Notes on

INTERNATIONAL BUSINESS
OR
INTERNATIONAL MARKETING
 What is globalization?

• The shift towards a more integrated and

interdependent world economy
• Two components:
– The globalization of markets
– The globalization of production
 Globalization : An Example
Designed in Germany
Office Assembled in Mexico (DaimlerChrysler)
American Car Components in USA & Japan

Gasoline
Fabricated from Korean Steel and M
alaysain Rubber
British MNC in US
BP Service Station Oil wells of Africa
Consult Pumped out by French company
Shipped in a Greek Shipping Line
okia Designed in Finland
N
Assembled in Texas
Stockbroker Chip sets designed by Indian
Ko Engineer working in San Diego for
rea Qualcomm
Coffee beans from Brazil
n Chip sets manufactured in Taiwan
im Chocolate from Peru
Duetsche Telecom, German
mi
gra Transformed from state owned
Coffee Stall
nt Shares monopoly into global co by Israeli
CEO
 Globalization of markets

• The merging of distinctly separate

national markets into a global marketplace
– Tastes and preferences converge onto a
global norm
– Firms offer standardized products worldwide
creating a world market
 Globalization of markets

• Significant differences still exist between

national markets on many relevant
dimensions

• These differences require that marketing and

operating strategies and product features be
customized to best match conditions in a
country.
 Globalization of markets

Range of problems are wider and more

complex in different countries
• Government intervention in trade and
investment creates problems
• International investment is impacted by
different currencies
 Globalization of production

• Refers to sourcing of goods and services from

locations around the world to take advantage of
– Differences in cost or quality of the factors of
production
• Labor
• Land
• Capital
 Emergence of global
institutions
• Globalization has created the need for
institutions to help manage, regulate and
police the global marketplace
– GATT
– WTO
– IMF
– World bank
– United Nations
 Global drivers

• Macro factors that underlie trend towards

greater globalization

– Decline in trade barriers

– Technological change
Pattern of declining tariffs
 Declining barriers to trade

• Globalization of markets and production has

been facilitated by
– Reduction in trade barriers (Tariff and Non Tariff)
– Removal of restrictions to foreign direct
investment
 The role of technological change

• Microprocessors and telecommunications

• The internet and world wide web

• Transportation technology
 Global drivers
Other factors that underlie trend towards
globalization
• Increased competition in the domestic market
• Profit advantage
• Growth opportunities / increase market share
• Increasing consumer needs
• Global Economic trends
• Government Policies and Regulations
• Monopoly on the business / industry
• Strategic vision of the organisation
 Globalization debate-Pro

• Lower prices for goods and services

• Economic growth stimulation
• Increase in consumer income
• Creates jobs
• Countries specialize in production of
goods and services that are produced
most efficiently
 Globalization debate-Con
• Destroys manufacturing jobs in wealthy,
advanced countries
• Wage rates of unskilled workers in
advanced countries declines
• Companies move to countries with fewer
labor and environment regulations
• Loss of sovereignty
 Managing in a Global
Marketplace
• Managing Difference in countries (PEST
Analysis)
• Control and Coordinate production and
marketing activities
• Knowledge of rules governing
international trading and investment
system
• Currency Market
MODULE 2
 Trade theory-overview

• Free Trade occurs when a government does

not attempt to influence, through quotas or
duties, what its citizens can buy from another
country or what they can produce and sell to
another country
• The Benefits of Trade allow a country to
specialize in the manufacture and export of
products that can be produced most efficiently
in that country
 Trade theory-overview

• The Pattern of International Trade displays

patterns that are easy to understand (Saudi
Arabia/oil or China/crawfish). Others are not
so easy to understand (Japan and cars)
• The history of Trade Theory and government
involvement presents a mixed case for the
role of government in promoting exports and
limiting imports
• Later theories appear to make a case for
limited involvement
 Mercantilism: mid-16th century

• A nation’s wealth depends on accumulated

treasure
– Gold and silver are the currency of
trade
• Theory says you should have a trade surplus.
– Maximize export through subsidies.
– Minimize imports through tariffs
and quotas
• Flaw: “zero-sum game”
 Mercantilism-zero-sum game

• David Hume in 1752 pointed out that:

– Increased exports leads to inflation and higher
prices
– Increased imports lead to lower prices
• Result: Country A sells less because of high
prices and Country B sells more because of
lower prices
• In the long run, no one can keep a trade
surplus
 Theory of absolute advantage
• Adam Smith: Wealth of Nations (1776) argued:
– Capability of one country to produce more of a
product with the same amount of input than another
country can vary
– A country should produce only goods where it is most
efficient, and trade for those goods where it is not
efficient
• Trade between countries is, therefore, beneficial
• Assumes there is an absolute balance among nations
– Example: Ghana/cocoa
 Theory of absolute advantage

Fig 4.1
Absolute advantage and the gains
from trade
Theory of comparative advantage
• David Ricardo: Principles of Political Economy
(1817).
– Extends free trade argument
– Efficiency of resource utilization leads to more
productivity.
– Should import even if country is more efficient in
the product’s production than country from which it
is buying.
– Look to see how much more efficient. If only
comparatively efficient, than import.
• Makes better use of resources
• Trade is a positive-sum game
 Theory of comparative advantage

Fig 4.2
Comparative advantage and the
gains from trade
Simple extensions of the Ricardian
model
• Immobile resources:
– Resources do not always move easily from one
economic activity to another

• Diminishing returns:
– Diminishing returns to specialization suggests that
after some point, the more units of a good the
country produces, the greater the additional
resources required to produce an additional item
– Different goods use resources in different proportions
Simple extensions of the Ricardian
model

• Free trade (open economies):

– Free trade might increase a country’s stock of
resources (as labor and capital arrives from
abroad)
– Increase the efficiency of resource utilization
 PPF under diminishing returns

Fig 4.3
 Influence of free trade on PPF
Fig 4.4
 Heckscher (1919)-Olin (1933)
Theory

• Export goods that intensively use factor

endowments which are locally abundant
– Corollary: import goods made from locally
scarce factors
• Note: Factor endowments can be impacted by
government policy - minimum wage
• Patterns of trade are determined by differences in
factor endowments - not productivity
• Remember, focus on relative advantage, not
absolute advantage
Product life-cycle Theory- R. Vernon,
(1966)
• As products mature, both location of
sales and optimal production changes
• Affects the direction and flow of imports
and exports
• Globalization and integration of the
economy makes this theory less valid
 Product life cycle theory

Fig 4.5
 New trade theory

In industries with high fixed costs:

• Specialization increases output, and the
ability to enhance economies of scale
increases
• learning effects are high. These are cost
savings that come from “learning by doing”
 New trade theory-applications
• Typically, requires industries with high, fixed
costs
– World demand will support few competitors
• Competitors may emerge because of “ First-
mover advantage”
– Economies of scale may preclude new entrants
– Role of the government becomes significant
• Some argue that it generates government
intervention and strategic trade policy
 Theory of national competitive
advantage
• The theory attempts to analyze the reasons for
a nations success in a particular industry
• Porter studied 100 industries in 10 nations
– postulated determinants of competitive advantage
of a nation were based on four major attributes
• Factor endowments
• Demand conditions
• Related and supporting industries
• Firm strategy, structure and rivalry
 Porter’s diamond

• Success occurs where these attributes exist.

• More/greater the attribute, the higher chance of success
• The diamond is mutually reinforcing

Fig 4.6
 Factor endowments

• Factor endowments:- A nation’s position

in factors of production such as skilled
labor or infrastructure necessary to
compete in a given industry
• Basic factor endowments
• Advanced factor endowments
 Basic factor endowments

• Basic factors: Factors present in a country

– Natural resources
– Climate
– Geographic location
– Demographics
• While basic factors can provide an initial
advantage they must be supported by
advanced factors to maintain success
 Advanced factor endowments

• Advanced factors: Are the result of

investment by people, companies,
government and are more likely to lead to
competitive advantage
• If a country has no basic factors,
it must invest in
advanced factors
 Advanced factor endowments

• communications
• skilled labor
• research
• Technology
• education
 Demand conditions

• Demand:
– creates capabilities
– creates sophisticated
and demanding
consumers

• Demand impacts quality

and innovation
 Related and supporting
industries

• Creates clusters of supporting industries

that are internationally competitive

• Must also meet requirements of other

parts of the Diamond
 Firm Strategy, Structure and
Rivalry

• Long term corporate vision is a

determinant of success
• Management ‘ideology’ and structure of
the firm can either help or hurt you
• Presence of domestic rivalry improves a
company’s competitiveness
 Determinants of Competitive
Advantage in nations
Fig 4.8
Chance
Company Strategy,
Structure,
and Rivalry

Two external
factors that Factor Demand
influence the Conditions Conditions
four
determinants.
Related
and Supporting
Industries
Government
 Porter’s Theory-predictions

• Porter’s theory should predict the pattern of

international trade that we observe in the real world

• Countries should be exporting products from those

industries where all four components of the diamond
are favorable, while importing in those areas where
the components are not favorable
 Implications for business

• Location implications:
– Disperse production activities to countries where
they can be performed most efficiently
• First-mover implications:
– Invest substantial financial resources in building a
first-mover, or early-mover advantage
• Policy implications:
– Promoting free trade is in the best interests of the
home-country, not always in the best interests of the
firm, even though, many firms promote open
markets
MODULE 3
 Strategies for going global
• Entry Decision
• Different Entry Modes
• Selecting an entry mode
• Strategic Alliances
 Entry Decisions

• Which market to enter ?

• When to enter ?
• Scale of entry ?
 Entry Decisions :
Which market to enter?
• Favourable Host country environment
– Politically stable nations
– Developed and developing economies
– No dramatic upsurge in inflation or private sector
debt
– Free market systems

• Unfavourable Host country environment

– Political unstable
– Excess borrowing
 Entry Decisions :
When to enter?

• Advantages of early market entry:

– First-mover advantage.
– Build sales volume.
– Move down experience curve and achieve cost advantage.
– Create switching costs.
• Disadvantages:
– First mover disadvantage - pioneering costs
– Changes in government policy
 Entry Decisions :
Scale of entry?
• Large scale entry
– Strategic Commitments - a decision that has a
long-term impact and is difficult to reverse.
– May cause rivals to rethink market entry.
– May lead to indigenous competitive response.
• Small scale entry:
– Time to learn about market.
– Reduces exposure risk.
 Different Entry Modes
• Export / Import
• Collaborative Arrangements
– Franchising
– Licensing
– Joint Ventures
– Turnkey Operations
• Wholly Owned Subsidiary
• Mergers & Acquisitions
 Entry Mode : Export / Import
• Export
– Selling products and services in other markets of the
world
– Direct Export
– Indirect Export
• Import
– Buying products and services from other markets of
the world
– Direct Import
– Indirect Import
 Entry Mode : Export

• Appropriate when
– Volume of business not large
– Cost of production in foreign market high
– Political or other risk of investment in foreign
market
– Production bottlenecks in foreign market
– Company has no permanent interest in
foreign market
– Foreign investment not favoured by the
government
 Entry Mode : Export
• Advantages:
– Avoids cost of establishing manufacturing
operations
– May help achieve experience curve and location
economies
• Disadvantages:
– May compete with low-cost location manufacturers
– Possible high transportation costs
– Tariff barriers
– Possible lack of control over marketing reps
 Entry Mode : Franchising
• Franchisor sells intangible property and ‘insists
on rules’ for operating business
• Low risk mode of entry in international market
• Franchise Agreement
– Responsibility of Franchisee
• payment of fee upfront and percentage of revenue
• Gets time proven concept and products and services that
can be brought to the market instantly
– Responsibility of Franchisor
• provides managerial and technical assistance, support and
ongoing training to ensure same quality of goods and
services worldwide
• Has new stream of income
 Entry Mode : Franchising

• Advantages:
– Reduces costs and risk of establishing
enterprise
• Disadvantages:
– May prohibit movement of profits from one
country to support operations in another
country
– Quality control
 Entry Mode : Licensing

• Agreement where licensor grants rights to a firm

(licensee) in host country to produce or sell a
product for a specific period of time & receives
‘royalty’
• Low cost way to exploit foreign market
• Licensing Arrangement
– Responsibility of Licensor
• Gives the license to use a patent, trademark or proprietary information
– Responsibility of Licensee
• Pays royalty
 Entry Mode : Licensing
• Advantages
– Reduces development costs and risks of
establishing foreign enterprise.
– Lack capital for venture.
– Unfamiliar or politically volatile market.
– Overcomes restrictive investment barriers.
– Others can develop business applications of
intangible property.
 Entry Mode : Joint Ventures

• Joint Venture: two or more partners own or

control a business
– Cross marketing arrangements
– Technology sharing agreements
– Production contracting deals
– Equity arrangements
• Types of Joint ventures
– Non equity venture : one group providing service
for another
– Equity Venture : financial investment by MNC in
business of local partner
 Entry Mode : Joint Ventures
• Advantages :
– Improvement of efficiency
• economies of scale
• Spread the risk / cost
– Access to knowledge
• e.g pool financial and technological resources
– Political Factors
• Local partner can manage political risk better
– Collusion or restrictions in competition
• Partner with competitors
• Face competition effectively
• Disadvantages:
– Risk giving control of technology to partner.
– May not realize experience curve or location economies.
– Shared ownership can lead to conflict
 Entry Mode : Turnkey Operations
• Contractor agrees to handle every detail of
project for foreign client and handover the ‘key
• Advantages:
– Can earn a return on knowledge asset.
– Less risky than conventional FDI.
• Disadvantages:
– No long-term interest in the foreign country.
– May create a competitor.
– Selling process technology may be selling competitive
advantage as well.
 Entry Mode : Wholly Owned
Subsidiary
• Overseas operation that is owned and
controlled by an MNC
• Could be Greenfield investments or
acquisitions
 Entry Mode : Wholly Owned
Subsidiary
• Advantages:
– No risk of losing technical competence to a
competitor
– Tight control of operations.
– Realize learning curve and location economies.
• Disadvantage:
– Bear full cost and risk
 Entry Mode : Mergers &
Acquisitions
• Outright purchase of a running company
abroad or an amalgamation with a running
foreign company
• Advantages
– Quick to execute – instant presence in foreign
market
– Preempt the competitors
– Less risky than green field ventures
• Disadvantages
– Clash of interest
 Selecting an Entry Mode
Core competency
•Technological Know-How
•Opt for wholly owned subsidiary
•licensing or JV if supported by agreements or technology is
transitory
•Management Know-How
•Franchising, subsidiary and turnkey operations

Pressure for Cost Reduction

•Exporting
•Wholly owned subsidiary
 Strategic Alliances
• Cooperative agreements between potential
or actual competitors
• Advantages:
– Facilitate entry into market.
– Share fixed costs.
– Bring together skills and assets that neither company
has or can develop.
– Establish industry technology standards.
• Disadvantage:
– Competitors get low cost route to technology and
markets.
 Partner Selection

Making Alliances
Work

Alliance Structure
 Partner Selection

• Get as much information as possible on the

potential partner
• Collect data from informed third parties
– former partners
– investment bankers
– former employees
• Get to know the potential partner before
committing
 Structuring the Alliance
to Reduce Opportunism
Walling off
critical technology

Establishing
contractual
safeguards

Opportunism by partner Agreeing to swap

reduced by: valuable skills
and technologies

Seeking credible
commitments
Managing the Alliance

Building Learning
Trust from
Partners
Alliance between GM and Toyota in
Focus on California Toyota learned US supply,
developing transportation and also how to
interpersonal manage workforce which they used
relationship while opening their plant in Kentucky
MODULE 4
Organization of Global Business
 Organizational architecture

• Formal Organization
structure
• Control Systems &
incentives (Module 6)
• Processes (module 7,8,
10)
• Organizational Culture
(Module 5)
• People (Module 9
 Organizational architecture
• Formal Organization structure
– Division of organization into subunits focusing on functions,
products and geographic area
– Location of decision making responsibilities within the structure
– Coordination of subunits
• Control Systems & incentives (Module 6)
– Measuring performance
– Rewards
• Processes
– Decisions are made and work is performed
 Organizational architecture
• Organizational Culture
– Norms and value system shared among the
employees
• People
– Recruitment, compensation and strategy to
retain
– skills, values and orientation
 Organization structure
– Division of organization into subunits –
Horizontal differentiation
– Location of decision making responsibilities
within the structure – vertical differentiation
– Integrating mechanism for coordination of
subunits
 Horizontal Differentiation

• Concerned with firms division into subunits

• Decisions made on basis of function, type of
business or geographical area
• Structure of domestic firms
– Single entrepreneur or small team of individuals
therefore a centralized structure
– With introduction of more product lines, product
divisional structure introduced
– Each division responsible for single product line
– Self-contained, largely autonomous entities
– Responsible for operating decisions and performance
A typical functional structure
A typical product divisional
structure
 Horizontal Differentiation : Structure
of the international division
• International division
– Organized on geography
– Initially export goods to foreign subsidiary but later
outsource production
• Problems
– Heads of foreign subsidiaries relegated to second-
tier position
– Lack of coordination between domestic and foreign
operations
• Therefore firms begin adopting worldwide
structures
International Division Structure
The International structural stages
model
 Horizontal Differentiation : Worldwide
area structure
• Worldwide area structure
– Favored by firms with low degree of diversification
& domestic structure based on function
– World is divided into autonomous geographic areas
– Operational authority decentralized
– Facilitates local responsiveness
– Fragmentation of organization can occur
– Consistent with multidomestic strategy
A worldwide area structure
Horizontal Differentiation : World wide
product divisional structure
• Adopted by firms that are reasonably diversified
• Original domestic firm structure based on product division
• Value creation activities of each product division coordinated by
that division worldwide
– Help realize location and experience curve economies
– Facilitate transfer of core competencies
• Problem: area managers have limited control, subservient to
product division managers, leading to lack of local responsiveness
A worldwide product division
structure
 Horizontal differentiation: Global
matrix structure
• Helps to cope with conflicting demands of earlier
strategies
• Two dimensions: product division and
geographic area
• Product division and geographic areas given
equal responsibility for operating decisions
• Problems
– Bureaucratic structure slows decision making
– Conflict between areas and product divisions
– Difficult to make one party accountable due to dual
responsibility
A Global matrix structure
 Vertical differentiation
• Concerned with where decisions are
made
– Where is decision making power concentrated?

• Two Approaches
– Centralization
– Decentralization
 Integrating mechanisms

• Need for coordination follows the following order

on an ascending basis

High » Transnational
» Multi domestic corporations
» International companies
» Global companies
Low
 Integrating mechanism

• Impediments to coordination
– Differing goals and lack of respect
– Different orientations due to different tasks
– Differences in nationality, time zone &
distance
– Particularly problematic in multinational
enterprises with its many subunits both home
and abroad
Formal integrating mechanisms
 Formal integrating systems
• Direct contact between subunit managers
• Liaison roles: an individual assigned
responsibility to coordinate with another
subunit on a regular basis
• Temporary or permanent teams from subunits
to achieve coordination
• Matrix structure: all roles viewed as integrating
roles
– Often based on geographical areas and worldwide
product divisions
Informal integrating
mechanisms
 Informal integrating mechanisms
• Informal management networks supported by
an organization culture that values teamwork
and a common culture
• Non-bureaucratic flow of information
• It must embrace as many managers as possible
• Two techniques used to establish networks
– Information systems
– Management development policies
• Rotating managers through various subunits on a regular
basis
MODULE 5
Mc Donald’s and Hindu Culture
 McDonald’ Global Expansion

• Mc Donald’s known for its global expansion

• 4.2 new McDonald’s restaurant every day
• By 2003, 30,000 restaurants in 121
countries serving 46 million customers
• Late 1990s entered Indian market
 Entering Indian Market :
• Challenges
Prosperous middle class - 150 to 200
million
• Hindu culture has revered cow
• Represents divine mother that sustains all
human being
• Hindus do not eat meat of the scared cow
• McDonald’s largest user of beef
• Since its inception in 1955, countless
animals have died to produce Big Macs
• Challenge : company whose fortune are
built on beef enter a country where
consumption of beef is a sin
 Entering Indian Market :
•Use pork?
Challenges
• 140 million Muslims & Muslims do not eat
pork
• Chicken & mutton?
• Maharaja Mac – made from mutton
• Mac Aloo Tikki Burger
• Chicken burger
• Foods strictly segregated into Vegetarian
and non vegetarian lines
 Global Challenges translating into
local challenges
• In 2001 - Lawsuit by three Indian
Businessmen in Seatle, USA
• All vegetarians, two of them Hindus
• Sued for “fraudulently concealing” existence
of beef in McDonald’s French fries
• Initially company insisted that they used only
100 percent vegetable oil
• But soon admitted that it used a miniscule
amount of beef extract in the oil
 Global Challenges translating into
local challenges
• Settled suit for $10 million dollars
• Issued an apology
“ McDonald’s sincerely apologize to Hindus, vegetarians
and other for failing to provide the kind of information
they needed to make informed dietary decisions at our
U.S. restaurant”
• The company pledged to label the ingredients of its food
and find a substitute for the beef extract used in its oil
 Global Challenges translating into
local challenges
• News came to India
• Vandalized one restaurant causing damage
of $45,000
• Shouted slogans outside another
• Picketed company’s headquarters
• Called on Indian Prime Minister to closed
McDonald’s 27 restaurants in the country
• Denials by franchisee in India
• Hindu extremists responded by stating that
they would submit oil to laboratory tests
 Mc Donald’s : Cultural
Sensitiveness
• no impact of negative publicity on
McDonald’s long term palns in India
• By 2003 had 38 restaurants
• Announced plans to open 80 restaurants
by end of 2005
• Satisfied Indian customers “Children
enjoyed the American experience, food of
consistent quality and toilets were clean!
 What is culture?

• “A system of values and norms that are

shared among a group of people and
that when taken together constitute a
design for living.”
• Hofstede, Namenwirth and Weber
 Different components of culture

• Values and Norms

• Folkways and mores

 Values and norms

• Values: Abstract ideas/assumptions about

what a group believes to be good, right
and desirable

• Norms: social rules and guidelines that

prescribe appropriate behavior in
particular situations
 Folkways and mores
• Folkways: Routine conventions of everyday life.
– Little moral significance
– Generally, social conventions such as dress
codes, social manners, and neighborly behavior
• Mores: Norms central to the functioning of society
and its social life
– Greater significance than folkways
– Violation can bring serious retribution
• Theft, adultery, incest and cannibalism
 Determinants of culture

• Social structure
• Religion
• Language
• Education
• Economic philosophy
• Political philosophy
 Social structure
• Two dimensions
– The extent to which society is group or
individually oriented
– Degree of stratification into castes or classes
• Social mobility
• Significance to business
 Religion
• Shared beliefs and rituals
• Moral principles and values – guide or
shape our behaviour
 Language
• Spoken
– Verbal cues
– Language structures
perception of world
• Unspoken
– Body language
– Personal space
 Education

• Education can be a source of competitive

advantage
 Other influences
– Political philosophy
– Economic philosophy
 Culture and the workplace
• Study on the relationship between culture and
the workplace by Geert Hofstede 1967-73

– 40 countries
– 100,000 individuals
 Hofstede’s cultural dimensions

• Four dimensions of culture

– Power distance
– Individualism versus collectivism
– Uncertainty avoidance
– Masculinity versus femininity
 Power distance

• Cultures are ranked high or low on this

dimensions based on the particular
society’s ability to deal with inequalities
 Individualism versus collectivism
• This dimension focuses on the relationship between
the individual and his/her fellows within a culture
– Individualistic societies:
• loose ties
• individual achievement and freedom highly
valued
• Collectivist societies-
• tight ties
• tend to be more relationship oriented
 Uncertainty avoidance

• This dimension measures the extent to

which a culture socializes its members
into accepting ambiguous situations and
tolerating uncertainty
 Masculinity versus femininity

• This dimension looks at the relationship

between gender and work roles
Work related values for twenty
countries
 Problems with Hofstede’s findings

• Assumes one-to-one relationship between culture

and the nation-state
• His research may have been culturally bound.
• Survey respondents were from a single industry
(computer) and a single company (IBM)
 Cultural change

• Culture is not a constant; it evolves over

time
• Since 1960s American values
toward the role of women are
changing.
• Japan moves toward greater
individualism in the workplace
• Effects of globalization
 Managerial implications

• Cross cultural literacy

• Culture and competitive advantage
• Culture and business ethics
MODULE 5 CONTD..
The Economic Environment
Facing Global Business
 KEY MACROECONOMIC
INDICATORS
• Economic Growth
• Inflation
• Surpluses & Deficit
 KEY MACROECONOMIC
INDICATORS : ECONOMIC GROWTH
• GDP and GNI (or GNP)
– High or Low
– total amount of goods and services produced in a
year within the domestic territory) or GNI (GDP + net
income)
– Per capita GNI (total GNI divided by total population)
– PPP GNI (unmber of units of a country’s currency
required to buy the same goods and services in the
domestic market that $1 will buy in USA
 KEY MACROECONOMIC
INDICATORS : INFLATION
• Increase in prices
• Inflation rate percentage increase in the change
in prices from one period to another, usually a
year
• Demand more than supply
• Inflation effects
– interest rates
– exchange rates
– cost of living and
– General confidence in a country’s political and
economic system
 KEY MACROECONOMIC
INDICATORS : INFLATION

• Inflation and Interest rates

• High inflation – High interest rates
 KEY MACROECONOMIC
INDICATORS : INFLATION
• Inflation and Exchange Rate
• Higher inflation – devaluation
• Case 1
• UK exporter – US distributor
• Cost 100 pounds Exchange rate $1.59 / GBP
• Cost to US distributor $159
• Case 2
– High Inflation – exchange rate constant – exports will be costly
• Cost 110 pounds Exchange rate $1.59 / GBP
• Cost to US distributor $174.90
– High Inflation – currency devaluation – exports will be competitive
• Cost 110 pounds Exchange rate $1.47 / GBP
• Cost to US distributor $161.70
 KEY MACROECONOMIC
INDICATORS : INFLATION
• Inflation and cost of living
• Less disposable income with consumers

• Inflation and government

• Under pressure to bring down inflation
• Rise interest rates for slow economic growth
– social unrest
• Protest if any control over wages
 KEY MACROECONOMIC INDICATORS :
SURPLUSES AND DEFICIT
• Balance of Payment
• Record of country’s international transaction
between companies, individuals and government
• Composed of current and capital account
• Current Account
– Merchandise trade – Balance of trade - trade deficit or
surplus
– Trade in Services
– Income Receipts or payment on assets, receipt on
FDI
– Unilateral transfers – govt and private relief grants
and income transferred from abroad
 KEY MACROECONOMIC INDICATORS :
SURPLUSES AND DEFICIT
• Capital Account
• Transactions in real or financial assets
• Foreign Direct Investment
• Purchase of securities
• Official Asset Reserve e.g Gold, SDRs
and Foreign Currency
 KEY MACROECONOMIC INDICATORS :
SURPLUSES AND DEFICIT
• External Debt
• Total debt or debt as percentage of GDP
• Larger external debt – unstable economy
 KEY MACROECONOMIC INDICATORS :
SURPLUSES AND DEFICIT
• Internal Debt
• Excess of Government expenditure than
revenues
• Budget deficit
– Poor tax system
– Huge expenditure on defense and welfare
– Sick state owned enterprises
Privatization
 CLASSIFYING ECONOMIC SYSTEMS
Economic Systems

Centrally planned Market based Mixed economy

economy economy

Production and Decisions to produce Private and public sectors

distribution and distribute goods co exist
system is owned is taken by individual No country has mixed
by government firms based on the economy in purest form
forces of demand and Form of Government
Decisions based supply intervention :
on fulfilling e.g USA and - ownership of the means
economic, European countries of production
political and - influence in decision
social objectives making
e.g former USSR In China CPE + Special
and East Economic Zones with
European private initiatives, India
countries
Economic System and Implications
for Business
• CPE - State trading corporations
participates in international trade
• Market Based Economy – Individual firms
• Mixed Economy – Both the systems are
found
 Understanding Economic
Environment
• Demand for its products
• Expected cost of production & net earnings
• Consumption behavior
• Availability of Human or physical resources
• Network of infrastructure
• Fiscal, Monetary and Industrial Policy
• Strength of External sector
• Repatriation of earnings
 Understanding Economic
Environment : Demand conditions
• Level of income & its distribution
• tendency to consume
• Rate of inflation
 Understanding Economic
Environment : Demand conditions
• Level of income and its distribution
– GDP
– Per Capita income
– Countries classified by World Bank on basis on Per
capita income as

Country classification Per capital Income

Low income country US$ 905 or less in 2006
Middle income country US$ 906 – $11,115
High income country US$ 11,116 or above
 Understanding Economic
Environment : Demand conditions
• Based on GDP, GNI, Income level and
other economic and socio economic
factors countries are divided into
• Developed Economies
• Developing Economies and
• Least Developed Economies
 Demand conditions and
Implications for business
• MNCs also enter low income countries for high
price goods
– Huge population, low wages , cheap labor force
– Distribution of national income
• Unequal distribution e.g population of 500 million, 10% of the
population has 60% of the income , company can sell high
price goods
• Equal distribution , company can sell low price goods
– Not per capita income but income distribution that
influences the international business decision
 Understanding Economic
Environment : Inflation
• Purchasing power of consumer depend
upon real income
• Higher level of inflation
– lower real income and purchasing power
– Cost of production will be higher ( beneficial to
export from home country where inflation level
is low)
Understanding Economic Environment :
Consumption behavior
• Low income country – price conscious customers
• Rural areas of LDCs – savings or real estate
investment
• LDCs – income spent on fulfilling basic needs e.g
food and housing
• High literacy rate – quality conscious
• Less educated – price conscious
• Less social security – prefer savings with low
tendency to consume
 Understanding Economic Environment :
Availability of Human or physical resources
• Easy availability – lower manufacturing
cost
• MNCs look for skilled manpower locally
• Availability of physical resource e.g factors
of production
• Indian companies have shifted to Sri
Lanka for manufacture of rubber products
and to Nepal for herbal products
 Understanding Economic
Environment : Network of infrastructure
• Power supply, good road/ rail / air links,
communication system
 Understanding Economic
Environment : Fiscal, Monetary and
Industrial Policy
• Fiscal policy
– Income tax, excise duties, tariff
– Fiscal deficit
• Monetary Policy
– Money supply, rate of inflation, rate of interest
and cost of credit
– Inflation within limits, low interest rates
• Industrial Policy
– Sectors open to foreign participation
 Understanding Economic
Environment : Strength of External
sector
• Strong Balance of payment position
• Huge Forex reserves
• Favourable when government adopts
liberal policies
• Current account deficit when imports are
more than exports
• Capital account deficit due to difference in
inflow and outflow of currency
 Understanding Economic
Environment : Repatriation of Earnings
• Possible when govt have liberal policy
• strong balance of payment position
• foreign exchange reserves is large
 Analysing Economic Environment
• Data collection
– Secondary data - International organisations
like World Bank, IMF, United Nations etc.
– Primary data – own sources or consultants
• Statistical Analysis of data
– to predict demand for the product
– Analyse economic trends etc.
MODULE 5 CONTD..
 Instruments of trade policy

• Tariffs - oldest form of trade policy

– Specific
– Ad valorem
• Good for government
• Protects domestic producers
– Reduces efficiency
• Bad for consumers
– Increases cost of goods
 Instruments of trade policy-
subsidies
• Government payment to a domestic producer
– Cash grants
– Low-interest loans
– Tax breaks
– Government equity participation in the company
• Subsidy revenues are generated from taxes
• Subsidies encourage over-production, inefficiency and
reduced trade
 Instruments of trade policy -
Quota
• Import quota
– Restriction on the quantity of some good
imported into a country
• Voluntary export restraint (VER)
– Quota on trade imposed by exporting country,
typically at the request of the importing country
 Instruments of trade policy -Quota
• Benefits producers by limiting import
competition
 Instruments of trade policy- local
content
• Requires some specific fraction of a good to be
produced domestically
• Initially used by developing countries to help shift
from assembly to production of goods.
• Developed countries (US) beginning to implement.
• For component parts manufacturer, LCR acts the
same as an import quota
• Benefits producers, not consumers
 Instruments of trade policy-
administrative policies

• Bureaucratic rules designed to make it

difficult for imports to enter a country.
• Japanese ‘masters’ in imposing rules.
 Instruments of trade policy-anti
dumping policies
• Defined as
– Selling goods in a foreign market below
production costs
– Selling goods in a foreign market below fair
market value
• Result of
– Unloading excess production.
– Predatory behavior
• Remedy: seek imposition of tariffs
Political arguments for intervention

• Protecting jobs and industries

– CAP (Europe) and VER
• National security
– Defense industries - semiconductors
• Retaliation
– Punitive sanctions
 Political arguments for intervention
• Protecting consumers
– Genetically engineered seeds and crops
– Hormone treated beef
• Furthering foreign policy objectives
– Helms-Burton Act.
– D’Amato Act
• Protecting human rights
– MFN
 Economic arguments for
intervention
• Infant industry.
– Oldest argument - Alexander Hamilton, 1792
– Protected under the WTO
– Only good if it makes the industry efficient.
• Brazil auto-makers - 10th largest - wilted when
protection eliminated
– Requires government financial assistance.
• Today if the industry is a good investment, global
capital markets would invest
 Economic arguments for
intervention
• Strategic trade policy
– Government should use subsidies to protect
promising firms in newly emerging industries
with substantial scale economies
– Governments benefit if they support domestic
firms to overcome barriers to entry created by
existing foreign firms
Development of the world trading
system
• Intellectual arguments for free trade
– Adam Smith and David Ricardo
• Free trade as government policy
– Britain’s (1846) repeal of the Corn Laws
• Britain continued free trade policy
– Fear of trade war
 Development of the world trading
system
• Great Depression
– US stock market collapse
– Smoot-Hawley tariff(1930)
• Almost every industry had its “made to
order tariff”
• Foreign response was to impose own
barriers
• US exports tumbled
 Development of the world trading
system
• GATT -multilateral agreement established
under US leadership1948
– Objective is to liberalize trade by eliminating
tariffs, subsidies, & import quotas
– 19 original members grew to 120
 Development of the world trading
system
• Used ‘Rounds of talks’ to gradually reduce
trade barriers
• Uruguay Round GATT 1986-93
– Mutual tariff reductions negotiated
– Dispute resolution only if complaints were
received
Disturbing trends in the world trading
system
• Pressure for greater protectionism due to
– Increase in the power of Japan’s economic
machine and closed Japanese markets
– US trade deficit
– GATT circumvented by many countries
• Through use of VER
 GATT criticisms

• Economic theories don’t fit the ‘real world’

model
• US global preeminence has declined
• Shift from cutting tariffs to eliminating
non-tariff barriers angered countries
• ‘National Treatment’ or ‘Most Favored
Nation’ status results in inequalities
 The World Trade Organization
• The WTO was created during the Uruguay Round
of GATT to police and enforce GATT rules
• Most comprehensive trade agreement in history
• Formation of WTO had an impact on
– Agriculture subsidies (stumbling block: US/EU)
– Applied GATT rules to services and intellectual
property (TRIPS)
– Strengthened GATT monitoring and enforcement
 The WTO
• 145 members in 2003
• Represents 90% of world trade
• 9 of 10 disputes satisfactorily settled
• Tariff reduction from 40% to 5%
• Trade volume of manufactured goods has
increased 20 times
 The WTO

• Policing organization for:

– GATT
– Services
– Intellectual property
• Responsibility for trade arbitration:
– Reports adopted unless specifically rejected
– After appeal, failure to comply can result in
compensation to injured country or trade
sanctions
 WTO at work
• 280 disputes brought to WTO between
1995 and 2003
• 196 handled by GATT during its 50 year
history
• US is biggest WTO user
– Big wins - beef - bananas
– Big loss - Kodak
 The WTO -achievements
• Telecommunications (1997)
– 68 countries (90%) of world telecommunications
revenues
– Pledged to open their market to fair competition
• Financial Services (1997)
– 95% of financial services market
– 102 countries will open, their markets to varying
degrees
 WTO in Seattle
• Millennium round was aimed at further
reduction of trade barriers in agriculture
and services
• WTO meeting disrupted by
– Human rights groups
– Trade unions
– Environmentalists
– Anti globalization groups
• No agreement was reached
 Doha agenda -WTO

• Cutting tariffs on industrial goods and

services
• Phasing out subsidies
• Reducing antidumping laws
• WTO regulation on intellectual property
should not prevent members from
protecting public health
– TRIPS agreement
 Antidumping cases by WTO
members
Fig 5.1
 Antidumping actions
• Four sectors account for 70 percent of all
antidumping actions reported to WTO
– Metal industries
– Chemicals
– Plastics
– Machinery and electrical equipment
– Actions often initiated by politicians in the
various countries to please strong lobbying
groups in exchange for votes
 Protectionism in agriculture
• Recent focus of WTO on agricultural
subsides
– These are 3 to 5 times higher than non-
agricultural subsidies
– Advanced nations are the strongest defenders of
this system
• Combination of high tariffs and subsides on
agricultural product
– Raises price to the consumer
– Reduces volume of agricultural trade
– Encourages overproduction of subsidized
products
 Protection of intellectual property
• Trade related Aspects of Intellectual
property (TRIPS)
– WTO members allowed to grant and enforce
patents and copyrights
– This encourages innovation
– Reduces piracy rates in drugs, software music
• Expected to boost global economic rates
and social and economic welfare around
the world
 Managerial implications
• Trade barriers act as a constraint on firm
strategy
• May be useful to establish more production
activities in the protected country
• Business gains from government’s efforts to
open protected markets are more than gains
from governments efforts to protect
domestic industries/firms
MODULE 5 CONTD..
The Political Environment
 Nature of Political Risk
• Political risk due to
• host government intervention into foreign
business : Trade restrictions viz tariffs,
Quota, LCR, Subsidies, Policies etc.
• Political risk due to unstable host
government
– Multi party system
 The Political Environment
• Reasons for government intervention in
international trade
– Protect domestic producers/ consumers
– Protect jobs
– Promoting indigenous goods in the Foreign market
– National Security
– Retaliation
• Restricting imports
• Promoting Exports
 Host government intervention into
foreign business
• Trade policy instruments
– Tariffs
– Subsidies
– Quota
– Local content requirement
– Administrative policies
– Anti-dumping regulations
 Instruments of trade policy

• Tariffs - oldest form of trade policy

– Specific
– Ad valorem
• Good for government
• Protects domestic producers
– Reduces efficiency
• Bad for consumers
– Increases cost of goods
 Instruments of trade policy-
subsidies
• Government payment to a domestic producer
– Cash grants
– Low-interest loans
– Tax breaks
– Government equity participation in the company
• Subsidy revenues are generated from taxes
• Subsidies encourage over-production, inefficiency and
reduced trade
 Instruments of trade policy -
Quota
• Import quota
– Restriction on the quantity of some good
imported into a country
• Voluntary export restraint (VER)
– Quota on trade imposed by exporting country,
typically at the request of the importing country
 Instruments of trade policy -Quota
• Benefits producers by limiting import
competition
 Instruments of trade policy- local
content
requirement
• Requires some specific fraction of a good to be
produced domestically
• Initially used by developing countries to help shift
from assembly to production of goods.
• Developed countries (US) beginning to implement.
• For component parts manufacturer, LCR acts the
same as an import quota
• Benefits producers, not consumers
 Instruments of trade policy-
administrative policies

• Bureaucratic rules designed to make it

difficult for imports to enter a country.
• Japanese ‘masters’ in imposing rules.
 Instruments of trade policy-anti
dumping policies
• Defined as
– Selling goods in a foreign market below
production costs
– Selling goods in a foreign market below fair
market value
• Result of
– Unloading excess production.
– Predatory behavior
• Remedy: seek imposition of tariffs
 Host Government Instability
• Wars arising from within the country or outside
the country
• Ethnic / Religion / Class conflict
• Revolution
• Terrorism
• Military Coup
• New International Alliances
• Changes in Ideology or Business Plicy
• International Debt
 Nature of Political Risk
• Political Risk can be analysed through
– Leadership succession
– Historical tendency to nationalize
– Labour agitation and worker participation in
management
– Civil Disorder, violence and terrorism
– Military unrest
– External territorial dispute
– Policies concerning foreign investment
The Environment of Political
Risk
Ideology
International Law
Local Law

Business conflict

MNC
 The Environment of Political
Risk
Ideology

Communism Socialism Capitalism

Classless society Government Private
Greatest risk when ownership ownership
communist government No concern for profit National
takes over the non Nationalization of key security,
communist government industry defense, police
Confiscates or under
expropriates private government
property control
 The Legal Environment
• International Law
– Laws conforming to WTO rules and regulations
• Anti-dumping law
• Subsidies & Countervailing duty
• IPR
• Local Laws
– Laws designed to protect interest of business and
consumer interest alike
• Taxation
• Monetary Policy
• Business Conflicts
– Methods to resolve business conflicts (litigation, arbitration
or conciliation)
 Political Rick Assessment
Techniques
• Type of government in power
– Political patterns
– Norms of stability
• Analyze the characteristic of its own products
– Identify potential risk
• Identify sources of potential risk
• Future projections of the probabilities and time
frame of potential risks
• Surveys / Research of international organisation
 Protection for MNCs
• Trade : Policy e.g ECGC in India
• Investment : MIGA (Multilateral Investment
Guarantee Agency
MODULE 6
Control Strategies
 References
• Daniels John D., Radebaugh Lee H., Sullivan Daniel P., International
Business : Environment and Operations, Pearson Education, 10th Edition,
Chapter 15
• Hodgetts Richard M, Luthans F. & Doh Johathan P., , International
Management, Tata McGrawHill Publishing Company Ltd., (2005) Chapter
11
• Koontz Harold and Weihrich Heinz, (2001), Management : A Global
Perspective, Tata McGraw Hills Publishing Co. Ltd., Chapter 20, 21 & 23
• Thakur Manab, Burton Gene E. & Srivastava B. N. (2002), International
Management Concepts & Cases, Tata McGraw Hills Publishing Co. Ltd.,
Chapter 11
• Bhalla V. K. & Ramu Shiva S. ( 2005). International Business, Environment
and Management, Anmol Publications Pvt. Ltd., Chapter 12
• Sharan Vyuptakesh, (2006), International Business, Concept, Environment
and Strategy, Pearson Education, Chapter 14
 Why Control ?

Planning correction of
performance
Control

Implementing Evaluation
 Control is essential but difficult
if……
• Distance
• Diversity
– Market size
– Type of competition
– Nature of product
– Labour policy
– Currency
• Uncontrollable
– Outside stakeholders
– Government regulations
• Degree of certainty / uncertainity
– Changing political environment
– Insufficient country data
 Control Process
Planning

Organizational Architecture

Location of Decision making

Control Strategies
 Planning
STEP 1
Setting Goals
STEP 2
• Analyze internal corporate resources
– Financial Resources
• Capital, cash flow needs, Transfer funds, Profit and
dividend targets
– Human Resources
• Product / General Skill, Functional skills, Transferability
of people, Additional Resources
– Product Resources
• Capacity use and bottlenecks, Monopolistic
characteristic, Adaptation for foreign sales,
Transportation, Cost savings
– Environmental Effects
• Cyclical change in demand, Competition, Societal
Attitudes
 Planning
STEP 3
• Set International Corporate Objectives
– sales objectives,
– Resource acquisition objectives,
– Diversification,
– Competitive risk minimizing objectives
 Planning
STEP 4
• Analyze Local Conditions ( in current or
perspective host countries)
– Same as in step 2 plus
– Financial Factors
• Tax system, Timing of receivables and payables, need for
finance
– Marketing Factors
• Cost and availability of market data, distribution methods and
cost, nature of competition, government regulation,
advertising
– Other Factors
• Attitude towards foreign business, political and economic
stability
 Planning
STEP 5
• Select Alternatives and priorities
– Alternatives
• Location of value added activities
• Location of sales target
– Setting priorities among alternatives
 Planning
STEP 6
• Implementation strategy
• Set targets / goals
• Reports
• Environmental Analysis
• Corrective steps
• Contingency plan
 Organizational Structure
• International Division
• Worldwide area Structure
• Worldwide Product Structure
• Martix Structure
 Location of Decision Making
• Centralized – decision making at top e.g
global organisation
• Decentralized – decisions delegated to
operating personnel e.g transnational
organisation
 Location of Decision Making
• Pressure for Global Integration vs. Local
Responsiveness
– Transferring resources i.e capital, personnel
and technology
– Standardization
– Systematic dealing with stakeholders
– Transnational strategies
 Location of Decision Making
• Capabilities of Headquarter Vs. Subsidiary
Personnel
– Decentralized
• Large teams in subsidiary
• Worked for a long time with the company
• Successful track record
• Decision Expediency and Quality
– Cost and Expediency
– Importance of decision
 Factors effecting decision making
Centralization Decentralization
Large Size Small Size
Large Capital Investment Small Capital Investment
Relative high importance to Relative low importance to
MNC MNC
Highly competitive Stable environment
environment
Strong volume to cost Weak volume to cost
relationship relationship
High degree of technology Moderate to Low degree of
technology
Strong importance attached to Little importance attached to
brand name, patent rights, brand name, patent rights,
etc. etc.
 Factors effecting decision making
Centralization Decentralization
Low level of product High level of product
diversification diversification
Homogenous product lines Heterogeneous product lines
Small geographic distance Large geographic distance
between home office and between home office and
subsidiary subsidiary
High interdependent between Low interdependent between
the units the units
Fewer highly competent More highly competent
managers in host country managers in host country
Much experience in Little experience in
international business international business
 Control Strategies
• Controlling means evaluating results in relation
to plans and objectives and deciding what action
to take
• Types of control
– Direct Control – face to face or personal meetings,
visit by top executives to foreign subsidiaries, staffing
policy, organization structure
– Indirect Control – Reports and other written forms e.g
balance sheets, income statements etc.
 Control Techniques
• Corporate Culture e.g dress, time, code of
conduct etc.
• Coordinating mechanism
• Financial Performance
• Quality Performance
• Personnel Performance
 Control Techniques
• Financial Performance
– Profit and ROI
• Quality Performance
– Initiatives to improve Quality
– Importance to customer feedback
– Working closely with suppliers
• Personnel Performance
– Periodic appraisal of work performance
– Performance to be evaluated separately from the
performance of the subsidiary
MODULE 7
 The globalization of markets and
brands
• Standardization vs Adaptation
• Different marketing mix in different country

• Globalization may be the exception rather

than the rule in many consumer goods
markets and industrial markets
 Market segmentation
• Refers to identifying distinct groups of
consumers whose purchasing behavior differs
from others in important ways

• Segments can based on:

– Geography
– Demography
– Socio-cultural factors
– Psychological factors
 Market segmentation

• Two main issues relating to segmentation:

– Extent of differences between countries in the
structure of market segments
– Existence of segments that transcend national
borders
 Product Policy

• Cultural differences
• Economic development
• Product and technical standards
Product Policy : Cultural differences

– Differ along dimensions such as social

structure, language, religion and
education
– Impact of tradition
– Some tastes and preferences becoming
cosmopolitan
Product Policy : Economic development
• Consumer behavior is influenced by
economic development
– Consumers in highly developed countries
tend to demand extra performance attributes
in their products
• Price not a factor due to high income level
– Consumers in less developed countries, value
basic features as more important
• Price a factor due to lower income level
– Cars: no air-conditioning, power steering,
power windows, radios and cassette players.
• Product reliability is more important
 Product Policy : Technical
standards

–Government standards can rule out

mass production and marketing of a
standardized product
–Differing technical standards constrain
globalization of markets
• Different television signal frequencies, left hand and
right hand driven cars, different voltage requirements
 Pricing strategy

• Three aspects of international pricing

strategy
– Price discrimination
– Strategic pricing
– Regulatory influence on prices
 Price discrimination
• Said to occur when consumers in different countries
are charged different prices for the same product
• Two conditions necessary
– National markets kept separate to prevent
arbitrage
• Capitalization of price differentials by purchasing
product in countries where prices are lower and
reselling where prices are higher
– Different price elasticities of demand in different
countries
• Greater in countries with low income levels & highly
competitive conditions
Elastic and inelastic demand
curves
Price discrimination
 Strategic pricing

• Predatory pricing
– Using price as a competitive weapon to drive
weaker competition out of a national market
– Firms then raise prices to enjoy high profits
– Firms normally have profitable position in
another national market
 Strategic pricing

• Multipoint pricing strategy

– Two or more international firms compete
against each other in two or more national
markets
– A firm’s pricing strategy in one market may
impact a rival in another market.
• Kodak and Fuji
 Strategic pricing

• Experience curve pricing

– Firms price low worldwide to build market
share
– Incurred losses are made up as company
moves down experience curve, making
substantial profits
– Cost advantage over its less-aggressive
competitors
 Regulatory influences on prices
• Antidumping regulations
– Selling a product for a price that is less than the cost of
producing it
– Antidumping rules vague, but place a floor under export
prices and limit a firm’s ability to pursue strategic pricing
• Article 6 of GATT, allows action against an importer
if the product is sold at ‘less than fair value’ and
causes ‘material injury to a domestic industry’
• Competition policy
– Regulations designed to promote competition and
restrict monopoly practices
 Communication strategy

• Defines the process

the firm will use in
communicating the
attributes of its
product to prospective
customers
 Barriers to international
communication

• Cultural Barriers
– Develop cross-cultural literacy
– Firm should use local input such as local
advertising agency and sales force
 Barriers to international
communication
• Source and country of origin effects
– Receiver of the message evaluates the message
based on status or image of the sender
• Anti-Japan wave in US in 1990’s
– Place of manufacturing influences product
evaluations
• Often used when consumer lacks more detailed
knowledge of the product
– Examples: French wines, Italian clothes and German
luxury cars
 Barriers to international
communication
• Noise levels
– Amount of other messages competing for a
potential customer’s attention
• Developed countries - high.
• Less developed countries - low.
• Standardized advertising strategy
execution more difficult (culture, laws)
 Push versus pull strategy
• Push strategy emphasizes personal selling
– Requires intense use of a sales force
– Relatively costly
• Pull strategy depends on mass media
advertising
– Can be cheaper for a large market segment
• Determining factors of type of strategy
– Product type and consumer sophistication
– Channel length
– Media availability
 Product type and consumer
sophistication
• Pull strategy • Push strategy
– Industrial products or
complex new products
– Consumer goods
– Direct selling allows
– Large market segment firms to educate users
– Long distribution – Short distribution
channels channels
– Mass communication – Used in poorer nations
has cost advantages for consumer goods
where direct selling only
way to reach consumers
 Channel length
• Pull strategy
– Long or exclusive distribution channels
• e.g. Japan
– Mass advertising to generate demand to pull
product through various layers
• Push Strategy
– In countries with low literacy levels to educate
consumers
 Media availability
• Pull strategy
– Relies on access to advertising media
– Common in developed nations
• Push strategy
– Media availability limited by law
– All electronic media state owned with no
commercial policy
 Global advertising

• Standardized:
– Significant economic advantages
– Scarce creative talent
– Many global brand names
• Non-standardized:
– Cultural differences
– Advertising regulations can be a restriction
 Distribution strategy
• Choice of the optimal channel for
delivering a product to the consumer
– Optimal strategy is determined by the relative
costs and benefits of each alternative
– Depends on differences between countries
• retail concentration
• channel length
• channel exclusivity
A typical distribution system
 Retail concentration

• Concentrated system
– common in developed countries
– contributing factors: increase in car ownership, number of
households with refrigerators and freezers and two-income
households
• Fragmented system
– common in developing countries
– contributing factors: great population density with large
number of urban centers e.g. Japan
– uneven or mountainous terrain e.g. Nepal
 Channel length

• Refers to number of intermediaries

between the producer and the consumer
• Determined by degree to which the retail
system is fragmented
– Long distribution channel
– Short distribution channel
 Channel length
• Long distribution channel
– Fragmented retail system promotes growth of
wholesalers and retailers
– Firms go through intermediaries such as
wholesalers to cut selling costs
• Short distribution channel
– Concentrated retail system
– Firms deal directly with retailers
 Channel exclusivity
• Degree to which it is difficult for outsiders
to access distribution channels
• Varies between countries
– Japan - exclusive systems because personal
relations, often decades old play important
role in stocking products
– Difficult for new firm to get shelf space as
compared to an old firm
Configuring the marketing mix

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 New product development
• The location of R & D
– Rate of new product development greater
in countries where
• More money spent on R&D
• Underlying demand is strong
• Consumers are affluent
• Competition is intense
 Integrating R&D, marketing and
production

• Integrating R&D, production and marketing

ensures
– Project development driven by customer needs
– New products are designed for ease of
manufacture
– Development costs are kept in check
– Time to market is minimized
 Integrating R&D, marketing and
production
• High failure rate ratio
– Between 33 % and 60% of new products fail to
earn adequate profits
• Reasons for failure:
– Limited product demand
– Failure to adequately commercialize product
– Inability to manufacture product cost-effectively
 Cross-functional product development
teams
• Objective of team to take a product
development project from the initial concept
development to market introduction
• Effective teams must have
– “Heavyweight “ project manager
– One member from each key function
– Physically co-located to facilitate
communication
– Clear plan and goals
– Own process for communication and conflict
resolution
MODULE 8
Global Manufacturing Strategies
 Manufacturing Strategies

• Activity that controls the transmission of

physical materials through the value chain
– Includes procurement, production and into
distribution
• Logistics : Procurement and physical
transmission of materials through the
supply chain, from suppliers to customers
Manufacturing : Strategic objectives
• Lower costs
– Disperse manufacturing activities to efficient
global locations

• Increase productivity
– Using Total Quality Management
– Six Sigma
Manufacturing : Strategic objectives
• Accommodate demands for local
responsiveness
– decentralize production

• Respond quickly to shifts on customer

demand
– time-based competition extremely important
 Global Sourcing

Country
Factors

Technological
Factors

Product
Factors

Locating
Manufacturing
Facilities
 Country factors

• Optimum economic, political, and cultural

conditions
• Externalities
– Skilled labor pools
– Supporting industries
• Formal and informal trade barriers
• Exchange rate
 Technological factors
• Fixed costs
• Minimum efficient scale
• Flexible manufacturing for mass customization,
reduced cost and product customization
– reduce setup times for complex equipment
– increase machine utilization
– improve quality control

• flexible machine cells to perform a variety of

operations
A typical unit cost curve
 Manufacturing location
Single or few locations
• Fixed costs are substantial
• Minimum efficient scale is high
• Flexible manufacturing technologies available

Major market locations

• Better meets local demands
• Fixed costs are low
• Minimum efficient scale is low
• Flexible manufacturing technologies unavailable
• Trade barriers and transportation costs remain major
impediments
 Product factors and location
strategies
• Two product features affect location decisions:
– Value to weight ratio.
– Product serves universal needs
• Two basic strategies
– Concentrating in a centralized location and serving
the world market
– Decentralizing them in various regional or national
locations close to major markets when opposite
conditions exist
 Centralized location
• Factor costs have substantial impact
• Low trade barriers
• Externalities favor certain location
• Stable exchange rates
• High fixed costs, high minimum efficient scale
relative to global demand or flexible manufacturing
technology
• Product’s value-to-weight ratio is high
• Product serves universal needs
 Decentralized location
• Factor costs do not have substantial impact
• High trade barriers
• Location externalities not important
• Exchange rates volatile
• Low fixed costs, low minimum efficient scale
• Flexible manufacturing technology unavailable
• Product’s value-to-weight ratio is low
• Significant differences in consumer tastes and
preferences exist between nations.
 Strategic role of foreign factories
• Initially, established where labor costs low
• Later, important centers for design and
final assembly
• Upward migration caused by pressures to:
– Improve cost structure
– Customize product to meet customer demand.
and
– An increasing abundance of advanced factors
of production
 Make or buy decisions
• Should a firm make or buy the component
parts that go into their final product?
• Advantages of making own components:
– Lower costs if most efficient producer
– Facilitating specialized investments
– Proprietary product technology protection
– Improved scheduling
Advantages of buy versus make

• Strategic flexibility in sourcing components

• Lower firm’s cost structure
• Offsets
• Strategic alliances with suppliers give
benefits of vertical integration without the
associated organizational problems
 Managing a global supply chain
• Objective of materials management in
managing a firm’s global supply chain
– Maintain lowest possible cost
– In a way that best serves the customer’s
needs
• Role of just-in time inventory
– Economize on inventory holding costs
– Speeds inventory turnover
– Drawback: no buffer stock
 Role of organization
• Organizational linkages more numerous and
complex
– More difficult to control costs
• Require separate materials management as
a function
– Equal weight with other departments
– Decide between centralized and decentralized
organizational structure
Potential materials management
linkages
Traditional organizational structure
Organization structure with materials
management as separate function

Strategic
manager/CEO

Materials Manufacturing Marketing Finance

management

Production
Purchasing planning Distribution
and control
Role of information technology and
the internet
• Track component parts across the globe to an
assembly plant
– Optimize and adjust production scheduling
• Electronic data interchange (EDI)
– Used to coordinate flow of materials between suppliers
,firm, shippers and customers
– Communicate without time delay
• Increases flexibility and responsiveness of the whole
global system
– Paperwork decreased
– Significant competitive advantage
MODULE 9
Global Human Resource
Management
Human resource management (HRM)
• Refers to the activities an organization
carries out to use its human resources
effectively
• Four major tasks of HRM
– Staffing policy
– Management training and development
– Performance appraisal
– Compensation policy
 International human resource
management

• Strategic role: HRM policies should be

congruent with the firm’s strategy and it’s formal
and informal structure and controls
• Task complicated by profound differences
between countries in labor markets, culture,
legal and economic systems
 Staffing policy

• Staffing policy
– Selecting individuals with requisite skills to do a
particular job
– Tool for developing and promoting corporate culture
• Types of Staffing Policy
– Ethnocentric
– Polycentric
– Geocentric
 Ethnocentric policy
• Key management positions filled by parent-country
nationals
• Best suited to international businesses
• Advantages:
– Overcomes lack of qualified managers in host nation
– Unified culture
– Helps transfer core competencies
• Disadvantages:
– Limit advancement opportunities for host country nationals
– Produces resentment in host country
– Can lead to cultural myopia
 Polycentric policy
• Host-country nationals manage subsidiaries
• Parent company nationals hold key headquarter
positions
• Best suited to multi-domestic businesses
• Advantages:
– Alleviates cultural myopia.
– Inexpensive to implement
• Disadvantages:
– Limits opportunity to gain experience of host-country
nationals outside their own country.
– Can create gap between home-and host-country
operations
 Geocentric policy

• Seek best people, regardless of nationality

• Best suited to Global and trans-national businesses
• Advantages:
– Enables the firm to make best use of its human resources
– Equips executives to work in a number of cultures
– Helps build strong unifying culture and informal management
network
• Disadvantages:
– National immigration policies may limit implementation
– Expensive to implement due to training and relocation
– Compensation structure can be a problem.
 The expatriate problem
• Expatriate: citizens of one country working in
another
– Expatriate failure: premature return of the
expatriate manager to his/her home country
• Cost of failure is high
– Inpatriates: expatriates who are citizens of a
foreign country working in the home country
of their multinational employer
 Reasons for expatriate failure
• US multinationals • Japanese Firms
– Inability of spouse to adjust – Inability to cope with
larger overseas
– Manager’s inability to responsibilities
adjust – Difficulties with the
– Other family problems new environment
– Manager’s personal or – Personal or emotional
emotional immaturity problems
– Inability to cope with larger – Lack of technical
overseas responsibilities competence
– Inability of spouse to
• European multinationals adjust.
• Inability of spouse to adjust
 Expatriate selection

• Reduce expatriate failure rates by improving

selection procedures
• An executive’s domestic performance does not
(necessarily) equate his/her overseas
performance potential
• Employees need to be selected not solely on
technical expertise but also on cross-cultural
fluency
Four attributes that predict success
• Self-Orientation
– Possessing high self-esteem, self-confidence and mental well-being
• Others-Orientation
– Ability to develop relationships with host-country nationals
– Willingness to communicate
• Perceptual Ability
– The ability to understand why people of other countries behave the way
they do
– Being nonjudgmental and being flexible in management style
• Cultural Toughness
– Relationship between country of assignment and the expatriate’s
adjustment to it
 Training and management
development
• Training: Obtaining skills for a particular foreign
posting
– Cultural training : Seeks to foster an appreciation of
the host-country’s culture, regular foreign postings
– Language training : Can improve expatriate’s
effectiveness, aids in relating more easily to foreign
culture and fosters a better firm image
– Practical training: Ease into day-to-day life of the host
country
Training & management development
continued

• Development: Broader concept involving

developing manager’s skills over his or her
career with the firm

– Several foreign postings over a number of years

– Attend management education programs at regular
intervals
 Management development &
strategy
• Development programs designed to increase the
overall skill levels of managers through:
– On going management education
– Rotation of managers through a number of jobs within
the firm to give broad range of experiences
• Used as a strategic tool to build a strong unifying
culture and informal management network
• Above techniques support transnational and
global strategies
 Performance appraisal
• Problems:
– Unintentional bias
• Host-nation biased by cultural frame of reference
• Home-country biased by distance and lack of experience
working abroad
• Expatriate managers believe that headquarters unfairly
evaluates and under appreciates them
• In a survey of personnel managers in U.S.
multinationals, 56% stated foreign assignment either
detrimental or immaterial to one’s career.
Guidelines for performance appraisal

• More weight should be given to onsite manager’s

evaluation as they are able to recognize the soft
variables

• Expatriate who worked in same location should

assist home-office manager with evaluation

• If foreign on-site managers prepare an evaluation,

home-office manager should be consulted before
completion of formal the terminal evaluation
 Compensation

• Two issues:
– Pay executives in different countries according to the
standards in each country?
or
Equalize pay on a global basis?

– Method of payment
 Compensation issues
Type of Company Payment

Ethnocentric How much home-country

expatriates should be paid.

Polycentric Pay can and should be

country-specific.

Geocentric/Transnational May have to pay its

international cadre of
managers the same.
 Expatriate pay

• Typically use balance sheet approach

– Equalizes purchasing power to maintain same
standard of living across countries
– Provides financial incentives to offset qualitative
differences between assignment locations.
 Components of expatriate pay
• Base Salary
– Same range as a similar position in the home country
• Foreign service premium
– Extra pay for work outside country of origin
• Allowances
– Hardship, housing, cost-of-living and education
allowances
• Taxation
– Firm pays expatriate’s income tax in the host country
• Benefits
– Level of medical and pension benefits identical
overseas
 International labor relations

• Key Issue
– Degree to which organized labor can limit the choices
of an international business
• Aims to foster harmony and minimize conflicts
between firms and organized labor
 Concerns of organized labor
• Multinational can counter union bargaining power with
threats to move production to another country
• Multinational will keep highly skilled tasks in its home
country and farm out only low-skilled tasks to foreign
plants
– Easy to switch locations if economic conditions warrant
– Bargaining power of organized labor is reduced
• Attempts to import employment practices and contractual
agreements from multinationals home country
 Strategy of organized labor

• Attempts to establish international labor

organizations
• Lobby for national legislation to restrict
multinationals
• Attempts to achieve international regulations on
multinationals through such organizations as the
United Nations
MODULE 10
Accounting in International
Business
Accounting information and capital
flows
Need for Accounting Information
• Enables providers of capital to
– access the value of their investment
– Access security of their loan
– Make decisions about future resource allocation
• Tax assessment
• Performance evaluation of the firm
• Control internal expenditure
• Planning for future expenditure and income
Determinants of national
accounting standards
Relationship between business and
providers of capital
• Three external sources of capital:
– Individual investors
• Buying shares and bonds
– Banks.
• Loan capital
– Government
• Make loans or investment
 Relationship between business and
providers of capital : Individual
investors
• E.g in US and UK
– individual investors and major source of capital
– stock and bond market
– purchase small proportion of stocks and bonds
– No desire to be involved in day to day management of firms
– Lack the ability to get information on demand from
management
– Financial accounting system provide information required by
small investors to make decisions
Relationship between business and
providers of capital : Banks.
• E.g Switzerland, Germany and Japan
– Banks satisfy most of capital needs
– Bank officials on board of firms
– Information need satisfied through personal
contacts, direct visit, board meetings
– Reports for public disclosure of financial
information
– Assets and valued conservatively, and liabilities
are overvalued to provide cushion for banks
Relationship between business and
providers of capital : Government
• E.g France and Sweden
– Government major providers of capital
– Financial information oriented towards need
of government planners
 Political and economic ties with
other countries
• Accounting convergence due to close political
and economic ties between countries
– US system influenced accounting practices in
Canada and Mexico : NAFTA
– Former colonies of British Empire follow British
system
– European Union attempting to harmonize
accounting practices in its member countries
 Inflation accounting
• Historic cost principle:
– Assumes currency is not losing value to
inflation
– Most significant impact in the area of asset
valuation
• Current cost accounting:
– Factors out inflation
– Used in Great Britain until inflation rate
declined
 Level of development

• Developed countries have more sophisticated

accounting procedures
– Accounting problems are more complex
– Sophisticated capital markets
– Lenders require comprehensive reports
– Educated workforce can perform complex
accounting functions
 Culture

• Hofstede’s uncertainty avoidance has an

impact on accounting systems
– Low uncertainty avoidance - these countries
tend to have strong independent auditing
professions that ensure a firm’s compliance
with rules
 Accounting clusters

• Few countries have identical accounting

systems.
• Similarities exist in clusters
 Accounting clusters

British-American-Dutch Group
Firms raise capital from
Europe-Japan Group
investors. Accounting
systems designed to inform Have close ties to
investors banks. Accounting
South American Group practices meet bank’s
needs.
Countries have experienced
persistent and rapid inflation.
Accounting principles reflect the
inflation.
 National and international
standards
• Diverse accounting practices are
enshrined in national accounting and
auditing standards
• Accounting standards: Rules for preparing
financial statements
• Auditing standards: Specify rules for
performing an audit
 Lack of comparability
• One result of national differences in
auditing and accounting standards is lack
of comparability of financial reports
– Dutch – current values for replacement assets
– Japan – prescribes historic cost
– Germany – depreciation is liability, Britain –
depreciation is deducted from assets
 Lack of comparability
• With growth of global capital markets both
transnational financing and transnational
investment have grown

• Firm has to explain to investors why its

financial position looks different in two
accountings
 International standards
• Efforts to harmonize accounting standards across
countries
• Formation of International Accounting Standards
Board in March 2001
• Members represent 79 countries
• Responsible for formulating international accounting
standards (IAS)
• Has issued over 30 IAS
– Difficult to get requisite votes
– Voluntary compliance
• Recognition is growing
 Accounting aspects of control
systems
• Annual control process involves three steps:
– Head office and subunit management jointly determine
subunit goals for the coming year.
– Throughout year, head office monitors subunit
performance against agreed goals.
– If subunit fails to achieve goals, head office intervenes
to determine why the shortfall occurred, taking
corrective action when appropriate.
 Exchange rate combinations in the
control process
Fig19.3
 Accounting aspects of control
systems
• Lessard- Lorange Model:
– Three exchange rates used to translate foreign
currency into corporate currency for budget and
performance purposes.
• The initial rate, the spot exchange rate when the
budget is adopted.
• The projected rate, the spot exchange forecast for
the end of budget period (i.e., the forward rate)
• The ending rate, the spot exchange rate when the
budget and performance are being compared.
 Transfer pricing and control
systems

• Transfer prices introduce significant

distortions into the control process
• Transfer price must be taken into account
when setting budgets and evaluating a
subsidiary’s performance.
 Separation of subsidiary and
manager performance
• Valuation of a subsidiary should be separate
from the evaluation of the subsidiary manager

• Manager’s evaluation should take into

consideration how hostile or benign the
countries environment is for business and make
allowances over items the manager has no
control e.g. inflation rates, interest rates
exchange rates
MODULE 11
Strategic Management
 Strategic Management
• Mission : an organization’s current
purpose
• Vision : Fundamental aspirations and
values
• Plan of action for pursuing mission and
vision of the organization
 Dabur: Mission
We intend to significantly accelerate profitable growth. To do this, we will:
• Focus on growing our core brands across categories, reaching out to new
geographies, within and outside India, and improve operational efficiencies by
leveraging technology
• Be the preferred company to meet the health and personal grooming needs of
our target consumers with safe, efficacious, natural solutions by synthesizing our
deep knowledge of ayurveda and herbs with modern science
• Provide our consumers with innovative products within easy reach
• Build a platform to enable Dabur to become a global ayurvedic leader
• Be a professionally managed employer of choice, attracting, developing and
retaining quality personnel
• Be responsible citizens with a commitment to environmental protection
• Provide superior returns, relative to our peer group, to our shareholders
 Dabur: Vision
Dedicated to health and well being of every
household
 Hyundai Motors : Mission
• To create exceptional automotive value for
our customers by harmoniously blending
safety, quality and efficiency. With our
diverse team, we will provide responsible
stewardship to our community and
environment while achieving stability and
security now and for future generations.
 Hyundai Motors : Vision
Our team provides value for your future.
Need for Strategic Management
• diversification
• Need to integrate diverse operations with unified
and agreed on focus

Benefit of Strategic Management

• Better monitoring and coordination operations
worldwide
 Strategy Formulation

Four approaches
• Economic Imperative
• Political Imperative
• Quality Imperative
• Administrative Coordination Strategy
 Strategy Formulation : Economic
Imperative
Focus on
• Cost Leadership
• Differentiation
• Segmentation
Product is generic in nature
Brand name not important, performance /
results matters
 Strategy Formulation : Political
Imperative
Focus
• Protect local market niches
• e.g Thumps Up , Loreal
• Planning are country responsive
 Strategy Formulation : Quality
Imperative
• Change in attitude and raising expectations
for service quality e.g Japanese companies
A/V product
• Focus on quality improvement e.g TQM
 Strategy Formulation :
Administrative Coordination
• Decisions based on merits of individual
situations
• Wal-Mart in Latin America
 Steps in Strategy Formulation
1. Scanning the external environment
2. Internal resource analysis
3. Formulating goals on basis on 1 and 2
above
 Environmental Scanning
• Forecasts of Trends
– Macroeconomic indicators
– Currency market
– Industry trend, market share
 Internal Resource analysis
SWOT analysis
• Strength
• Weakness
• Opportunities
• Threat
 Goal Setting
• Goals for
– Profitability
• Level of profits, ROI, ROA
– Marketing goals
• Market share – worldwide, region, country, growth
– Operations
• Ratio of foreign to domestic production volume, Quality and
cost control
– Finance
• Minimizing tax burden globally, optimal capital structure
– Human Resource
• Managers with global orientation, Management development
of host country natioanls
 Strategy Implementation
• Providing goods and services in
accordance with plan of action
– Location consideration
– Functional Areas
Strategy Implementation : Location
consideration
• Country Selection
– Industralized countries
– Gateway to other markets
– Cost effective
– Government control
– Policies related to foreign investment
– Low tax rates, interest rates, subsidized
electricity, land, well developed infrastructure
etc.
Strategy Implementation : Location
consideration
• Specific locale in chosen country
– Access to markets
– Proximity to competitors
– Availability of transportation and electric
power
– Desirability of employees
– Nature of workforce, closer to availability of
skilled workforce
– Cost of doing business
 Strategy Implementation : Role of
Functional Areas
• Marketing
– Strategy to differ from country to country
– Marketing approach to match with overall
strategic plan
• Production
– Importance of worldwide production strategy
– Shift from multi domestic approach to global
integration approach
 Strategy Implementation : Role of
Functional Areas
• Finance
– Sourcing funds for overseas business
operations
– Shift from local sourcing to sourcing from
international money market
 Strategic Management
• Company that pursue most appropriate
strategy within the context of core
competencies and the markets in which it
does business, will outperform the
competitors
Airbus and Boeing

Building Planes in Global

Factories
 Airbus
 Formerly known as Airbus Industrie.
 The name AIRBUS was taken from a nonproprietary termed used by airline industry in 1960s.
 AIRBUS refers ton commercial aircraft of certain size and range.
 Owned by Europe's 2 largest contractors EADS and BAE.
 These 2 company had 80% and 20% of the stake respectively.
 BAE system put a option for their stakes to EADS for 2 billion pounds.
 No. of people employed 55000.
 It operated in 4 Europe countries-France, Germany, the United Kingdom and Spain.
 Final assembly of articles occurred at Toulouse (France) and Hamburg (Germany).
 It had 3 subsidiaries in the USA ,Japan, China.
 Conti…
 A300 was its maiden flight and 1st production model in 1972.
 The launch of A320 in 1981 made it emerge as a major player in the aircraft
market.
 The aircraft had over 400 orders before its launch ,compared to 15 for A300
in 1972.
 The alliance was weak but that changed in 2000 when Daimler Chrysler
areospace,aeropatiale and CASA merged to form EADS.
 IN 2001 when BAE system and EADS formed the airbus integrated
company to coincide with the development of new airbus A380
 A380 expected to seat 555 passengers and be the world’s largest
commercial passenger jet.
 In 2005 A380 successfully completed 1st flight from Toulouse ,France.
 Boeing
• Gobally the largest aircraft manufacture.
• Headquater in chicago, illinois(US)
• It’s the 2nd largest defence contractor in the world.
• Founded by william e boeing and george conrad westervelt. On 15 july 1916
• It was eatablised in seatle (us) and was named “b&W” after their initials.
• In1971 the name was changed to “pacific aero products”
• Soon the company was again renamed and became “boeing airplane
company”
• In 1927 boeing eatblised a new service,boeing air transport(bat).
• Later bat,pacific air transport and boeing airplane company merged into a
single corporation.
• In 1929 company acquired pratt & whitney , hamilton standard propeller co.
and chance vought.
 Conti….
• In 2005 the company was globally the largest civil aircraft manufactures.
• In 2005 it posted a revenue of us $54.845 billion and net profit was us $2.572
billion.
• It employed 153000 associated in2006.
• Its stock played a major role in the dow jones industrial average.
• United aircraft purchased national air transport in1930.
• Its 1st aircraft Boeing 314 clipper in June 1938.
• 1958 Boeing began to manufacture B707, the united states 1st commercial jet
airliner.
• Piasecki helicopter was acquired in 1960 and reorganized as Boeing's vertol
division.
 Conti…..
• In 1967 it introduced short and medium-range airliner, the twin 737.
• In the mid 1990s it developed a new and revamped version of the 737
called the next generation 737 or 737NG
• 1997 Boeing merged with McDonnell Douglas
• The Boeing 787 dreamliner was under development in 2006 by Boeing
commercial airplanes and scheduled to enter in service in 2008.
• The company also began to consider 2 new projects-the Boeing sonic
cruiser and 747X.
 About the case
# Manufacturing race between airbus versus boeing.
# This contributed to battle of racism and corporate war between us and Europe.
# Fear and apprehension in Europe and America as both airbus and Boeing were
transferring their technical know-how to Asian countries.
# The volume core manufacturing activities that the 2 companies outsourced to
other countries were so big that their national identity was fading.
# About 60% of the production work of A 350 was done outside continental
Europe.
# About 70% of Boeing 787 dreamliner was built outside united states.
# The 2 companies’ rival networks of exclusive subcontractors were evolving into
1 network.
# Europe and us feared to lose out expertise and job cuts.
 Global Civil Aerospace Market: A
Snapshot
► Civil aerospace was cyclical and was dependent upon the performance of
commercial airlines industry and profitability in the global scale.
► Airbus and Boeing were two major players.
► Bitter rivalry between these 2 companies.
► Both these companies had projected growth of 4.5 % during 2005-2010.
► Boeing was leader in of fragmented network and point-to-point traffic
concept thus supported smaller aircraft.
► In 2006 Boeing had 55% share followed by 21% of airbus and 24% rest.
► It was perceived that by 2010 share of airbus would increase to 31%
whereas Boeing's could decline to 51%.
► Analyst opined that Boeing failed to enrich its product.
► Airbus invested huge amount in R&D as compared to Boeing
 Conti…..
► While airbus favored hub-and-spoke model of operation ,network
consolidation and supported larger aircraft.
► Leading aircraft manufactures sourced parts and components from tier 1
suppliers and developed aircrafts.
► Commercial airlines sourced new aircraft system , components and spare
parts.
► Manufactures earned substantial revenue by selling aircraft system and
components and suppliers got their revenue from selling spare parts.
► Major customers were national carriers who provided long haul ,short haul
services and low cost airlines offering intra regional services.
► Analyst predicted that Boeing would be able to increase its Asian market
share by 1.3% during 2005-2010
► Airbus would be able to increase by 4.9% in other regions.
STRATEGIC INITIATIVES
 Outsourcing : A Trend or Political
Influence
 Outsourcing was done by these two companies as it helped them to reduce
labor and production cost which in turn reduced the manufacturing cost.
 A large portion of parts and equipments of these two companies came from
Japan and Canada.
 Expertise of handling the manufacturing process varied from country to
country
 As china had the better expertise of assembling metal aircraft and could
build wing boxes in much more efficient way.
 The us enjoyed good political relationship with Japan.
 Japanese govt. also provided subsidies to Boeing which was an indirect
help.
 Airbus also took advantage by setting up manufacturing units in china.
 Airbus v/s Boeing
• Richard J Samuels says, “ There is nothing impenetrable
about any duopoly in this industry”.
• Japan & China involved in the outsourcing rivalry.
• Japan’s Ministry of Economy, Trade & Industry (METI) had
invested US $76 million to establish the infrastructure.
• Japanese aerospace manufacturing companies
MHI,KHI,FHI,JAL,ANA got contracts from Boeing 787 to
manufacture Wings.
• One main reason for Boeing to revive their market position is
to increase the fuel efficiency of aircraft.
• On other hand, china was lagging behind Japan in the
technological aspect of manufacturing.
 Conti..
• China also failed when they made an attempt to make Y-10 based
on Boeing 707.
• The European plane maker had announced the site of assembly
plant in China, first ever outside Europe in 2005.
• The plant likely to built near Beijing or Hong Kong & start rolling out
A320 by 2008.
• Airbus announced a plan to invest $10 billion in China for 150
narrow body A320s.
 Outsourcing: across the continent
• Close social & political ties to the booming Asia-Pacific market
were certainly going to their help cause.
• Acc. To industry magazine “ Flight International in 2005, 40% of
new aircraft orders from Asia, 17% from Europe, 11% from North
America.
• China was growing fast & expected to become the 2nd largest
aviation market after US.
• Boeing components develops in various countries. Likely
– Japan- trailing edge, fuselages sections, wings boxes.
– Australia- Wing flaps.
– Sweden- Cargo doors.
– Canada- gear doors.
– UK- build Engine
– South Korea- wings tips.
 What lies ahead
• To pacify the thinking –”that it would be gloomy in the future
aerospace market of Europe and America
• To reduce apprehension about the knowledge outsourcing
• Airbus & Boeing had record sales in 2005
• In Japan & china there were already huge domestic demand for ND.
• The idea of national aerospace was fading away as the two giants
increased their outsourcing of manufacturing activities
• Outsourcing helped them to reduced their cost and maintain
efficiency level.
• If the trends continue by 2025 it would be impossible to distinguish
among American, European and Asian aircraft.
 Market Share in Aero
Space in 2006
70.00%

60.00%

50.00%

40.00% US
Europe
30.00% Asia

20.00%

10.00%

0.00%
Boeing Airbus Others
 Airbus-Boeing competition: Net
Aircraft Orders 2002-2005

1200

1000

800

Airbus
600
Boeing

400

200

0
2002 2003 2004 2005
The end