BA9209 INTERNATIONAL BUSINESS MANAGEMENT

UNIT III INTERNATIONAL STRATEGIC MANAGEMENT

DIFFERENT FORMS OF INTERNATIONAL BUSINESS
y Internationalization advantages are those benefits

that a company gets by manufacturing goods or rendering services in the host country by itself rather than through contract arrangements with the companies in the host country. y Sometimes the cost of negotiating, monitoring and enforcing an agreement with the host country s company would be difficult and costly.

y In such cases, the company enters the international

markets through direct investment. y Eg; Nokia corporation y Otherwise, if the company thinks that the transaction costs are low, and the local companies in the host country can produce efficiently without jeopardizing (endanger) its interest, the company can enter the foreign markets through contract manufacturing, franchising or licensing.

For example. you likely depend on network server software to perform certain functions. A CAL is not a software product. To legally access this server software.If the workstations in your organization are networked. .India) y However.y Toyota enters foreign markets through direct investment and joint-ventures as the local companies in foreign countries cannot produce as efficiently as Toyota. (Toyota kirloskar. it is a license that gives a user the right to access the services of the server. client access license. rather. may be required. a Client Access License. such as file and print sharing. the software companies prefer licensing and franchising mode as they have to respond quickly to the market needs. or CAL. Microsoft (CAL.

y Thus. company s abilities and conditions in the host country. different firms select different modes based on the nature of the industry. y The different modes of entry to International business .

y EXPORTING y Indirect Exports y Direct Exports y Intra-corporate transfers y y LICENSING y International Licensing y y FRANCHISING y International Franchising .

y SPECIAL MODES y Contract manufacturing y Business Process Outsourcing y Management Contracts y Turnkey projects y y FOREIGN DIRECT INVESTMENT WITHOUT ALLIANCES y Green Field Strategy y y FOREIGN DIRECT INVESTMENT WITH ALLIANCES y Mergers and Acquisitions y Joint Ventures .

typically for use in trade. transported from one country to another country in a legitimate fashion. In economics.EXPORTING y The term "export" is derived from the conceptual meaning as to ship the goods and services out of the port of a country. . an export is any good or commodity. y The definition of "export" is when you trade something out of the country.

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Antiques & Collectables(3185) y Artificial Flowers & Human Hair(136) y Chemicals. Cosmetics & Agarbatti(15245) y Consumer Products(437) y Drum. Oils & Wax(603) y Animal Products(1860) y Arms & Ammunition(26) y Art.y Additives(168) y Air & Ventilation Equipments(34) y Animal & Vegetable Fa y ts.Barrel & Other Tin Products(15) y Food & Beverage(2139) y Footwear. Headgear & Umbrellas(1087) y Freight & Shipping(2919) .

Electrical Eq.Indian goods exported: y Industrial Supplies(779) y Leather Products & Travel Goods(2870) y Machinery. Pulp & Paperboard(3759) y Plastic & Rubber(11913) y Gems . & Electronics(39180) y Merchant Exporters(3181) y Metal & Metal Products(18052) y Mineral Products(1568) y Miscellaneous Manufactured Articles(3647) y Name Plate(23) y Other Support Services(7874) y Others(80520) y Paper.

Medical & Surgical.y Scientific. Mica & Glass Articles(6070) y Textile & Textile Articles(15722) y Turnkey Projects(362) y Vegetable Products(3423) y Vehicles & Transport Equipment(2952) y Wood & Wood Products(1082) .(4953) y Stone. Cement..

7 per cent in Dollar terms and 24.2 per cent in Rupee terms over the same period last year.India s export trade result: y Cumulative value of exports for the period April-May 2010 was US $ 33032 million (Rs 149111 crore) y growth of 35.Ministry of commerce . .

.. the company can enter international market with no or less financial resources.Reliance digital iStore by Reliance Digital is an Apple Premium Reseller and your local Apple expert.y Exporting is the simplest and widely used mode of entering foreign markets. y NEED FOR LIMITED FINANCE: If the company selects a company in the host country to distribute.

. but this amount would be quite less compared to that would be necessary under other modes. it needs to invest financial resources. if the company chooses to distribute on its own.y Alternatively.

y LESS RISK: Exporting involves less risk as the company understands the culture. . customer and the market of the host country gradually. if the product is accepted by the host country s market. The company can enter the host country on a full-scale.

y Proactive (taking the initiative) motivations are opportunities available in the host country. .y MOTIVATION FOR EXPORTING: Motivations for exporting are proactive and reactive. y Reactive motivations are those efforts taken by the company to export the product to a foreign country due to the decline in demand for its product in the home country.

FORMS OF EXPORTING y Forms of exporting include: y indirect exporting. . y direct exporting and y intra-corporate transfers.

y INDIRECT EXPORTING(Selling goods to overseas markets through intermediaries .through some other company.The intermediary could be a commissioned agent.) . an export trading company (ETC) or an export agent y Indirect exporting is exporting the products either in their original form or in the modified form to a foreign country through another domestic company. an export management company (EMC). . an export company.

. in 1995 it established its icecream plant in Moscow. y Baskin Robbins initially exported its ice-cream to Russia in 1990 and later opened 74 outlets with Russian partners.y DIRECT EXPORTING y Direct exporting is selling the products in a foreign country directly through its distribution arrangements or through a host country s company. Finally.

this transaction is treated as exports in India and imports in the USA.y INTRA-CORPORATE TRANSFERS y Intra-Corporate transfers are selling of products by a company to its affiliated company in host country (another country). y Selling of products by Hindustan Unilever in India to Unilever in the USA. .

y FACTORS TO BE CONSIDERED: The company. export financing. distribution networks. import policies. foreign exchange etc. y Marketing factors like image. . customer awareness and customer preferences. responsiveness to the customer. while exporting. should consider the following factors: y Government policies like export policies.

Japanese companies like Sony and Hitachi rely on the distribution networks of their subsidiaries in the host country. . packaging.y Logistical consideration: These factors include physical distribution costs. warehousing costs. networks of host country s companies. transporting. inventory carrying costs etc. y Distribution Issues: These include own distribution networks.

.LICENSING y A business arrangement in which one company gives another company permission to manufacture its product for a specified payment.

. work methods. the domestic manufacturer leases the right to use its intellectual property. brand names. to a manufacturer in a foreign country for a fee.e. trademarks etc. technology. i. y Here the manufacturer in the domestic country is called licensor and the manufacturer in the foreign country is called licensee . . copy rights.LICENSING y INTERNATIONAL LICENSING y In this mode of entry. patents.

y Hence. y The cost of entering foreign markets through this mode is less costly. the domestic company earns revenue without additional investment. . most of the companies prefer this mode of foreign entry. As such.y Licensing is a popular method of entering foreign markets. y The domestic company need not invest any capital as it has already developed intellectual property.

y Licensing Process y LICENSOR Leases the Right to use the Intellectual property LICENSOR Receive royalty money Uses the Intellectual property to Pays royalty to the licensor for produce products for sale in his using intellectual property Country y LICENSEE LICENSEE .

Each international licensing is unique and has to be decided separately. .y BASIC ISSUES IN INTERNATIONAL LICENSING: Companies should consider various factors in deciding negotiations.

determining rights. determining the royalty. defining dispute resolution methods. specifying the duration of the contract. They are: specifying the agreement s boundaries. privileges and constraints.y However. . there are certain common factors. which y y y y y y affect the most of the international licenses.

y BOUNDARIES OF THE AGREEMENTS: y The companies should clearly define the boundaries

of agreements. They determine which rights and privileges are being conveyed in the agreement.

y Pepsi-Cola granted license to Heineken of

Netherlands with exclusive rights of producing and selling Pepsi-Cola in Netherlands. Under this agreement the boundaries are: (i) Heineken should not export Pepsi-Cola to any other country, y (ii) Pepsi supplies concentrated Cola syrup and Heineken adds carbonated water to produce beverage y (iii) Pepsi can grant license to other companies in Netherlands to produce other products of Pepsi like Potato chips.

y DETERMINATION OF ROYALTY: y The most important factor in deciding the license is

the amount of royalty. y It is needless to mention that the licensor expects high rate of royalty while the licensee would be unwilling to pay much royalty. y However, both the parties negotiate for a fair royalty for both the sides in order to implement the contract more successfully.

the image of the Japanese licensor would be damaged. privilege and constraints. if the Indian licensee of Aiwa TV reduces quality in order to reduce price. .y DETERMINING RIGHTS. PRIVILEGES AND CONSTRAINTS: y Another important factor. boost up sales and profits. y For example. in granting license is determining clearly and specifically the rights.

. of both the parties and reduce the hurdles in the implementation of the agreement.y Another constraint is that the licensee may under- report the volume of the sales in order to reduce the royalty payment to the licensor. . privileges etc. y Therefore. the licensing agreement clearly and specifically indicates the rights.

settlement of disputes in courts is costly. This is because.y DISPUTE SETTLEMENT MECHANISM: The licensee and licensor should clearly mention the mechanism to settle the disputes are bound to crop up. . time consuming and hinders business interests.

. Hence. the duration of the licensing should not be of the short-term.y AGREEMENT DURATION: y The two parties of the agreement specify the duration of the agreement. Licensing cannot be a short-term strategy. It would always be appropriate to have long duration of the licensing. y Tokyo Disneyland demanded on a 100-year licensing agreement with The Walt Disney Company.

an independent organization called the franchisee operates the business under the name of another company called the franchisor. .FRANCHISING y INTERNATIONAL FRANCHISING y Franchising is a form of licensing. The franchisor can exercise more control over the franchised compared to that in licensing. y International franchising is growing at a fast rate. y Under franchising. y Under this agreement the franchisee pays a fee to the franchisor.

reservation services. quality assurance programs. employee training.y The franchisor provides the following services to the y y y y franchisee: Trade marks Operating systems Product reputations Continuous support systems like advertising. .

. y Foreign investors should come forward for introducing the product on franchising basis. y The franchisor may have the experience in franchising in the home country before going for international franchising. McDonald was successful in the USA due to the popular menu and fast and efficient services.y BASIC ISSUES IN FRANCHISING y The franchisor has been successful in his home country. y The factors for the success of the McDonald are later transferred to other countries.

corporate image etc. services facilities. customer service etc. .y FRANCHISING AGREEMENTS: The franchising agreement should contain important items as follows: y Franchisee has to pay a fixed amount and royalty based on the sales to the franchisor. y Franchisor helps the franchisee in establishing the manufacturing facilities. financial reporting. provides expertise. operating procedures. y Franchisee should agree to adhere to follow the franchisor s requirements like appearance. advertising.

. Fast food companies like McDonalds. y Franchising is more popular in the USA. Pizza Hut.y Franchisor allows the franchisee some degree of flexibility in order to meet the local tastes and preferences. KFC have franchised restaurants worldwide. Domino s. McDonald restaurants in Germany sell beer also and McDonald restaurants in France sell wine also.

y Hotels like Hilton and Marriott. rental cars like Hertz and Avis also have international franchisees.y Hotels like Hilton and Marriott. . rental cars like Hertz and Avis also have international franchisees.

These specialized strategies include: Contract manufacturing Business process outsourcing Management contract Turnkey projects .SPECIAL MODES y Some companies cannot make long-term investments y y y y y or long-term contracts to enter foreign markets. they may use specialized strategies. Therefore.

.CONTRACT MANUFACTURING y Some companies outsource their part of or entire production and concentrate on marketing operations. y Nike has contracted with a number of factories in south-east Asia to produce its athletic foot ware and it concentrates on marketing. This practice is called the contract manufacturing or outsourcing.

y Mega Toys a Los Angeles based company contracts with Chinese plants to produce toys and Mega toys concentrated on Marketing.y Bata also concentrated with a number of cobblers in India to produce its foot ware and concentrate on marketing. .

E. Major corporations in the US and Europe are outsourcing their back office operations to India to save costs. y Although these jobs usually are not directly IT-related. their data-based orientation often means that they require IT departmental support to be successfully outsourced. employee payroll is maintained in India for their employees worldwide. .g.BUSINESS PROCESS OUTSOURCING (BPO) y What is BPO? y BPO stands for Business Process Outsourcing.

.y Generally outsourcing can be defined as .An organization entering into a contract with another organization to operate and manage one or more of its business processes.

. billing or even real estate management to a third party. the approach is about turning over functions such as payroll. management and business operations. accounting.y Though some forms of BPO may include both information technology (IT).

y Different Types of Services Being Offered By y y y y y y BPO's Customer Support Services Technical Support Services Telemarketing Services Book Keeping and Accounting Services Insurance Processing Data Entry Services / Data Processing Services .

. y WHY BPO? Availability of highly qualified skill pool and faster adoption of well-defined business processes leads to higher productivity gains without compromising on quality. such as data center activities or network management. they are separate functions from core IT operations.y Though these business processes may depend on IT.

the ratio can reversed. y Traditionally.y TO ENABLE EXECUTIVES TO CONCENTRATE ON STRATEGY y An important aspect of business process outsourcing is its ability to free corporate executives from some of their day-to-day process management responsibilities and enable them to concentrate on strategic issues. Once a process is successfully outsourced. executives spend 80% of their time managing details. and only 20% on strategy. .

y Executives get more control over their most valuable resource i. Time to explore new revenue streams. and time to focus on their customers. ..e. time to accelerate other projects. time.

y Manpower: A vast workforce of educated. . Technical support ( more than 100. tech-savvy personnel.y WHY BPO IN INDIA? y Scope: A booming IT industry. y Language: The largest English-speaking population after the USA. with IT strengths recognized all over the world.000 engineers are graduating each year). English speaking. cost -effective manpower.

.y Government policy: The government of India has recognized the potential of IT-enabled services and has taken positive steps by providing numerous incentives.

IT Infrastructure and Management. Insurance.. WNS delivers the entire spectrum of business processes from shared back office processes to industry-specific front and middle office processes. including Finance & Accounting. Collections and Customer Service.Top BPO companies in India . all the way to complex. actionable research and analytics. Supply Chain & Procurement.Genpact provides a wide range of services. Enterprise Application. Analytics. .

Aditya Birla Minacs .y - y y .

. This agreement between these two companies is called the management contract. y Then the foreign company may agree to provide technical assistance and managerial expertise.MANAGEMENT CONTRACTS y The companies with low level technology and managerial expertise may seek the assistance of a foreign company.

management of personnel. such as technical operation of a production facility. accounting. marketing services and training. y A management contract can involve a wide range of functions.y Management contracts involve not just selling a method of doing things (as with franchising or licensing) but involves actually doing them. .

many hotels operate under management contract arrangements. brand recognition etc.y In Asia. . y The Hilton Hotels Corporation operates on management contracts. a global reservation systems. as they can more easily obtain economies of scale.

production or quality measures. . whereby one company provide managerial assistance.y A management contract is an agreement between two companies. sales growth. technical expertise and specialized services to the second company of the agreement for a certain agreed period in return for monetary compensation may be in the form of: y A flat fee or y Percentage over sales and y Performance bonus based on profitability.

International companies involved in such projects. national highways. . Hence. they are large and multilayer projects. oil refinery. construct and equip a manufacturing/business/service facility and turn the project over to the purchaser when it is ready for operation for remuneration. railway lines etc. airports.TURNKEY PROJECT y A turnkey project is a contract under which a firm agrees to fully design. y International turnkey projects include nuclear power plants.

it for some time and then transfers it to the host country s government. operates. .y The recent approach to turnkey projects is Build. Operate and Transfer (B-O-T). The company builds the manufacturing/services facility.

the contractor will not be paid the remuneration. . Government of Gabon and the electricity supply board international of Ireland and Campaginc Generale des Eaux of France agreed to establish electric supply system and water system in Gabon and operate for twenty five years and then transfer the ownership of these projects to government of Gabon.y In this approach.

y One Japanese company quoted highest price compared to all other companies. Germany and Japan. . France. the UK. y Indonesia government received the tenders from the companies of the USA.y Indonesian government during 1974 invited global tenders for construction of a sugar factory in the country.

connecting the factory.. construction of sugar factory. roads. This Quotation includes: development of the fields for growing sugarcane. development of seedlings. communication. water etc.y Indonesian government studied the quotation of this y y y y y y Japanese company. . power. development of the distribution channels in Indonesia. train the local people.

.y production of by-products and their market. y It also made a provision for the transfer of the factory along with the total package to the Indonesian government and follow-up the activities after it is transferred to the Indonesian government. y plans for the export of surplus sugar etc.

The Japanese company and Indonesian government entered an agreement for implementation of this project by the Japanese company for a price.y Indonesian government was very much satisfied with the total package and invited the Japanese company to implement the project. . This Project is called Turnkey Project.

culture of the country..y FOREIGN DIRECT INVESTMENT WITHOUT ALLIANCES y Some companies. political situation of the country etc. and then establish manufacturing facilities by ownership in the foreign countries. licensing.. . franchising etc. get the knowledge and awareness of the foreign markets. enter the foreign markets through exporting. y Baskin-Robbins in Russia followed this strategy. customers preferences.

invest their money. .y In contrast some other companies enter the foreign market through ownership and control of assets in host countries. y Companies which enter the international markets through foreign direct investment (FDI). establish manufacturing and marketing facilities through ownership and control.

y Foreign firm needs to control the operations wheny It has subsidiaries to achieve strategic synergies. y The technology, manufacturing expertise, intellectual

property rights have potentialities and their full utilization needs planned exploitation (use for profit).

y The Us companies transferred their managerial

expertise and technological skills to their subsidiaries operating in the UK and hence these subsidiaries have become successful competitors to the UK companies. y Now, we shift our discussions to the different methods of FDI. y The mode of FDI without alliances is Greenfield strategy.

y THE GREENFIELD STRATEGY y The term Greenfield refers to starting with a new green

site and then building on it. Thus, Greenfield strategy is starting of the operations of a company from scratch in a foreign market. y The company conducts the market survey, selects the location, buys or leases land, creates the new facilities, erects the machinery, transfers the human resources and starts the operation and marketing activities.

. England. y by Mercedes-Benz in locating automobile assembly plant in Alabama and y by Nissan in locating its factory in Sunderland.y This strategy is followed by Fuji in locating its manufacturing facilities in South Carolina.

. The next one is the FDI with strategic alliances. y Local employees resisted the firm s attempt to impose its US work values. y Local contractors demanded $150 million extra at the of opening and threatened the opening.y Disney management faced the problems in building Disneyland in Paris. y Communication difficulties with painters. y These problems include: y Problems in dealing with French construction contractors.

productivity. acquisitions and joint-ventures. in the recent years. growth. . are mostly accomplished by the strategic alliances adopted by various companies like Mergers.y FOREIGN DIRECT INVESTMENT WITH y y y y STRATEGIC ALLIANCES Innovations. creations. expansions and diversifications.

in the 1999 merger of Glaxo Wellcome and SmithKline Beecham. GlaxoSmithKline. y An example of this would be the takeover of Chrysler by Daimler-Benz in 1999 which was widely referred to in the time.) y For example. was created. both firms ceased to exist when they merged. .y mergers. and a new company.(a merger happens when two firms agree to go forward as a single new company rather than remain separately owned and operated) y (Merger is when two companies combine together to form a new company all together.

the purchase is called an acquisition . is the buying of one company (the target ) by another.) y When one company takes over another and clearly establishes itself as the new owner.y acquisitions (An acquisition. also known as a takeover or a buyout.

y Tata Motors acquired U.000 million.3 billion from Ford Motor Co.y Tata Steel acquired Corus Group plc.K-based Jaguar-Land Rover for $2. The acquisition deal amounted to $12. . y The acquisition of Daewoo Electronics Corp. by Videocon involved transaction of $729 million. in March 2008.

loss and control--in a specific enterprise. a new entity and new assets by contributing equity.y Joint venture y The cooperation of two or more individuals or businesses--each agreeing to share profit. . y A joint venture (JV or J-V) is a legal entity formed between two or more parties to undertake an economic activity together. y The JV parties agree to create. for a finite time.

sky y Bharati-wallmart y Icici.sunlife .renault y Ing-vysya y Tata.aig y Tata.y Maruti suzuki y Bajaj allianz y Irizar tvs y Renault nissan y Mahindra.prudential y Birla.

y For example.y Strategic alliance is a co-operative and collaborative approach to achieve the larger goals. contract manufacturing. y Alliance is a strategy to explore a new market which the companies individually cannot do. joint-ventures etc. Xerox of the USA and Fuji of Japan collaborated to explore new markets in Europe. . Strategic alliance takes different forms like licensing. franchising.

y Two companies join hands in order to align their

distinctive and different strengths. Dunlop and Pirellithe two tyre making operations joined together in order to synergize the strength of marketing capabilities of Dunlop and R&D capabilities of Pirelli.

y A number of industries provided inputs for the

development of high density television. Similarly, IBM, Apple, Motorola joined their unique technological capabilities to meet the challenges of technological revolution.

ADVANTAGES OF INTERNATIONAL BUSINESS
y HIGH LIVING STANDARDS: y Comparative cost theory indicates that the countries

which have the advantage of raw materials, human resources, natural resources and climatic conditions in producing particular goods can produce the products at low cost and also of high quality. y Customers in various countries can buy more products with the same amount of money. In turn, it can also enhance the living standards of the people through enhanced purchasing power and by consuming high quality products.

and economic welfare (The level of prosperity and quality of living standards in an economy)of the people of the trading countries. Thus. y For example. .y INCREASED SOCIO-ECONOMIC WELFARE: International business enhances consumption level. electronic products of Japan and coffee from Brazil. the people of China are now enjoying a variety of products of various countries than before as China has been actively involved in International Business like Coca-Cola. the Chinese consumption levels and socio-economic welfare are enhanced. McDonald s range of products.

Therefore. now.y WIDER-MARKET: International business widens the market and increases the market size. This is true in case of most of the MNCs like Toyota. Honda. . y Due to the enhanced market the Air France. Xerox and Coca-Cola. mostly depends on the demand for air travel of the customers from countries other than France. the companies need not depend on the demand for the product in a single country.

. international business firms can escape from the recessionary conditions. Thus. Therefore. MNCs shift from the country. experiencing a recession to the country experiencing boom conditions.y REDUCED EFFECTS OF BUSINESS CYCLES: y The stages of business cycles vary from country to country.

y REDUCED RISKS: y Both commercial and political risks are reduced for the companies engaged in international business due to spread in different countries. y Multinationals which were operating in USSR were affected only partly due to their safer operations in other countries. But the domestic companies of the then USSR collapsed completely. .

quality etc. which provide the benefit of large-scale economies like reduced cost of production. availability of expertise.y LARGE-SCALE ECONOMIES: y Multinational companies due to the wider and larger markets produce larger quantities. .

. 200 in India. 1.y POTENTIAL UNTAPPED MARKETS: y International business provides the chance of exploring and exploiting the potential markets which are untapped so far. These markets provide the opportunity of selling the product at a higher price than in domestic markets. Bata sells shoes in the Uk at £ 100 (RS.8000) whose price is around Rs. For example.

For example. . African countries and Asian countries. product developments etc.y PROVIDES THE OPPORTUNITY FOR AND CHALLENGE TO DOMESTIC BUSINESS: International business firms provide the opportunities to the domestic companies. management expertise. Japanese firms operating in the US provide these opportunities to the US companies. This is more evident in the case of developing countries like India. market intelligence. These opportunities include technology.

Foreign Universities helped IIMs.y Similarly. Thus. the MNCs pose challenges to the domestic business initially. the opportunities and challenges help the domestic companies to develop. Domestic firms develop themselves to meet these challenges. IITs and Indian Universities to enhance their curricula. .

Brazil specializes in Coffee. . Japan in automobiles and electronics. international business leads to division of labor and specialization. India in textile garments etc. Kenya in Tea.y DIVISON OF LABOR AND SPECIALIZATION: As mentioned earlier.

and the UAE. . division of labor. y International business particularly helped the Asian countries like Japan. innovations and creations to meet the competition lead to overall economic growth of the world nations. enhancement of productivity. posing challenges. development to meet them. Taiwan. Singapore. Korea. Malaysia.y ECONOMIC GROWTH OF THE WORLD: Specialization. Philippines.

consumer goods from the UK. natural resources and human resources from the countries where they are in excess supply to those countries which are in short supply or need most. flow of human resources from India. y For example.y OPTIMUM AND PROPER UTILIZATION OF WORLD RESOURCES: y International business provides for the flow of raw materials. France. . This. Italy and Germany to developing countries. in turn. helps in the optimum and proper utilization of world resources.

there is a close cultural transformation and integration. we observe that the West is slowly tending towards the East and vice versa. y These days. It does mean that the good cultural factors and values of the East are acquired by the West and vice versa. they are even social and cultural.y CULTURAL TRANSFORMATION: y International business are not purely economical or commercial. Thus. .

societies and countries into a closely interactive and traditional village where one is for all and all for one. . ultimately knits(makes) the global economies.y KNITTING THE WORLD INTO A CLOSELY INTERACTIVE TRADITIONAL VILLAGE: y International business.

The structure is determined by factors such as the extent of commitment of the organization to the international business and the nature of its international orientation(adjusting to a situation).0RGANIZATIONAL STRUCTURES IN INTERNATIONAL BUSINESS y There are different organizational structures for doing y y y y international business. . characteristics of foreign markets. the size of international business and expansion plans. etc. the number and consistency of product lines.

y Taggart and McDermott point out that while during the 1960s many US MNCs established an international division to oversee their growing overseas operations. .y The nature of the organizational structure is also influenced by the relative sizes of the domestic and foreign markets of their relative importance. the international division was largely redundant (useless) for European MNCs.

y This was because the US MNCs still relied upon their large domestic market whereas the European MNCsspecially those from smaller countries (like the Netherlands. thus.did not have a large domestic market. International sales often accounted for the bulk of their turnover. Sweden and Switzerland). y The European MNCs were. . more disposed(inclined or agree) to internationalization. rather than a small proportion was the case in the 1960s for many US MNCs.

y The Organizational structure would undergo changes during the different stages of the evolution(gradual development) of a domestic firm into a transnational one. organization-wide effort to increase an organization's effectiveness and viability) . y They are: geographic dispersion of corporate resources and corresponding changes in organizational development. This evolution is characterized by two related processes. (Organization development (OD) is a planned.

. as the name indicates. y BUILT-IN EXPORT DEPARTMENT y The built-in export department is the simplest form of export organization and. therefore. the export organization is built into the regular domestic system. y Under this arrangement.y The common organizational types are described below. the easiest to establish.

y credit. . y traffic. y shipping and y accounting are handled by the appropriate domestic departments.y The function of the special department is usually confined (restricted) to the actual selling or directing. and all such different functions connected with export transactions as y advertising.

y y y y The built-in export department is suitable under certain conditions. the management philosophy is not oriented (adjustment to situation)towards growth in overseas business. . such as when the export business is small. the company resources are limited. the company is new to international marketing.

as the business expands. it may be developed into a separate export department.y The built-in export department may also be regarded as the initial development to do export business. y In course of time. .

Under this arrangement. y Sometimes.y The built-in export department suffers from disadvantages. . therefore. many of the activities connected with international business are carried out by domestic departments. there may be a tendency to regard export activities as subsidiary (supplementary)to domestic business.

y Further. . the personnel of the domestic departments may not have sufficient knowledge or experience to deal with matters connected with the overseas market. y Another danger is that the export manager may not get the required amount of cooperation from the personnel of other departments who are not under his control.

when the overseas business substantially increases.SEPARATE EXPORT DEPARTMENT y Although a relatively large volume of export business may be handled by a built-in form of organization. y A separate export department may. this arrangement. becomes unsatisfactory. be established to take effective care of all the activities connected with the export business. . therefore.

y It is not. and it is well equipped to handle all the activities connected with the export business. a company which wants to expand its international business substantially would find a separate export department more useful than the builtin arrangement. therefore. the separate export department is essentially self sufficient. y Unlike the built-in department. at the mercy of domestic departments. .y Further.

product or a combination of these.y The organizational structure of the export department y y y y y may vary between companies. The internal organization structure of a separate export department may be based upon: functions. . territory.

.y Needless to say. any such orientation of the internal organizational structure of the department will depend primarily upon how the marketing task varies.

y regarding the time to be spent by domestic marketing personnel on overseas business matters. . y such as : y the clash between the international and domestic sides of the firm.y A separate marketing department avoids some of the problems of the built-in department.

. it can do the job more efficiently. y It can have personnel trained to perform the international marketing functions.y A separate department is full-fledged department.

.y A separate department will also impart (communicate) an export orientation (adjustment to the circumstances)to the company. be located at the most suitable place. y Another advantage is that a separate export department may. unlike the built-in department. which may not be the headquarters of the company.

EXPORT SALES SUBSIDIARY y Firms with large export business may establish export subsidiary(supplement or controlled by another) companies and divorce international marketing activities from domestic operations because of certain advantages associated with it. y Although an export sales subsidiary is a separate company. y The subsidiary company purchases products from the parent company and markets them abroad. . it is wholly owned and controlled by the parent company and is quasi (almost or not really)independent.

the sales subsidiary differs very little from a separate export department. y In terms of internal organization and the specific activities performed. more flexible and adaptable to change situations. y It can more easily develop export marketing facilities and expertise and organize international marketing tasks more effectively. It is more independent than a department. and therefore. .y An export sales subsidiary enjoys certain advantages.

developing and expanding export markets and enlarging international business.y Some companies establish subsidiary companies with the main objective of developing export markets and doing export business in a big way. the export marketing subsidiary of the HMT Ltd... . has been assigned the task of exploring. y The HMT (International) Ltd.

y An International division will facilitate concentrated attention on the international business. i. while international side is organized on an area basis. .e. However. y Coordinating activities may prove difficult because domestic activities are organized on a product line basis.INTERNATIONAL DIVISION y Companies have foreign subsidiaries whose role is not confined (restrict)to sales alone tend to establish an international division to manage the international business.. non-domestic. creating an international division may generate internal problems.

.y The global organizational structures like the global product structure and global geographical structure which seek to integrate domestic and international operations emerged as a solution to this problem.

GLOBAL ORGANIZATIONAL STRUCTURES y The growth of business into global dimensions and the competition on a global basis resulted in the development of different global structures. The basic types of global structures are described below. .

y Global product structure y The product division structure is popular with large conglomerates with multiple. . unrelated business. y Under this structure different subsidiaries pertaining (relate) to different products within the same foreign country report to the head of different product groups at the headquarters. y The product division structure enhances coordination between different areas for any one product line.

y Global geographic structure y Under the global geographic divisional structure. For example. the market is divided geographically. . its export department was abolished and the world market was divided into four regions (India along with the Middle East forms one of the four regions). when the Ranbaxy restructured its organization as a part of its global orientation.

this pattern tends to improve coordination of all product lines within each zone but to reduce coordination between areas for any one product line. y Naturally. . the geographic division structure is appropriate for MNCs with narrow product lines.y In contrast to the product division structure.

finance and personnel. marketing. such as production. the heads of functional areas. . are responsible for the worldwide operations of their own functional areas.y Global functional structure y Under the functional structure.

making customer groups different for each product group.y Global Customer structure y If the global customer groups are so diverse requiring distinctive approaches. the organizational structure may be based on the diversity of the customer groups. y This structure would not be appropriate if the product lines are very diverse. .

.y Global matrix structure y All the global organizational patterns depicted above have certain advantages and disadvantages. hybrid or matrix structure seeks to combine the advantages and overcome the disadvantages of other alternative structures. The mixed.

staffing and directing.CONTROLLING OF INTERNATIONAL BUSINESS y Control is one of the managerial functions like planning. y Control in management means setting standards. y It is an important function because it helps to check the errors and to take the corrective action so that deviation from standards are minimized and stated goals of the organization are achieved in desired manner. measuring actual performance and taking corrective action. control is a foreseeing action whereas earlier concept of control was used only when errors were detected. . y According to modern concepts. organizing.

natural resources and environment of the host country. Enron. absence of perfect co-ordination between the headquarters and subsidiaries. These incidents occur mostly due to the variations between strategies/plans and operations. collaboration between the company s efforts and global objectives. y Coca-Cola. Pepsi.y MNC s prefer to maximize their short term profits even at the cost of the health of the host country customers. Union carbide in India is examples for the self centered approach of MNC s. .

contained toxins including lindane. Mirinda. a non-governmental organisation in New Delhi. DDT. Thums Up. many produced by The Coca-Cola Company.y In 2003. including multinational giants Pepsico and Coca-Cola. Tested products included Coke. said aerated waters produced by soft drinks manufacturers in India. the Centre for Science and Environment (CSE). Fanta. malathion andchlorpyrifos pesticides that can contribute to cancer and a breakdown of the immune system. and several other soft drinks (7Up. Pepsi. Sprite). y . Limca.

y CSE found that the Indian produced Pepsi's soft drink products had 36 times the level of pesticide residues (leftovers) permitted under European Unionregulations. CSE said it had tested the same products in the US and found no such residues . Coca Cola's 30 times.

Control is. As such its subsidiaries could not report to the headquarters and also achieve the global objectives. essential to ensure that the MNC s achieve their objectives and strategies. control ensures that the basic objectives of the entire MNC are efficiently achieved. Thus. .y Nestle failed to communicate the decisions taken at the top to all the managers at various levels. therefore.

Evaluation and control keep the MNC s strategy and direction on track. formulating strategies. implementing. evaluating and correcting the performance in order to ensure that the organization achieves its objectives. y The top management has to balance its objectives with the company differences.y The Control function includes planning. . The Big K Mart in the USA became sick as its management failed to implement the strategies as planned.

y PROBLEMS IN CONTROL OF INTERNATIONAL BUSINESS y Control of International Business is more difficult than that of domestic business due to the influence of the following factors: y Distance: Distances between the countries makes it very difficult to control the International Business. This limitation prevails even after the development of information technology devices. reasons being absence of face-to-face communication and interaction. .

makes the control in international business more difficult. currency. y Uncontrollable: Various stakeholders of the international business in the host country like government. etc. labor cost. politicians and market intermediaries are uncontrollable. supplies of inputs.y Diversity: Diversity in different aspects like culture. .. product. market structure.

y Degree of certainty: It would be very difficult for the MNCs to evaluate and predict the political and cultural environment and the market reactions to the strategies. . close to reality.

it is also concerned with the flow of information from one sub-system to the other within the subsidiary. .y ROLE OF INFORMATION SYSTEM y Control process heavily depends upon the flow of information from one subsidiary to another and from the subsidiary to the headquarters and vice-versa. y In addition.

y In addition. strategies.. prices. sources. quality should flow from the environment to the company. information regarding input variables. . goals etc.y Information regarding environment factors. objectives. plans. should flow freely from the subsidiary to the headquarters and vice-versa.

should flow from the company to the market. . we can conclude that information system plays vital role in the control of international business. thus. Hence. ingredients. Information. functions etc. y The control process in international business depends heavily on the flow of accurate and timely information. market intermediaries. and government policies should also flow.y In contrast. availability. y The information regarding competitors. should flow from a number of global centre to stakeholders and vice-versa.. information regarding the product design. price.

y The measured performance. . then should be compared with the plans with a view to find the deviations and control them.y Performance Measurement: y Operations of international business should be planned and then its performance against the plans should be measured.

y MNC s performance can be measured in the following y y y y y y areas: Organizational Structure Type of the organizational structure Degree of freedom provided to the employees for decision making and operational issues Degree of organizational flexibility to the environmental demands Degree of decentralization Degree of informality. .

y Marketing Area y Percentage of market share y Trends in customer demand and sales-area-wise and country-wise y Customer preference and customer shifts in and out y Customer response to various promotional programs. .

government and socially and religiously accepted standards of the local area. y Compatibility of product design to the cultural norms of the country. . y Contributions to ecological balance and environmental protection. y Location of the company in non-controversial areas.y Production/Operations Area y Compatibility of product ingredients to the norms of the local authorities.

. y Structuring the jobs. y Recognizing and negotiating with the trade unions to the extent necessary. working conditions. based on the humanistic principles.y Human Resource Area y Employing the people from among the locals at various levels in the organization. work hours. . y Treating the local employees at par with foreign employees in all respects including human resource development. y Structuring the pay and benefit schemes based on the local norms in addition to performance and productivity norms. etc.

y Finance Area y Reinvestment of the profits in the local country vs. exporting the dividend. . y Diversion of investment to various subsidiaries. y Levels of working capital in comparison with local industry and other subsidiaries.

. y Maintaining the ethical standards based on the local as well as international standards.y Social Responsibilities and Ethics Areas y Percentage of profits allocated for discharging social responsibilities.

y A performance indicator or key performance indicator (KPI) is a measure of performance.[1] Such measures are commonly used to help an organization define and evaluate how successful it is.y (B). y They include: financial. PERFORMANCE INDICATORS y Performance Indicators: MNCs can develop the performance indicators to act upon them. product and environmental indicators. human resources. typically in terms of making progress towards its long-term organizational goals[2]. .

.y Financial Indicators y Financial indicators cover: y Level of cash flows y Availability capital including borrowing y Levels of funds available for transfers y Profit and dividend rates.

.y Human resources y These indicators include: y Level of general skills and production skills y Level of specific functional skills y Level of ability of the people to be transferred y Level of employable skills y Percentage of potentiality utilization y Level of ability to acquire additional skills y Employee s attitude towards foreign companies.

y Production Resources y These factors include: y Percentage of capacity utilization y Degree of monopolistic characteristics. . y Degree of fastness in transport y Other areas of logistics management y Level of cost savings.

y Environmental Indicators y Environmental Indicators include: y Supply and cost changes including foreign trade y Long run and cyclical changes in demand .

volume and degree of its maintenance y Growth in sales volume y Following of Government regulations in promotional programs.y Marketing Indicators y Marketing indicators include: y Level of sales. .

. y Location of value-added activities. y Level of involvement in social and local activities.y Other Indicators y Other indicators include: y Political and economic stability of the country.

. CONTROL MECHANISMS. y management performance evaluation etc. y reports. y Control mechanisms include y corporate culture. y visits to subsidiaries. y coordinating methods.y (C).

y These form its culture. customs and practices. how late they work. follow company traditions in terms of dress. how early they start the work. how they socialize and interact with others and how they consult others.y Corporate culture y Every company has certain common values. in the absence of explicit (stated in detail or outspoken) rules. Managers of an MNC. traditions. .

norms and values in the absence of explicit (stated in detail) controls. MNCs find it difficult to rely on corporate culture for control in such cases. y Hence.y Managers in different countries follow different customs. . MNCs encourage a common corporate culture in all its subsidiaries and headquarters promoting closer contact among managers of different subsidiaries in various countries.

. y Selection of subsidiary managers and deputing home country nationals to the subsidiaries ensure the control of culture and thereby control of the operations of the subsidiary companies.y Nestle moves its managers and trainees throughout Europe and Matsushita brings foreign employees to Japan in a move to build common corporate culture.

These mechanisms include: . MNCs adopt another controlling device i. y MNCs coordinate the activities of the subsidiaries as the latter adopt various kinds of organization structures.. y MNCs coordinate the activities without disbanding (break up) their existing structures. coordinating methods.y Coordinating Methods y In addition to forming a common culture.e.

y Placing the foreign personnel on boards and top management teams. . y Develop proximity and closeness among corporate and subsidiary staff. y Develop multi-thinking and analyzing skills of the corporate staff. y Introduce job rotation for the staff between the corporation/subsidiaries.y Building teams with managers from different subsidiaries. y Develop liaison (communication or cooperation) among staff of the subsidiaries of the same country in product development and other combined actions.

y The headquarters use these reports for allocating resources. . personnel and facilities. y These reports are also useful to evaluate.y Reports y Subsidiary companies send reports to the headquarters. regulate and control the operations of the subsidiary companies.

the headquarters staffs undertake visits to subsidiaries in order to have face-to-face interactions. y Therefore. .y Visits to Subsidiaries y All the data and information cannot be provided to the headquarters through reports. y Foreign visits serve to control foreign operations.

performance standards and behavior in advance and measure the performance against these standards. y They set the job norms.y MANAGEMENT PERFORMANCE EVALUATION y MNCs in order to control the operations of their subordinates control the performance of their managers working in subsidiaries. .

y The performance standards vary from company to company and one level of managers to another level. .y They control the subsidiary activities by controlling manager s performance.

y COST AND ACCOUNTING COMPARABILITY y Managements of MNCs use cost of production of

various products and items in order to control the subsidiaries. y However, input cost, may vary from country to country, though the total cost may not be different. y For example, labor cost in labor abundant countries in lower compared to that in other countries. y Therefore, the headquarters should interpret the data carefully and judiciously in controlling.

y EVALUATIVE MEASURE y MNCs should adopt a variety of evaluative measures

rather than only financial measures. y As indicated earlier, the MNCs should use the budgets, sales, profits, market share, human resource measures, production measures, criteria of contributions to social responsibilities, following ethical standards, quality, customer service, relationship with host governments, etc.

y Information Systems: As explained earlier,

information systems play a vital role in controlling process. They provide valuable and timely information for planning and controlling the operations of the subsidiaries. The information includes: y Information for centralized co-ordination of cash balance and funds flow. y Information on external conditions like local economic, political, social, etc.

y Information on external reporting needs like reporting to the host government. standards etc. .y Information for feedback from parent to subsidiaries like R & D breakthroughs.

y Acquisitions: MNCs face problems like overlapping geographic responsibilities and markets and managing new lines of business without experience. shared ownership and changes in strategies. we shall discuss these aspects. Now.y CONTROL IN SPECIAL SITUATIONS y MNCs face control problems in specific situations like acquisitions. . Nestle faced this problem in the USA acquisitions.

y Similarly. other areas of control like centralization in decision making vary from the MNC and the acquired firm.y An MNC has to follow different approaches in controlling an acquired company as the control norms of acquired firms may be different. y Hence. y US firm use profitability whereas Korean firms use market potential for controlling. MNC should use different approaches in controlling acquired firm until it is internationalized. .

etc. spreading the ownership. y Both the firms find it difficult in controlling the operations of this company. y However. y Coca cola and nestle shared the ownership in a joint venture for the production and sales of canned coffee and tea drinks. the MNCs can use various control measures in such cases. side agreements.y Shared Ownership: Should ownership makes the control difficult compared to that of full ownership firms. . These measures include: Contract stipulations.

y CHANGES IN STRATEGIES y Recent changes in strategies resulted in multi domestic to transnational operations. y Strategic charges result in multiple control problems including human resource problems. . y MNCs should change their controlling mechanisms accordingly.

the claims of legal suits would be settled by the MNC at the headquarters.y LEGAL STRUCTURES AND CONTROL y Subsidiary companies which are not 100 percent owned by the parent company are legally separate from its parent company. y Legal authorities in each country normally limit the legal liability to the assets of the subsidiary company. . y If an MNC establishes a branch in a foreign country instead of subsidiary.

subsidiary and branch. y Thus. y Each form has different tax advantages. . if it has the control over the ownership. liability.y The company can maintain secrecy.. there are control advantages to these two forms. viz. secrecy and control.

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