UNIT 3

STRATEGIC COMPULSIONS
STANDARDIZATION

Characteristics of production
Cost savings in R&D
Cost savings in production
Cost savings in communication
Simplifying planning and control
Inventory reduction
Unification of customers requirements
DIFFERENTIATION
Market requirements
Macro-economies differences
Legal system
Socio-cultural differences
Differences in customer preferences
Adaptive behavior of the competition towards local market
Marketing infrastructure
Technological adaptation

STRATEGIC OPTIONS
1. Exporting strategy
2. Licensing strategy
3. Franchising strategy
4. Multi-country strategy
5. Global strategy
6. Strategic alliances

Exporting strategy:

Excellent initial strategy to pursue international sales
Involves domestic plants as a production base for exporting to foreign markets
Advantages
Minimizes both risk and capital requirements
Minimizes direct investments in foreign countries
Disadvantages
Manufacturing costs in home country are higher than in foreign countries where
rivals have plants
High shipping costs are involved
Licensing strategy
A business arrangement in which one company gives another company permission to
manufacture its product for a specified payment
Advantages
Capital not tied up in foreign operation
Something unique that competitors dont
Get better margin and take royalties in stock
Disadvantages
Risk of providing valuable technical know-how to foreign firms and losing some
control over its use
Requires considerable fact finding, planning, investigation and interpretation
Franchising strategy

Often is better suited to global expansion efforts of service and retailing enterprises (e.g.,
McDonalds, Hilton Hotels, KFC, NIIT etc.)
Advantages
Franchisee bears most of costs and risks of establishing foreign locations
Franchiser has to expend only the resources to recruit, train, and support
franchisees

Disadvantages
Maintaining cross-country quality control
Scope of misunderstanding with the parties

Multi-country strategy

This strategy matches local market needs
Different country strategies are called for when
Significant country-to-country differences in customers needs exist
Buyers in one country want a product different from buyers in another country
Host government regulations preclude uniform global approach
Drawbacks
Can pose a problem when transferring competencies across borders
Global strategy
Works against building a unified competitive advantage
This works best in markets that are globally competitive or beginning to globalize
The company coordinates strategic moves globally and it sells in many nations where a
market for its product exists
This strategy works well when markets needs are similar from country to country
Risks
Diversify macroeconomic risks (business cycles not perfectly correlated among
countries)
Diversify operational risks (labor problems, earthquakes, wars)
Strategic alliances
Cooperative agreements / strategic alliances with foreign companies are a means to
Enter a foreign market or
Strengthen a firms competitiveness in world markets
Purpose of alliances
Joint research efforts
Technology transfer
Joint use of production or distribution facilities
Marketing / promoting one anothers products

GLOBAL PORTFOLIO MANAGEMENT
A portfolio refers to a collection of investment tools such as stocks, shares, mutual funds, bonds, cash and so on
depending on the investors income, budget and convenient time frame.
Following are the two types of Portfolio:
1. Market Portfolio
2. Zero Investment Portfolio
Portfolio management
The art of selecting the right investment policy for the individuals in terms of minimum risk and
maximum return is called as portfolio management.
Portfolio management refers to managing an individuals investments in the form of bonds, shares, cash, mutual
funds etc so that he earns the maximum profits within the stipulated time frame.

Portfolio management refers to managing money of an individual under the expert guidance of
portfolio managers. In a laymans language, the art of managing an individuals investment is
called as portfolio management.
Need for Portfolio Management
Portfolio management presents the best investment plan to the individuals as per their income,
budget, age and ability to undertake risks. Portfolio management minimizes the risks involved
in investing and also increases the chance of making profits. Portfolio managers understand the
clients financial needs and suggest the best and unique investment policy for them with
minimum risks involved. Portfolio management enables the portfolio managers to provide
customized investment solutions to clients as per their needs and requirements.
Types of Portfolio Management
Portfolio Management is further of the following types:
Active Portfolio Management: As the name suggests, in an active portfolio
management service, the portfolio managers are actively involved in buying and
selling of securities to ensure maximum profits to individuals.
Passive Portfolio Management: In a passive portfolio management, the portfolio
manager deals with a fixed portfolio designed to match the current market scenario.
Discretionary Portfolio management services: In Discretionary portfolio
management services, an individual authorizes a portfolio manager to take care of his
financial needs on his behalf. The individual issues money to the portfolio manager
who in turn takes care of all his investment needs, paper work, documentation, filing
and so on. In discretionary portfolio management, the portfolio manager has full
rights to take decisions on his clients behalf.
Non-Discretionary Portfolio management services: In non discretionary portfolio
management services, the portfolio manager can merely advise the client what is
good and bad for him but the client reserves full right to take his own decisions.
Portfolio manager
An individual who understands the clients financial needs and designs a suitable investment
plan as per his income and risk taking abilities is called a portfolio manager. A portfolio manager
is one who invests on behalf of the client. A portfolio manager counsels the clients and advises
him the best possible investment plan which would guarantee maximum returns to the individual.
A portfolio manager must understand the clients financial goals and objectives and offer a tailor
made investment solution to him. No two clients can have the same financial needs.
GLOBAL ENTRY STRATEGIES
Introduction
The need for a solid market entry decision is an integral part of a global market entry
strategy.
Entry decisions will heavily influence the firms other marketing-mix decisions.
Global marketers have to make a multitude of decisions regarding the entry mode which
may include:
(1) the target product/market
(2) the goals of the target markets
(3) the mode of entry
(4) The time of entry
(5) A marketing-mix plan
(6) A control system to check the performance in the entered markets
Selecting the Target Market
A crucial step in developing a global expansion strategy is the selection of potential target
markets (see Exhibit 9-1 for the entry decision process).
A four-step procedure for the initial screening process:
1. Select indicators and collect data
2. Determine importance of country indicators
3. Rate the countries in the pool on each indicator
4. Compute overall score for each country
2. Choosing the Mode of Entry
Decision Criteria for Mode of Entry:
Market Size and Growth
Risk
Government Regulations
Competitive Environment/Cultural Distance
Local Infrastructure
Classification of Markets:
1. Platform Countries (Singapore & Hong Kong)
2. Emerging Countries (Vietnam & the Philippines)
3. Growth Countries (China & India)
4. Maturing and established countries (examples: South Korea, Taiwan & Japan)
Company Objectives
Need for Control
Internal Resources, Assets and Capabilities Flexibility
1. Exporting
Indirect Exporting
a. Export merchants
b. Export agents
c. Export management companies (EMC)
Cooperative Exporting
d. Piggyback Exporting
Direct Exporting
e. Firms set up their own exporting departments
2. Licensing
3. Licensor and the licensee
4. Benefits:
a. Appealing to small companies that lack resources
b. Faster access to the market
c. Rapid penetration of the global markets
5. Caveats:
a. Other entry mode choices may be affected
b. Licensee may not be committed
c. Lack of enthusiasm on the part of a licensee
d. Biggest danger is the risk of opportunism
e. Licensee may become a future competitor
3. Franchising
Franchisor and the franchisee
Master franchising
Benefits:
Overseas expansion with a minimum investment
Franchisees profits tied to their efforts
Availability of local franchisees knowledge
4. Contract Manufacturing (Outsourcing)
Benefits:
1. Labor cost advantages
2. Savings via taxation, lower energy costs, raw materials, and overheads
3. Lower political and economic risk
4. Quicker access to markets
Caveats:
5. Contract manufacturer may become a future competitor
6. Lower productivity standards
7. Backlash from the companys home-market employees regarding HR and labor
issues
8. Issues of quality and production standards
Qualities of an ideal subcontractor:
Flexible/geared toward just-in-time delivery
Able to meet quality standards
Solid financial footings
Able to integrate with companys business
Must have contingency plans
5. Expanding through Joint Ventures
Cooperative joint venture
Equity joint venture
Benefits:
1. Higher rate of return and more control over the operations
2. Creation of synergy
3. Sharing of resources
4. Access to distribution network
5. Contact with local suppliers and government officials
Caveats:
6. Lack of control
7. Lack of trust
8. Conflicts arising over matters such as strategies, resource allocation, transfer
pricing, ownership of critical assets like technologies and brand names
6. Drivers Behind Successful International Joint Ventures :
1. Pick the right partner
2. Establish clear objectives from the beginning
3. Bridge cultural gaps
4. Gain top managerial commitment and respect
5. Use incremental approach
6. Create a launch team during the launch phase:
7. (1) Build and maintain strategic alignment
8. (2) Create a governance system
9. (3) Manage the economic interdependencies
10. (4) Build the organization for the joint venture
7. Entering New Markets through Wholly Owned Subsidiaries
Acquisitions
Greenfield Operations
Benefits:
Greater control and higher profits
Strong commitment to the local market on the part of companies
Allows the investor to manage and control marketing, production, and sourcing
decisions
Caveats:
Risks of full ownership
Developing a foreign presence without the support of a third part
Risk of nationalization
Issues of cultural and economic sovereignty of the host country
Acquisitions and Mergers
Quick access to the local market
Good way to get access to the local brands
Greenfield Operations
Offer the company more flexibility than acquisitions in the areas of human
resources, suppliers, logistics, plant layout, and manufacturing technology.
8.Creating Strategic Alliances
Types of Strategic Alliances
Simple licensing agreements between two partners
Market-based alliances
Operations and logistics alliances
Operations-based alliances
The Logic Behind Strategic Alliances
Defend
Catch-Up
Remain
Restructure
Cross-Border Alliances that Succeed:
Alliances between strong and weak partners seldom work.
Autonomy and flexibility
Equal ownership
Other factors:
Commitment and support of the top of the partners organizations
Strong alliance managers are the key
Alliances between partners that are related in terms of products,
technologies, and markets
Have similar cultures, assets sizes and venturing experience
Tend to start on a narrow basis and broaden over time
A shared vision on goals and mutual benefits
9. Timing of Entry
International market entry decisions should also cover the following timing-of-entry
issues:
a. When should the firm enter a foreign market?
b. Other important factors include: level of international experience, firm size
c. Also, the broader the scope of products and services
d. Mode of entry issues, market knowledge, various economic attractiveness
variables, etc.
Reasons for exit:
Sustained losses
Volatility
Premature entry
Ethical reasons
Intense competition
Resource reallocation
10. Exit Strategies
Risks of exit:
a. Fixed costs of exit
b. Disposition of assets
c. Signal to other markets
d. Long-term opportunities
Guidelines:
e. Contemplate and assess all options to salvage the foreign business
f. Incremental exit Migrate customers
DIFFERENT FORMS OF INTERNATIONAL BUSINESS-ADVANTAGES
Importing and Exporting
Importing and exporting are often the simplest ways a business may go global.
Importing is the purchasing abroad, either directly from target suppliers or indirectly
through sales agents and distributors.
Exporting is the selling abroad, either directly to target customers or indirectly by
retaining foreign sales agents and distributors.
Products that are made or grown abroad but sold domestically are called imports and products
made or grown domestically and shipped for sale abroad are exports. People who engage in this
type of international trade are called importers or exporters.
A good question is why a country imports or exports certain products. It may be simply that they
do not have that resource internally or that it has an excess of that product. It could also be more
complex than this simple answer. A country may have an absolute or competitive advantage.
Absolute advantage: when a country can produce something more cheaply than any
other country. For example, Saudi Arabia, due to its natural resources, has an absolute
advantage in oil.
Comparative advantage: when a country can make certain items more cheaply or better
than other items relative to other countries. For example, Japan, due to its manufacturing
efficiencies, has a comparative advantage in automobiles.
Licensing
Licensing does not have to be an international arrangement. Licensing may take place
completely within one country. But, it is also a convenient way for a company to spread its
products abroad with minimal risk.
Licensing is an arrangement whereby a firm (the licensor) grants a foreign firm (the licensee)
the right to use intangible property such as a patent, logo, formula, process, etc. The licensee
pays a royalty or percent of the profits to the licensor. Licensing allows a business to go global
relatively rapidly and simply. Rather than trying to export a product directly, incurring shipping
costs and delays, among other barriers, a company can license their methods of doing business to
a foreign organization. For example, rather than blend and bottle a soft drink here and then ship
overseas, a company may license a foreign bottler who produces the soft drink locally using the
licensed formula. This may also allow some adaptation to local tastes and customs.

Franchising
Franchising also does not have to be an international arrangement. Franchising may take place
completely within one country. There are many examples of nationally-based franchises with
which we are sure you are familiar. It is also another convenient way for a company to introduce
its products abroad with minimal risk.
Franchising is a form of licensing in which the parent company (franchisor) offers some
combination of trademark, equipment, materials, managerial guidelines, consulting advice, and
cooperative advertising to the investor (franchisee) for a fee and/or percentage of revenues
(royalties). As with licensing, franchising allows a business to go global relatively rapidly and
simply, however, franchising generally requires a greater commitment, financially and otherwise,
than licensing by both parties. The most obvious example is the ubiquitous McDonalds
franchise. Some other examples are Starbucks or hotel chains such as Hilton. Franchising may
also allow some adaptation to local tastes and customs.
Foreign Direct Investment
Foreign direct investment occurs when a company invests resources and personnel to build or
purchase an operation in another country. This turns the firm into amultinational
company (MNC).
A wholly owned subsidiary is a firm that is owned 100% by a foreign firm
This is a major decision for an organization because costs and risks of direct investment are
greater than with franchising or licensing. Although governments usually welcome foreign
direct investment, they are also often concerned about this type of investment for several reasons.
Due to their size, MNCs may influence the host countrys economic and political systems.
Control of a countrys important resources may pass into the hands of foreign corporations and,
perhaps, then governments. Some countries enact programs to counteract these concerns.
Joint Ventures and Strategic Alliances
Joint ventures and strategic alliances are somewhat different from foreign direct investment in
that we are not talking about creating wholly owned subsidiaries. Yet, they can be excellent,
strategic ways to penetrate different global markets around the world while limiting exposure at
the entry phase.
A joint venture is an organization created by two or more companies or a company and a
foreign government in which each party contributes assets, owns the entity to some degree, and
shares risk. A joint venture allows a company to partner with a firm from another country thus
learning about business practices, cultural differences, etc. This is particularly popular among
manufacturing concerns. For example, Ford Motor Company (U.S.) entered into a joint venture
with the Mazda Company (Japan) and France's PSA Peugeot Citroen has joined with Chinas
Dongfeng Motor Corp.
A strategic alliance is an agreement between potential or actual competitors to achieve common
objectives. Unlike a joint venture they do not actually form a new entity but work cooperatively
while maintaining their independence. It allows participants to share costs and risks and to take
advantages of each other strengths. Because strategic alliances are built on trust, this type of
arrangement should be undertaken with care. A good example of international strategic alliance
is the code sharing done by airlines. For example, you may purchase a ticket in the U.S. on
Delta airlines for a flight to Italy and find yourself actually on an Alitalia flight carrying a Delta
flight number.
Advantages
Export
Control over selection of foreign markets and choice of foreign representative companies
Good information feedback from target market
Better protection of trademarks, patents, goodwill, and other intangible property
Potentially greater sales than with indirect exporting
Import
Fast market access
Concentration of resources towards production
Little or no financial commitment as the clients' exports usually covers most expenses
associated with international sales.
Low risk exists for companies who consider their domestic market to be more important and
for companies that are still developing their R&D, marketing, and sales strategies.
Export management is outsourced, alleviating pressure from management team
No direct handle of export processes
Licensing
Following are the main advantages and reasons to use an international licensing for expanding
internationally:
Obtain extra income for technical know-how and services
Reach new markets not accessible by export from existing facilities
Quickly expand without much risk and large capital investment
Pave the way for future investments in the market
Retain established markets closed by trade restrictions
Political risk is minimized as the licensee is usually 100% locally owned
Is highly attractive for companies that are new in international business
Franchising
Advantages of the international franchising mode:
Low political risk
Low cost
Allows simultaneous expansion into different regions of the world
Well selected partners bring financial investment as well as managerial capabilities to the
operation.
Strategic alliance
Such alliances often are favorable when:
The partners' strategic goals converge while their competitive goals diverge
The partners' size, market power, and resources are small compared to the Industry leaders
Partners are able to learn from one another while limiting access to their own proprietary
skills

ORGANISATIONAL ISSUES IN INTERNATIONAL BUSINESS
Centralization Vs Decentralization:
Decentralization allows managers of subsidiaries to make decision which serve host country
needs best, but overall interest of the firm are compromised. Centralization of decision making
helps the firm retain control headquarters and protect the overall interest of the company, but the
ability of subsidiary managers to respond quickly and effectively
Use of subsidiary board of directors:
Subsidiary of any international firm particularly fully owned will have its own board of directors
to oversee the activities of the top level managers in that subsidiary
Non traditional organizational arrangements:
In recent years MNC have increasingly expanded their operations in ways that differ from those
used in the past .These include acquisition and joint venture.
Role of IT
International business relies heavily on information technology because it lend competitive
advantage to them.
Integrating mechanism:
One of the issues relating to international business relates to the need for coordination among
different subsidiaries and all of them with the parent company
Control system:
Distance
Diversity
Degree of uncertainty
Differences in approach
Culture in international business:
Corporate culture is the set shared values that defines for its members what the organization
stands for how it functions and what it considers important.
Managing change in international business:
Change take place because of environmental changes, and change in technology and cultural
values and mores

ORGANIZATIONAL STRUCTURE
Global organizations in the 21st century must compete with a much wider array of companies
than their domestic counterparts do, and have therefore evolved several strategies to become as
efficient and cost-effective as possible. The choice of organizational structure reflects where
decisions are made, how work gets completed, and ultimately how quickly and cheaply the
firms products can be made.
Functional
A functional structure is one in which type of work is performed in a different department. For
instance, all the companys accountants work in Accounting, Accounts Receivable or Accounts
payable, whereas all the marketers work in Marketing. Each product line or geographic region
then makes use of these centralized resources as if the other department were a different
company. This allows the company to benefit from having very standardized processes for each
of its functions, and from having economies of scale such as being able to place a single,
centralized order for a commonly used widget that it can then distribute worldwide. However, it
can be challenging and inefficient to shepherd a single product through all the steps and
departments it needs to go through. These firms focus on specialization of job skills, and are
more centralized.
Divisional
Companies with divisional structures assign small groups of each type of function to a single
division, making each self-sufficient. They may be divided by product line, such as the Shoe
division, the Shirt division, and the Hat division. Or they might be divided geographically, such
as the European or Asian divisions, or even further into France or Thailand divisions.
Alternatively, they may be divided by customer group, such as Consumers, Small Business, and
Government. In most cases, every division will have its own accounting, marketing, product
development, manufacturing and executive staffs. This structure allows each specialty to become
intimately familiar with the product or market the division serves, and reduces inter-departmental
delays. The down side is that each division may be duplicating the efforts of several other
divisions, or may be unknowingly working at cross purposes. These companies are concerned
with specialization of products or markets, and are more decentralized.
Hybrid
Due to the difficulty of working globally with a centralized functional structure, and the
communication gaps that come from working in divisional silos, most modern companies
employ a hybrid structure that combines elements of each. There is no single hybrid structure,
but rather a range from mostly-functional to mostly-divisional, which varies between companies.
They often have central headquarters that set strategy and high-level policy, combined with
product or geographic divisions that determine their operational methods, and may even have
internal functional departments within the division. These companies are attempting to balance
economies of scale with local efficiency.
CONTROLLING OF INTERNATIONAL BUSINESS
Every MNE must regulate what its employees can and cannot do in order to avoid spinning out
of control. Control systems must ensure that people are doing what they are supposed to do and
not doing what they are not supposed to do. There are three prevalent methods of control:
Market control which uses external market mechanisms to establish objective standards
Bureaucratic control which emphasizes organizational authority and relies on rules and
regulations
Clan control that uses shared values and ideals to moderate employee behavior
APPROACHES TO CONTROL
Reports: Decisions on how to allocate capital, personnel, and technology continue without
interruption, so reports must be timely, accurate and informative. Written reports are
crucial for international operations because subsidiary managers so often lack substantive
personal contact with corporate staff. To permit comparisons across operations, most
MNEs use reports for foreign subsidiaries that resemble those they use domestically. The
primary emphasis of an operations report is to evaluate a subsidiarys performance; the
evaluation of its management should generally be of secondary importance.
Visits to Subsidiaries: Within many MNEs certain members of the corporate staff spend
considerable time visiting foreign subsidiaries in order to collect information and provide
direction.
Management Performance Evaluation: MNEs should evaluate a subsidiary manager
separately from the subsidiarys performance so as not to penalize or reward managers
for conditions beyond their control. That said, precisely what is within their control is
frequently a matter for disagreement.
Cost and Accounting Comparability: Headquarters needs to use considerable discretion in
interpreting the data it uses to evaluate and change subsidiary performance, especially if
it is comparing a subsidiarys performance with competitors from other countries whose
currencies and accounting methods are different from its own.
Evaluative Measurements: A system that relies on a combination of measurements is more
reliable than one that doesnt. The most important criteria tend to be budget-compared-
with-profit and budget-compared-with-revenue. Other non-financial criteria such as
market share, quality control, and host government relations are also important.
Information Systems : With ever-expanding computer and global telecommunications links,
managers can share information more quickly and easily than ever before. In fact,
information technology can facilitate both the centralization and the decentralization of
operations. The primary problems associated with information systems concern the cost
of information relative to its value, its redundancy, and its irrelevance.
PERFORMANCE OF GLOBAL BUSINESS
Performance measurement is the key in ensuring that an organization strategy is successfully
implemented. It is about monitoring an organization effectiveness in fulfilling its own pre
determined goals or stake holders requirements.
Process of performance measurement:
1. Establish standard of performance
2. Measure actual performance
3. \analyze performance and compare it with the standards
4. Construct and implement an action plan
5. Review and revise standards
Effective performance measurement system:
1. The performance measurement system must be integrated with the overall strategy of the
business
2. There must be a system of regular feedback and review of actual results
3. It should be comprehensive
4. The system must be owned and supported throughout the organization
5. Measures need to be fair and achievable
6. The system and results reporting need to be simple clear, and understandable
PERFORMANCE EVALUATION SYSTEM
The periodic review of operations to ensure that the objectives of the enterprise are being
accomplished
Objectives:
To evaluate the economic performance of its international operations, this is frequently
referred to as an evaluation of the unit economic performance
To evaluate the unit management performance
To monitor progress toward corporate objectives including strategic goals
To assist the efficient allocation of resources
Prerequisites for performance evaluation
The objectives should be clearly defined
Performance evaluation should be periodic-specific
Assumptions made in making the evaluation should be articulated without reservation
The limitation of the evaluation indicators should be spelt in clear terms
It should not open to different meanings or conclusions