographical marketdiversification.
--- Content provided by FirstRanker.com ---
Financial gains.
--- Content provided by FirstRanker.com ---
The Sixth motive behind M&As is financial Motive. Stock prices do notalways reflect the true value of a firm. A potential acquirer can, for example,
value a company`s anticipated earnings stream higher than current shareholders
--- Content provided by FirstRanker.com ---
do. Bad management of a firm, imperfections in the capital market and major
exchange rate realignments may provide short-term capital gains to be made by
acquiring an undervalued firm, or affect the timing of planned M&As. Such
--- Content provided by FirstRanker.com ---
motivations are particularly important in the case of portfolio-type M&As and in
economies with poorly developed capital markets or in financial crisis. In
--- Content provided by FirstRanker.com ---
addition, some M&As are undertaken partly for tax considerations, e.g., toexploit unused tax shields.
--- Content provided by FirstRanker.com ---
Personal Gains.
--- Content provided by FirstRanker.com ---
The personal gains (or behavioral) explanation argues that corporatemanagers pursue their own self-interest, especially where corporate governance
is weak (a manifestation of what economists have denoted the principal-agent
--- Content provided by FirstRanker.com ---
proble). They may seek expansion or empire building to enhance executives`
power, prestige, job security or remuneration, even when this is not
--- Content provided by FirstRanker.com ---
technologically efficient or in the interest of shareholders.Technology and M&A.
--- Content provided by FirstRanker.com ---
The rapid pace of technological change has intensified competitive
--- Content provided by FirstRanker.com ---
pressures on the world`s technology leaders. Consequently, the costs and risksof innovation have risen in most industries, as has the need to incorporate
continuously new technologies and management practices. Firms thus need
--- Content provided by FirstRanker.com ---
more efforts to maintain innovative leads, to find new areas of technological
leadership, and to keep up with new knowledge and shorter product life cycles.
--- Content provided by FirstRanker.com ---
In an environment characterized by rapid technological change and risingexpenditure for risky R&D projects, many firms feel compelled to enter into
cross-border M&As as a way of sharing the costs of innovation and accessing
--- Content provided by FirstRanker.com ---
new technological assets to enhance their innovatory capabilities. M&As allow
firms to do this quickly. Such asset seeking FDI by TNCs from developed (and
--- Content provided by FirstRanker.com ---
increasingly from developing) countries is a rising form of FDI. It is likely tobecome more common as intangible, knowledge-based assets and access to a
pool of skilled people and work teams become more important in the world
--- Content provided by FirstRanker.com ---
economy.Changes in the Policy and Regulatory Environment Policies on FDI and
--- Content provided by FirstRanker.com ---
Cross-border M&As
--- Content provided by FirstRanker.com ---
The liberalization of FDI regimes has continued apace, typically on a
--- Content provided by FirstRanker.com ---
unilateral basis. Most countries are now trying to attract direct investment, not
just by removing restrictions, but also through active promotion and by
--- Content provided by FirstRanker.com ---
providing high standards of treatment, legal protection and guarantees. Of the1,035 FDI regulatory changes between 1991 and 1999in over 100 countries in
all regions, 974 went in the direction of facilitating FDI inflows. Examples of
--- Content provided by FirstRanker.com ---
such changes relevant to M&As include the removal of compulsory joint
venture requirements, restrictions on majority ownership and authorization
--- Content provided by FirstRanker.com ---
requirements. The international regulatory framework has also beenstrengthened, especially through the conclusion of bilateral investment
protection and double taxation treaties. Multilateral agreements support these
--- Content provided by FirstRanker.com ---
trends. For instance, WTO agreements limit the use of certain investment-
related measures that affect trade, like local content requirements on TNCs, and
--- Content provided by FirstRanker.com ---
certain types of export requirements. World Bank and IMF programmesencourage countries to adopt more open, transparent and welcoming r?gimes
towards foreign investors.
--- Content provided by FirstRanker.com ---
Other Changes in the Regulatory environment
--- Content provided by FirstRanker.com ---
Trade liberalization gathered pace in the 1990s with the conclusion of the
Uruguay Round. The cumulative effect has been a radical change in the signals
--- Content provided by FirstRanker.com ---
and competitive setting for international investors. Firms now face more intensecompetition at home as well as abroad.
--- Content provided by FirstRanker.com ---
The formation of regional free trade areas has facilitated both Greenfield
investment and cross-border M&As in several ways. Regional trade agreements
--- Content provided by FirstRanker.com ---
enlarge the size of the immediately accessible market for firms, and so attractforeign investors to serve them by setting up new facilities. They can enhance
market transparency and, if they link national currencies, lower the costs of
--- Content provided by FirstRanker.com ---
cross-border transactions. If they incorporate investment agreements, they make
M&As more feasible.
--- Content provided by FirstRanker.com ---
In parallel with trade liberalization and regional integration processes,
--- Content provided by FirstRanker.com ---
there has bee widespread privatization and deregulation of activities, most
notably in such service industries as telecommunications, transportation, power
--- Content provided by FirstRanker.com ---
generation and financial services. These changes have provided anotherstimulus to M&As in general and cross-border ones in particular. Privatization
programmes in many developing countries for sale. In fact, the combination of
--- Content provided by FirstRanker.com ---
privatization and deregulation has created a number of new TNCs.
--- Content provided by FirstRanker.com ---
Changes in Capital Markets.Cross-border M&As have been facilitated by changesin world capital
--- Content provided by FirstRanker.com ---
markets. The liberalization of capital movements, new information technology
providing instant information across the globe, more active market
--- Content provided by FirstRanker.com ---
intermediaries, and new financial instruments have had a profound impact onM&A activity worldwide. Whereas the liberalization of capital markets since
the mid-1980s had already greatly facilitated the growth of cross-border M&As,
--- Content provided by FirstRanker.com ---
most developed countries now have completely liberalized their capital
accounts, with virtually unrestricted facilities for cross-border loans and credits,
--- Content provided by FirstRanker.com ---
foreign currency deposits and portfolio investment. Most recently, financialtransactions have also been substantially liberalized in many developing
countries.
--- Content provided by FirstRanker.com ---
The liberalization of foreign equity ownership has facilitated M&As based
on stock swaps rather than cash deals. Major M&As have also been facilitated
--- Content provided by FirstRanker.com ---
by the rise of stock markets and ample liquidity in capital markets, which has
allowed firms by the introduction of the single European currency, which has
--- Content provided by FirstRanker.com ---
created a liquid market in European corporate bonds. Companies areincreasingly issuing Euro-denominated bonds to refinance debt and to raise
money for takeovers. For example, the rise of the Euro-denominated corporate
--- Content provided by FirstRanker.com ---
bond market and the underlying Euro-syndicated loan market greatly facilitated
Olivetti`s acquisition of Telecom Italia.
--- Content provided by FirstRanker.com ---
The TOWS Matrix: A Modern Tool for Analysis of the Situation
--- Content provided by FirstRanker.com ---
Today, strategy designers are aided by a number of matrices that show the
--- Content provided by FirstRanker.com ---
relationships of critical variables, such as Boston Consulting Group`s businessportfolio matrix, which will be discussed later. For many years, the SWOT
analysis has been used to identify a company`s strengths. Weaknesses,
--- Content provided by FirstRanker.com ---
opportunities, and threats. However, this kind of analysis is static and seldom
leads to the development of distinct alternative strategies based on it. Therefore,
--- Content provided by FirstRanker.com ---
the TOWS Matrix has been introduced for analyzing the competitive situation ofthe company or even of a nation that leads to the development of four distinct
sets of strategic alternatives.
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
The TOWS Matrix has a wider scope and a different emphasis from thebusiness portfolio matrix. The former does not replace the latter. The TOWS
Matrix is a conceptual framework for a systematic analysis that facilitates
--- Content provided by FirstRanker.com ---
matching of the external threats and opportunities with the internal weakness
and strengths of the organization.
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
It is common to suggest that companies should identify their strengths andweaknesses, as well as the opportunities and threats in the external environment,
but what is often overlooked is that combining these factors may require distinct
--- Content provided by FirstRanker.com ---
strategic choices. To systematize these choices, the TOWS Matrix has been
proposed, where T stands for threats, O for opportunities, W for weaknesses, and
--- Content provided by FirstRanker.com ---
S for strengths. The TOWS model starts with the threats (T in TOWS) becausein many situations a company undertake strategic planning as a result of
perceived crisis, problem, or threat.
--- Content provided by FirstRanker.com ---
Application of the TOWS Merger Matrix for Mergers, Acquisitions, Joint
--- Content provided by FirstRanker.com ---
Ventures, and Alliances.Companies around the world now use the TOWS Matrix; the matrix has
--- Content provided by FirstRanker.com ---
also been included in several modern textbooks on strategic management.
Recently, the TOWS Matrix concept has been introduced for planning mergers,
--- Content provided by FirstRanker.com ---
acquisitions, joint ventures, and alliances. Whenever two partners consider jointactivities. It is prudent to analyze the strengths and weaknesses for each partner
as well as their opportunities and threats. Moreover, their alternative strategies
--- Content provided by FirstRanker.com ---
before their association should be considered: these two TOWS Matrices
provide a better understanding of the prospective partners before the actual
--- Content provided by FirstRanker.com ---
linkage. For example, complementary strengths and weaknesses could result ina competitive advantage for both companies. On the other hand, reception and
overlap may result in duplication of efforts. After the two matrices are
--- Content provided by FirstRanker.com ---
evaluated, a third matrix should be developed for the partnership. This is
especially important for acquisitions and mergers because of the relative
--- Content provided by FirstRanker.com ---
permanency of the resulting entity. Preparing the three TOWS Matrices canalso allow potential problems to be identified in more loosely coupled
partnerships such as a strategic alliance.
--- Content provided by FirstRanker.com ---
Case - Global Car Industry
Daimler + Chrysler=New Car Company
--- Content provided by FirstRanker.com ---
In the late 1980s and the early 1990s, the Japanese made great strides in
--- Content provided by FirstRanker.com ---
the auto industry through efficient production methods and high-qualityproducts. However, a new trend was set by the German car maker that changed
the car industry with the Daimler-Chrysler merger, in which the former has 53
--- Content provided by FirstRanker.com ---
percent ownership and the latter the rest. The new car company is now the fifth
largest in the world and could become the volume producer in the whole
--- Content provided by FirstRanker.com ---
product range.--- Content provided by FirstRanker.com ---
The respective strengths are that Daimler is known for its luxury cars and
its innovation in small cars (A-Class, Smart car). Chrysler, on the other hand,
--- Content provided by FirstRanker.com ---
has an average profit per vehicle that is the highest among the Big 3 (GM, Ford,and Chrysler) in Detroit, thanks to high margins derived from the sale of
minivans and jeeps. It is also known for its highly skilled management and
--- Content provided by FirstRanker.com ---
efficient production. Low costs and simplicity (e.g. the Neon model) are other
hallmarks of Chrysler.
--- Content provided by FirstRanker.com ---
Mercedes-Benz (a part of Daimler Corporation) was known for its
--- Content provided by FirstRanker.com ---
excellence in engineering and product quality, the company`s brand image was
luxury cars. The high development costs and the need for gaining economies of
--- Content provided by FirstRanker.com ---
scale called for finding a partner that would enable it to other a complete productline from high-priced to low-priced vehicles.
--- Content provided by FirstRanker.com ---
They can now offer a full product line in all segments in their respective
--- Content provided by FirstRanker.com ---
home markets. There is little product overlap with the exception of the JeepCherokee competing directly with the Mercedes M-Class SUV, which is
produced in Alabama. Moreover, the partners can now utilize the innovation in
--- Content provided by FirstRanker.com ---
both their particular areas of expertise. Their facilities in various countries canbe used for the production and assembly of both low-and premium-priced cars.
In all, the merged Daimler Chrysler Corporation may achieve synergy and cost
--- Content provided by FirstRanker.com ---
savings.
--- Content provided by FirstRanker.com ---
Despite the potential advantages of the merger, challengers remain. The
--- Content provided by FirstRanker.com ---
company has little experience in penetrating the worldwide market of lower
priced products. There is also the potential for conflicts in the integration of the
--- Content provided by FirstRanker.com ---
operational and management systems of the merged companies. External threatsremain and may get worse. Car markets in the European union and NAFTA are
becoming saturated, and economic deterioration in developed and emerging
--- Content provided by FirstRanker.com ---
economies reduce and stagnate the growth in those countries. In addition,
competition (especially in the luxury segments) becomes fiercer.
--- Content provided by FirstRanker.com ---
The challenge for Daimler`s ECO, Jurgen Schrempp, is to integrate the
--- Content provided by FirstRanker.com ---
two companies and achieve the efficiencies that were one of the important aims
of the merger. In addition, integrating the organization cultures of the two
--- Content provided by FirstRanker.com ---
companies will be a major challenge.SELF-ASSESMENT QUESTIONS.
--- Content provided by FirstRanker.com ---
1. Explain the different types of International M&A.
2. Discuss the reasons why firms going for International M&A.
--- Content provided by FirstRanker.com ---
3. Explain the role of Technology in Cross-border M&A.4. Explain the significance of Cross-border M&A in the context of
Indian Economy.
--- Content provided by FirstRanker.com ---
FURTHER READINGS
Devraj, 2002, Merger and Amalgamations in Banking Industry,
--- Content provided by FirstRanker.com ---
Rajat Publications, New Delhi.
--- Content provided by FirstRanker.com ---
Bhalla. V.K. and ShivaRamu. S., 2003, International Business,Anmol Publications, New Delhi.
--- Content provided by FirstRanker.com ---
Chindnovsky, Danial. B., 1999, The Globalization of
Multinational Enterprise Activity and Economic Development,
--- Content provided by FirstRanker.com ---
Macmillan, London.GLOSSARY.
--- Content provided by FirstRanker.com ---
Merger & Acquisition
Vertical
Conglomerate
Synergies
--- Content provided by FirstRanker.com ---
VulnerabilityAsymmetries
North Atlantic free Trade Area (NAFTA)
Horizontal
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---
--- Content provided by FirstRanker.com ---