Gbe unit 4

Strategy and structure of International Business

Course: MBA

Subject: GLOBAL BUSINESS ENVIRONMENT

Unit: 4

The Firm as a Value Chain• Primary Activities:– Those activities having to do with creating, marketing

and delivering the product to customers and providing support and after-sales service.

• Support Activities:– Provide inputs that allow primary activities to occur.

• An Efficient Infrastructure:– helps create value and reduce the cost of creating

value.

The Firm as a Value Chain

Organizational infrastructureInformation systems

Human resources

Research and development

Materials management

Manufacturing Marketing

Primary activities

Supportactivities

The Firm as a Value Chain

The Role of Strategy

• Strategy:– Actions managers take to attain the goals of the

firm.– Need to identify and take action that lowers the

cost of value creation and/or differentiates the firm’s product through superior design, quality, service, or functionality.

Profiting from Global Expansion

• International firms can:– Earn a greater return from distinctive

skills or core competencies.– Realize location economies by dispersing value

creation activities to locations where they can be performed most efficiently.

– Realize greater experience curve economies, which reduces the cost of value creation.

Parts

PartsParts

Assembly

Advertising Design

Sales

Location Economies

Pontiac LeMans

caution

• When making location decisions:– Consider trade barriers and transportation

costs.– Assess political and economic

risks.

Experience Curve Economies• Learning Effects:– Labor productivity increases over time as individuals

learn the most efficient ways to perform particular tasks.

• Economies of Scale:– Reductions in unit cost achieved by producing a large

volume of a product.

• Strategic Significance:– Moving down the experience curve allows a firm to

reduce its cost of creating value.

Firms Face Two Conflicting Concepts (Pressures) Overseas

• Reduce costs.• Be responsive to local

needs.

Cost Reduction• Desire to reduce costs by:– Mass production– Product standardization.– Optimal location production.

• Hard to do with commodity-type products.– products serving universal needs.

• Also hard where competition is in low cost producing location.

• Finally, int’l competition creates price pressures.

$

Local Responsiveness

• Different consumer tastes and preferences.

• Different infrastructure and practice.• Differences in distribution channels.• Government demands.

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

Strategic Choice

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

International Strategy

• Go where locals don’t have your skills.• Little adaptation. Products developed at home

(centralization).• Manufacturing and marketing in each location.• Makes sense where low skills, competition,

and costs exist.

Multi-domestic Strategy

• Maximize local responsiveness.– Customize the product and marketing strategy

to national demands.

• Skill and product transfer.• Transfer all value-creation activities• Good for high local responsiveness and low

cost reduction pressures.

Global Strategy

• Best use of the experience curve and location economies.

• This is the low cost strategy.• Utilize product standardization.• Not good where local responsiveness

demand is high.

Transnational Strategy

• Core competencies can develop in any of the firm’s worldwide operations.

• Flow of skills and product offerings occurs throughout the firm - not only from home firm to foreign subsidiary (global learning).

• Makes sense where there is pressure for both cost reduction and local responsiveness.

The Advantages and Disadvantages of the

Four StrategiesStrategy Advantages Disadvantages

Global Exploit experience curve effects

Exploit location economies

Lack of localresponsiveness

International

Transfer distinctive competencies to

Foreign Markets

Lack of local responsivenessInability to realizelocation economiesFailure to exploit experience curve effects

The Advantages and Disadvantages of the Four Strategies

Strategy Advantages Disadvantages

Multi-domestic Customize product offeringsand marketing in accordancewith local responsiveness

Inability to realize locationeconomies

Failure to exploitexperience curve effects

Failure to transferdistinctive competenciesto foreign markets

Transnational Exploit experience curveeffects

Exploit location economiesCustomize product offerings

and marketing in accordancewith local responsiveness

Reap benefits of global learning

Difficult to implement dueto organizationalproblems

Cost Pressures and Pressures for Local Responsiveness Facing Caterpillar

CaterpillarCaterpillarTractorTractor

High

Cost pressures

Low

Low HighPressures for local responsiveness

Which Foreign market entry mode?

EXPORTING

• The commercial activity of selling and shipping goods to a foreign country

• The most common overseas entry approach for small firms

EXPORTING

• Exporting can be either – direct or indirect– In direct exporting the

company sells to a customer in another country

– In contrast, indirect exporting usually means that the company sells to a buyer (importer or distributor) in the home country who in turn exports the product

EXPORTING• The Internet is becoming

increasingly important as a foreign market entry method

• Initially, Internet marketingfocused on domestic sales,however, a surprisingly large number of companies started receiving orders from customers in other countries, resulting in the concept of:– international Internet

marketing (IIM).

CONTRACTUAL AGREEMENTS

• Contractual agreements are long-term, non-equity associations between a company and another in a foreign market

• Approaches:– Licensing– Franchising – Contract manufacturing– Management contracting– Turnkey projects

LICENSING

• An arrangement whereby a licensor grants the rights to intangible property to another entity for a specified period and in return, the licensor receives a royalty fee from the licensee.

• Offers know-how, shares technology, and shares brand name with licensee; licensee pays royalties; lower-risk entry mode; permits access to markets

FRANCHISING

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

• Longer-term commitments

TURNKEY PROJECTS

• A product or service which can be implemented or utilized with no additional work required by the buyer (just by 'turning the key')".

• The contractor agrees to handle every detail of the project for a foreign client, including the training of operating personnel

Contract manufacturing

• Contract manufacturing is a process that establish a working agreement between two companies.

• As part of the agreement, one company will custom produce parts or other materials on behalf of their client.

Management contracting

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

Management contracting

• Management contracts involve not just selling a method of doing things (as with franchising or licensing) but involves actually doing them.

• A management contract can involve a wide range of functions, such as technical operation of a production facility, management of personnel, accounting, marketing services and training.

STRATEGIC ALLIANCE

• Cooperative agreements between potential or actual competitors

• A strategic international alliance (SIA) is a business relationship established by two or more companies to cooperate out of mutual need and to share risk in achieving a common objective

• SIAs are sought as a way to shore up weaknesses and increase competitive strengths.

• Licensing, Joint venture, consortia etc

Strategic alliances

• Firms enter SIAs for several reasons:– Opportunities for rapid expansion into new

markets– Access to new technology– More efficient production and innovation– Reduced marketing costs– Strategic competitive moves– Access to additional sources of products and

capital

Strategic alliances- JOINT VENTURES

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

JOINT VENTURE

• Four Characteristics define joint ventures:– JVs are established, separate, legal entities– The acknowledged intent by the partners to share

in the management of the JV– There are partnerships between legally

incorporated entities such as companies, chartered organizations, or governments, and not between individuals

– Equity positions are held by each of the partners

Strategic alliances- Consortia

• Consortia are similar to joint ventures and could be classified as such except for two unique characteristics:– They typically involve a large number of participants– They frequently operate in a country or market in which

none of the participants is currently active.• Consortia are developed

to pool financial and managerial resources and

to lessen risks.

Global Production, Outsourcing, and Logistics

Introduction

• In today’s global economy, firms must decide– where to locate productive activities – what the long-term strategic role of foreign production

sites should be – whether to own foreign production activities or outsource

those activities – how to manage a globally dispersed supply chain and what

the role of Internet-based information technology should be in the management of global logistics

– whether to manage global logistics or outsource

Strategy, Production, and Logistics

Question: How can production and logistics be conducted internationally to

1. lower the costs of value creation2. add value by better serving customer needs?

• Production refers to activities involved in creating a product• Logistics refers to the procurement and physical

transmission of material through the supply chain, from suppliers to customers


• The strategic objectives of the production and logistics function are– to lower costs– to increase product quality by eliminating

defective products from both the supply chain and the manufacturing process

• These two objectives are interrelated


• Better quality control helps firms reduce costs because – time is not wasted manufacturing poor quality

products that cannot be sold– re-work and scrap costs are lower– warranty costs and the time used too fix defective

products are lower


Question: What management tool is used to increase the reliability of product offerings?

• The Six Sigma quality improvement program aims to reduce defects, boost productivity, eliminate waste, and cut costs throughout a company

• Six Sigma is a direct descendant of total quality management (TQM)

• In addition, some countries have also promoted specific quality guidelines like the European Union’s ISO 9000 standards

Where to Produce

Question: Where should production activities be located?

• When deciding where to locate production facilities, firms must consider– country factors– technological factors– product factors


• Two other objectives are important for international companies

1. production and logistics functions must be able to accommodate demands for local responsiveness

2. production and logistics must be able to respond quickly to shifts in customer demand

Country Factors

• Firms should locate manufacturing activities where economic, political, and cultural conditions, including relative factor costs, are most conducive to the performance of that activity

• Regulations affecting FDI and trade can significantly affect the appropriateness of specific countries, as can expectations about future exchange rate changes

Technological Factors• The type of technology a firm uses in its manufacturing can

affect location decisions• Firms should consider 1. The level of fixed costs involved• If the fixed costs of setting up a manufacturing plant are very

high, it could make sense for the firm to serve the world market from a single location or from a very few locations

2. The minimum efficient scale of the technology• The larger the minimum efficient scale (the level of output at

which most plant-level scale economies are exhausted) of a plant, the more likely centralized production makes sense

Technological Factors

3. The flexibility of the technology• The term flexible manufacturing technology or lean

production covers a range of manufacturing technologies that are designed to:– reduce set up times for complex equipment– increase the utilization of individual machines through

better scheduling– improve quality control at all stages of the manufacturing

process

Product Factors

• Two product factors impact location decisions1. The product's value-to-weight ratio – If the value-to-weight ratio is high, it is practical to

produce the product in a single location and export it – If the value-to-weight ratio is low, there is greater

pressure to manufacture the product in multiple locations across the world

2. Whether the product serves universal needs– The need for local responsiveness is reduced for products

that do, which increases the attractiveness of concentrated manufacturing

Locating Production Facilities

• There are two basic strategies for locating manufacturing facilities

1. Concentrating them in the optimal location and serving the world market from there

2. Decentralizing them in various regional or national locations that are close to major markets

The Strategic Role of Foreign Factories

Question: Does the rationale for establishing a foreign production facility change?

• The strategic role of foreign factories and the strategic advantage of a particular location can change over time

• A factory initially established to make a standard product to serve a local market, or to take advantage of low cost inputs, can evolve into a facility with advanced design capabilities

• As governmental regulations change and/or countries upgrade their factors of production the strategic advantage of a particular location can change

The Strategic Role of Foreign Factories

• As the strategic role of a factory is upgraded and a firm develops centers of excellence in different locations worldwide, it supports the development of a transnational strategy

• A focus of a transnational strategy is global learning (the idea that valuable knowledge does not reside just in a firm’s domestic operations, it may also be found in its foreign subsidiaries)

• So, managers should promote the idea that factories are potential centers of excellence with strategic importance to the firm

Outsourcing Production: Make-or-Buy Decisions

Question: Should an international business make the component parts to go into their final product or outsource them?

• Make-or-buy decisions (decisions about whether to perform a certain value creation activity in-house or outsource it to another firm) are important to a firm’s manufacturing strategy

The Advantages of Make

• Making component parts in-house (vertical integration) is attractive because it

1. is associated with lower costs

2. facilitates investments in highly specialized assets

3. protects proprietary technology

4. facilitates the scheduling of adjacent processes


1. Lowering Costs• A firm should consider manufacturing a part in-

house if the firm is more efficient at that a production activity than any other enterprise

2. Facilitating Specialized Investments• In-house production makes sense when substantial

investments in specialized assets (assets whose value is contingent upon a particular relationship persisting) are required to manufacture a component


3. Protecting Proprietary Technology• When proprietary technology is involved, in-house

production can make sense to maintain control over the technology

4. Improving Scheduling • In some cases, in-house production can make

planning, coordination, and scheduling of adjacent processes easier

The Advantages of Buy

• Buying component parts from independent suppliers (outsourcing) is attractive because it

1. gives the firm greater flexibility

2. helps drive down the firm's cost structure

3. helps the firm to capture orders from international customers


1. Strategic Flexibility• Outsourcing provides the firm with the flexibility to

switching orders between suppliers as circumstances dictate

• This ability is particularly important when changes in exchange rates and trade barriers the attractiveness of supply sources


2. Lower Costs • Firms that outsource can avoid– the challenges involved with coordinating and

controlling additional subunits – the lack of incentive associated with internal suppliers– the difficulties with setting appropriate transfer prices

3. Offsets• Outsourcing can help firms capture more orders from

suppliers’ countries

Trade-Offs

• The benefits of manufacturing components in-house are greatest when– highly specialized assets are involved– when vertical integration is necessary for

protecting proprietary technology– when the firm is more efficient than external

suppliers at performing a particular activity

Procter & Gamble in Japan

Globalization and Markets

• “Globalization seems to be the exception rather than the rule in many consumer goods markets and industrial markets; and,

• Procter and Gamble …still customizes the final product offering and market strategy to the conditions that pertain in individual national markets.” - Charles W. Hill -

Market Segmentation

• Identifying distinct groups of consumers whose purchasing behavior differs from others in important ways.

• Segmented markets: – Sex, age, income, race, education.– Social-cultural factors.– Psychological factors.

Product Attributes

• Cultural differences.• Economic differences.• Product and technical

standards.

Cultural Differences

• Most important - the impact of tradition.• Impact is greatest in foodstuffs and beverages.• Scent preferences differ from country to country.

• Some tastes and preferences becoming international:

• Coffee (Japan).• American-style frozen dinners

(Europe).

Economic Differences• Consumer behavior is influenced by

economic development.– Consumers in highly developed countries tend

to have extra performance attributes in their products.

– Consumers in less developed countries tend not to demand these extra performance attributes.• Cars: no air-conditioning, power steering, power

windows, radios and cassette players.• Product reliability is more important.

Product and Technical Standards

• Government standards can prevent the introduction of global products.

• Different technical standards impede global markets, as well.– Come from distinctive decisions made long

ago.• Different television signal frequencies.

Distribution Strategy

• Three different distribution systems:– Retail consideration.– Channel length.– Channel exclusivity.

• Choice of channel:– Cost/benefit of each alternative

vary from country to country.

ConcentratedFragmented

Short

Long Channel

No Outsiders

Communications Strategy• Effectiveness of international

communications can be impacted by:– Cultural barriers.• Need to develop cross-cultural literacy.

– Source effects.• Emphasize/De-emphasize foreign origin.

– Noise levels.• Developed countries - high.• Less developed countries - low.

Global Advertising

• Standardized:– Significant economic advantages.– Scarce creative talent.– Many global brand names.

• Non-standardized:– Messages in one country may fail in another.– Advertising regulations can be a restriction.

Pricing Strategy• Price discrimination:– Must keep national markets separate.– Different price elasticities

• Arbitrage:Charging different prices in different countries for same product.– Doesn’t always work.

• Ford in Germany and Belgium

– Sometimes it does.• Ford in UK and Belgium

Using Arbitrage

The Location of R&D

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

Configuring the Marketing Mix

Culture

Economy

Competition

Stan

dard

s

Distrib

ution

Gov’t Regs

Product

Attri

butes

Dist

ribut

ion

Stra

tegy

Communications

Strategy

Pricing Strategy

Differences Here

Requires Variation

Here

The Need to Integrate R&D, Marketing and Production

• High failure rate ratio between new products development and profit goals.

• Reasons for failure:– Limited product demand.– Failure to adequately commercialize product.– Inability to manufacture product cost-effectively.

Cross-Functional Integration• Integrating R&D, production and marketing

ensures:– Project development is driven by customer

need.– New products are designed for ease of

manufacture.– Development costs are kept in check.– Time to market is minimized.

• Use cross-functional development teams.

GLOBAL H.R.M IN INTERNATIONAL BUSINESS

How different is Global HRM?

Several key factors make Global HRM different from domestic management:

i. Different labour markets

ii. Mobility problems: legal, economic, cultural barriers

iii. Different management styles

iv. Varied compensation practices

v. Labour laws.

I. Staffing Policy

Staffing policy is concerned with the selection of employees for particular jobs.

i. Selecting individuals who have the skill to do a particular job.

ii. Tool for developing and promoting the desired corporate culture (norms & value system) of the firm.

II. Training and Management Development

After selection, the next step is training the manager to do the specific job.

MDP is a broader concept, it is intended to develop a manager’s skills over her career in the firm, e.g., sending managers on various foreign postings over years to build her cross cultural sensitivity and experience.

To enhance management and leadership skills of executives. MDP have a strategic purpose, and helps reinforce desired

culture of the firm by creating an informal network.

III. Performance Appraisal These are the systems used to evaluate the performance of managers

against some criteria, that the firm judges to be important for the implementation of strategy and attainment of competitive advantage.

Important elements of control system. 2 groups evaluate the performance of Expatriates, - Host country

managers and home country managers. Biasness by cultural frame of reference and expectations Unfair evaluation Due to proximity, onsite manager should evaluate soft variables of

expatriate’s performance. Consultation of home country manager to balance out.

IV. Compensation

National differences in compensation Payments according to global standards or

country specific standards. Issues in compensation practices:i. How compensation should be adjusted to

reflect national differences in economic circumstances and practices?

ii. How should the expatriate managers be paid?

Expatriate Pay

Acc. To “Balance Sheet Approach”, it equalizes purchasing power across countries so employees can enjoy the same living standard in their foreign posting, as the enjoyed at home.

It also provides financial incentives to offset qualitative differences between assignment locations.

Financial Management in International Business

• For Detail refer Unit 3

Sources:-http://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&sqi=2

&ved=0CBwQFjAA&url=http%3A%2F%2Fwww.unm.edu%2F~rauldg%2Fmgt728%2FChap12.ppt&ei=FZKzVIiUO8LmuQTolIFw&usg=AFQjCNEeS5MYYN7rHSAiXMMZX7Cyzwkp8g

http://www.slideshare.net/geeta_123/foreign-market-entry-strategies

http://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&cad=rja&uact=8&ved=0CCgQFjAC&url=http%3A%2F%2Fwww.drluisortiz.com%2FPPT%2FChap014GBT.ppt&ei=gKazVMO8M5GRuATg6oGICQ&usg=AFQjCNHaZHZVuj1Kcj8mpFONt83qA3maBQ&sig2=9_ebDG0k_wXEFkaeb4ghpQ&bvm=bv.83339334,d.c2E

http://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CBwQFjAA&url=http%3A%2F%2Fwww.unm.edu%2F~rauldg%2Fmgt728%2FChap17.ppt&ei=HqmzVP28BoyiuQTk0oDIDQ&usg=AFQjCNGunnuFxJjij96bzpjao9bmbQZ35g&sig2=_l0LpcnE9kLoCyiBh_FVrA&bvm=bv.83339334,d.c2E

http://www.slideshare.net/jatinmaims/global-human-resource-management

http://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&sqi=2&ved=0CBwQFjAA&url=http%3A%2F%2Fwww.unm.edu%2F~rauldg%2Fmgt728%2FChap12.ppt&ei=FZKzVIiUO8LmuQTolIFw&usg=AFQjCNEeS5MYYN7rHSAiXMMZX7Cyzwkp8g

http://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&sqi=2&ved=0CBwQFjAA&url=http%3A%2F%2Fwww.unm.edu%2F~rauldg%2Fmgt728%2FChap12.ppt&ei=FZKzVIiUO8LmuQTolIFw&usg=AFQjCNEeS5MYYN7rHSAiXMMZX7Cyzwkp8g

Gbe unit 4

Education

Transcript of Gbe unit 4