Chapter- 5

Functional Areas of International Business

What Is Outsourcing?
Outsourcing is the business practice of hiring a party outside a company to perform services or
create goods that were traditionally performed in-house by the company's own employees and
staff. Outsourcing is a practice usually undertaken by companies as a cost-cutting measure. As
such, it can affect a wide range of jobs, ranging from customer support to manufacturing to the
back office.

Outsourcing was first recognized as a business strategy in 1989 and became an integral part
of business economics throughout the 1990s.1 The practice of outsourcing is subject to
considerable controversy in many countries. Those opposed argue that it has caused the loss of
domestic jobs, particularly in the manufacturing sector. Supporters say it creates an incentive
for businesses and companies to allocate resources where they are most effective, and that
outsourcing helps maintain the nature of free-market economies on a global scale.

Examples of Outsourcing
Outsourcing's biggest advantages are time and cost savings. A manufacturer of personal
computers might buy internal components for its machines from other companies to save on
production costs. A law firm might store and back up its files using a cloud-computing service
provider, thus giving it access to digital technology without investing large amounts of money
to actually own the technology.

A small company may decide to outsource bookkeeping duties to an accounting firm, as doing
so may be cheaper than retaining an in-house accountant. Other companies find outsourcing the
functions of human resource departments, such as payroll and health insurance, as
beneficial. When used properly, outsourcing is an effective strategy to reduce expenses, and can
even provide a business with a competitive advantage over rivals.

Benefits of Outsourcing

Companies are able to enjoy the following benefits through outsourcing:

 A decrease in operational expenses

 Increased reach
 Cost and efficiency savings
 Operation control
 Focus on tasks that can help yield more earnings
 Access to quality talents that are experts in handling non-core tasks
 Enhance the efficiency of business processes
 Enjoy a boost in sales given the mature process of attaining customer satisfaction that a BPO
company has
What Are Logistics?
Logistics refers to the overall process of managing how resources are acquired, stored, and
transported to their final destination. Logistics management involves identifying prospective
distributors and suppliers and determining their effectiveness and accessibility. Logistics
managers are referred to as logisticians.

"Logistics" was initially a military-based term used in reference to how military personnel
obtained,

stored, and moved equipment and supplies.1 The term is now used widely in the business
sector, particularly by companies in the manufacturing sectors, to refer to how resources are
handled and moved along the supply chain.

Logistics are inbound and outbound.

Inbound logistics refers to the movement of goods from suppliers to production. This includes
storage and transportation of various products and information from the suppliers through the
warehouse and further through manufacturers’ production facilities for processing and
production.

For example, if you produce car parts in a factory. You will use door-to-door inbound transport
to send your car parts to various recipients depending on the nature of your relationship with
those businesses. This could be providing car parts to manufacturers, using them in their finished
products, or passing them on to retailers and distributors. Most car parts distributors use large
trucks to transport these products, so choosing the right partner for these logistics services is
essential.

Outbound logistics is the movement of finished products from production facilities to the next
supply chain link. These goods move through warehouses, further to the point of consumption
(in the hands of end-users). This is often referred to as the order fulfillment process.

Using the same example above, after the manufactured car parts make their way through the
inbound logistics flow to a retailer, they will then be sold and distributed to the end-user, thus
moving through the outbound logistics flow to reach the desired final destination.
What Is Supply Chain Management (SCM)?

Supply chain management (SCM) is the process of managing the flow of goods and services to
and from a business, including every step involved in turning raw materials and components
into final products and getting them to the ultimate customer. Effective SCM can help
streamline a company's activities to eliminate waste, maximize customer value, and gain a
competitive advantage in the marketplace.

Supply chain management represents an ongoing effort by companies to make their supply
chains as efficient and economical as possible.

Typically, SCM attempts to centrallycontrol or link the production, shipment, and distribution
of a product. By managing the supply chain, companies can cut excess costs and needless steps
and deliver products to the consumer faster. This is done by keeping tighter control of
internal inventories, internal production, distribution, sales, and the inventories of company
vendors.

SCM is based on the idea that nearly every product that comes to market does so as the result of
efforts by multiple organizations that make up a supply chain. Although supply chains have
existed for ages, most companies

have only recently paid attention to them as a value-add to their operations.

Why Is Supply Chain Management Important?

Supply chain management is important because it can help achieve several business objectives.
For instance, controlling manufacturing processes can improve product quality, reducing the
risk of recalls and lawsuits while helping to build a strong consumer brand. At the same time,
control over shipping procedures can improve customer service by avoiding costly shortages or
periods of inventory oversupply. Overall, supply chain management provides multiple
opportunities for companies to improve their profit margins and is especially important for
businesses with large and international operations.

Global supply-chain management has six main areas of concentration: logistics management,
competitor orientation, customer orientation, supply-chain coordination, supply management,
and operations management. These six areas of concentration can be divided into four main
areas: marketing, logistics, supply management, and operations management. Successful
management of a global supply chain also requires complying with various international
regulations set by a variety of non-governmental organizations (e.g. The United Nations).

Operating and managing a global supply chain comes with several risks. These risks can be
divided into two main categories: supply-side risk and demand side risk.[4] Supply-side risk is a
category that includes risks accompanied by the availability of raw materials which effects the
ability of the company to satisfy customer demands. Demand-side risk is a category that includes
risks that pertain to the availability of the finished product. Depending on the supply chain, a
manager may choose to minimize or take on these risks.
 Successful global supply-chain management occurs after implementing the appropriate
framework of concentration, complying with international regulations set by governments and
non-governmental organizations, and recognizing and appropriately handling the risks involved
while maximizing profit and minimizing waste.

Focus areas of global supply chain management:

Global supply chain management encompasses a broad range of focus areas, all aimed at
efficiently managing the flow of goods, information, and finances across the global marketplace.
Some key focus areas include:

1. Supplier Management: Establishing and maintaining relationships with suppliers worldwide,

ensuring reliability, quality, and cost-effectiveness.
2. Logistics and Transportation: Optimizing the movement of goods from suppliers to
manufacturers, warehouses, and ultimately to customers, considering factors like mode of
transportation, route optimization, and inventory management.
3. Inventory Management: Balancing inventory levels to meet demand while minimizing
excess stock, utilizing techniques like just-in-time inventory and demand forecasting.
4. Demand Planning and Forecasting: Anticipating customer demand accurately to ensure
adequate supply without excessive inventory, using data analytics and market insights.
5. Risk Management: Identifying and mitigating risks such as geopolitical instability, natural
disasters, supplier disruptions, and currency fluctuations that could impact the supply chain.
6. Sustainability and Corporate Social Responsibility (CSR): Incorporating environmentally
sustainable practices, ethical sourcing, and fair labor practices into supply chain operations to
meet societal expectations and regulatory requirements.
7. Information Systems and Technology Integration: Implementing technology solutions like
Enterprise Resource Planning (ERP) systems, supply chain management software, and Internet
of Things (IoT) devices to enhance visibility, communication, and coordination throughout the
supply chain.
8. Quality Management: Ensuring product quality and compliance with regulations and
standards throughout the supply chain, including quality control measures, inspections, and
certifications.
9. Collaboration and Partnership Development: Building strategic alliances and
collaborations with key stakeholders such as suppliers, distributors, logistics providers, and
customers to enhance efficiency, innovation, and responsiveness.
10. Global Trade Compliance and Regulations: Navigating complex international trade laws,
tariffs, customs regulations, and trade agreements to facilitate smooth cross-border transactions
while ensuring compliance with legal requirements.
11. Supply Chain Resilience and Agility: Building flexibility and adaptability into the supply
chain to respond quickly to disruptions, market changes, and unforeseen events, enabling the
business to maintain continuity and competitiveness.

These focus areas are interconnected and require continuous monitoring, analysis, and
improvement to optimize global supply chain performance and achieve strategic objectives.
 Global marketing strategy, global marketing plan and its strategies.
A global marketing strategy is a comprehensive plan developed by a company to market its
products or services internationally, taking into account the unique characteristics of different
markets, cultures, and consumer behaviors around the world. It involves strategic decision-
making regarding the standardization or customization of marketing activities across multiple
countries or regions to achieve consistent brand positioning, maximize market penetration, and
drive revenue growth on a global scale.

A global marketing plan is the actionable blueprint derived from the global marketing strategy. It
outlines the specific tactics, timelines, and resources required to execute the strategy effectively
in diverse markets. Here's a breakdown of the components of a global marketing plan and its
strategies:

1. Market Analysis: Conduct thorough research to understand the cultural, economic, legal, and
competitive landscapes of target markets. Identify opportunities, challenges, and trends that may
impact marketing activities.
2. Segmentation and Targeting: Divide the global market into distinct segments based on
demographic, psychographic, behavioral, or geographic factors. Select target segments that offer
the greatest potential for success and tailor marketing efforts to meet their specific needs and
preferences.
3. Product Localization or Standardization: Determine whether product offerings need to
be adapted to suit local tastes, preferences, or regulatory requirements (localization) or if
a standardized approach can be employed across markets. Balance the need for
customization with the benefits of economies of scale.
4. Pricing Strategy: Develop pricing strategies that account for currency fluctuations,
purchasing power parity, competition, and local market conditions. Consider factors such
as price sensitivity, perceived value, and price discrimination across different markets.
5. Distribution Channel Management: Choose appropriate distribution channels (e.g.,
direct sales, distributors, retailers, e-commerce) based on market characteristics,
infrastructure, and consumer buying behavior. Ensure efficient logistics and supply chain
management to deliver products to customers worldwide.
6. Promotion and Communication: Develop integrated marketing communication
strategies that resonate with target audiences in each market. Tailor messaging, branding,
advertising, and promotional activities to reflect cultural nuances, language preferences,
and media consumption habits.
7. Brand Management: Maintain brand consistency while accommodating cultural
sensitivities and preferences. Develop brand guidelines that ensure uniformity in visual
identity, messaging, and brand positioning across diverse markets.
8. Digital Marketing and Social Media: Leverage digital channels and social media
platforms to reach global audiences cost-effectively. Implement strategies for search
engine optimization (SEO), content localization, social media engagement, and online
advertising to increase brand visibility and engagement.
9. Market Entry and Expansion: Develop entry strategies for new markets, considering
factors such as market size, growth potential, competitive intensity, and regulatory
 requirements. Evaluate options such as joint ventures, strategic alliances, acquisitions, or
organic growth.
10. Performance Measurement and Optimization: Establish key performance indicators
(KPIs) to evaluate the effectiveness of global marketing initiatives. Monitor metrics such
as market share, sales revenue, customer acquisition, brand awareness, and return on
investment (ROI). Continuously refine strategies based on performance insights and
market feedback.

By developing a comprehensive global marketing plan with these strategies in mind, companies
can effectively navigate the complexities of international markets and achieve sustainable growth
and competitive advantage on a global scale.

Global Branding Strategy

A global branding strategy is a comprehensive plan developed by a company to create and

manage a consistent brand image and identity across multiple countries and cultures worldwide.
It involves aligning branding efforts to convey a unified message, values, and personality that
resonate with diverse audiences while maintaining flexibility to adapt to local preferences and
market conditions.

Here's a breakdown of the components and characteristics of a global branding strategy:

1. Brand Identity: Define the core elements of the brand, including its name, logo, colors,
typography, and visual assets. Ensure consistency in brand identity across all markets to facilitate
recognition and recall among consumers globally.
2. Brand Positioning: Clearly articulate the unique value proposition and positioning of the
brand in the marketplace. Identify key attributes, benefits, and emotional connections that
differentiate the brand from competitors and resonate with target audiences worldwide.
3. Brand Values and Personality: Establish the brand's values, beliefs, and personality traits
that guide its behavior and interactions with customers. Communicate these values authentically
and consistently across all touchpoints to build trust and loyalty with global consumers.
4. Brand Messaging: Develop a cohesive messaging strategy that communicates the brand's
story, purpose, and value proposition in a compelling and relevant manner across different
cultures and languages. Adapt messaging to resonate with local sensibilities while maintaining
brand integrity and authenticity.
5. Brand Architecture: Determine the optimal structure for organizing and managing brand
portfolios across multiple product lines, categories, or geographic regions.
Choose between strategies such as branded house, house of brands, or hybrid models based on
business objectives and market dynamics.
6. Brand Extensions and Adaptations: Identify opportunities for extending the brand into new
product categories, markets, or customer segments while maintaining consistency with the core
 brand identity. Customize brand offerings and marketing approaches as needed to meet local
market preferences and requirements.
7. Brand Experience: Design and deliver a seamless and differentiated brand experience at
every touchpoint along the customer journey, including product design, packaging, retail
environments, customer service, and digital interactions. Aim to evoke positive emotions and
create memorable experiences that strengthen brand affinity and loyalty.
8. Brand Governance and Compliance: Establish clear guidelines and standards for
maintaining brand consistency and integrity across global markets. Provide training and support
to ensure that local teams and partners understand and adhere to brand guidelines while allowing
for creativity and adaptation as necessary.
9. Brand Monitoring and Measurement: Regularly monitor brand performance, perception,
and sentiment in key markets to assess the effectiveness of branding efforts. Track metrics such
as brand awareness, brand equity, customer satisfaction, and market share to identify areas for
improvement and optimization.
10. Brand Adaptation and Evolution: Continuously evolve and refine the global branding
strategy in response to changing market dynamics, consumer preferences, and competitive
pressures. Stay agile and responsive to emerging trends and opportunities while staying true to
the core essence of the brand.

By implementing a well-defined global branding strategy, companies can build strong, resilient,
and enduring brands that resonate with consumers worldwide, drive market differentiation, and
create sustainable competitive advantage in the global marketplace.

Currency Risk Management:

Currency risk management refers to the process of identifying, assessing, and mitigating the
potential adverse effects of fluctuations in exchange rates on a company's financial performance.
It involves strategies and techniques employed by businesses to minimize the impact of currency
exchange rate movements on their operations, cash flows, and profits.

Three main types of currency exposure risks that companies typically face are:

1. Transaction Exposure: Transaction exposure arises from contractual obligations denominated in

foreign currencies. When a company buys or sells goods or services internationally and the
transaction is denominated in a foreign currency, it becomes exposed to transaction risk.
Fluctuations in exchange rates between the transaction date and settlement date can impact the
company's costs, revenues, and profitability. To manage transaction exposure, companies may
use techniques such as forward contracts, currency options, and currency swaps to hedge against
exchange rate fluctuations.

2. Translation Exposure: Translation exposure, also known as accounting exposure, refers to the
risk that a company's financial statements may be affected by changes in exchange rates when
consolidating the financial results of its foreign subsidiaries or when translating foreign
currency-denominated assets and liabilities into the reporting currency for financial reporting
purposes. Translation exposure can lead to fluctuations in reported earnings and financial ratios,
impacting the company's valuation and shareholder wealth. To manage translation exposure,
 companies may employ techniques such as balance sheet hedging or diversification of operations
across different geographic regions.

3. Economic Exposure: Economic exposure, also known as operating exposure, arises from the
impact of exchange rate fluctuations on a company's competitive position, cash flows, and long-
term strategic decisions. It reflects the potential effect of currency movements on a company's
future revenues, costs, and market share. Economic exposure is influenced by factors such as
pricing flexibility, competition, and the ability to adjust production and sourcing locations. To
manage economic exposure, companies may focus on strategies such as diversifying markets,
adjusting pricing strategies, and locating production facilities in countries with stable currencies
or natural hedges.

By effectively managing these currency exposure risks, companies can minimize the negative
impact of exchange rate fluctuations on their financial performance and enhance their
competitiveness in the global marketplace.
Sources of funds for international operations:

1. Eurocurrency markets: Eurocurrency refers to any currency held and deposited outside its
country of origin. For example, Eurodollars are U.S. dollars held in banks outside the United
States. Similarly, Euroyen, Euroeuros, and other Eurocurrencies exist for various currencies. The
Eurocurrency market encompasses a network of banks, financial institutions, corporations, and
governments operating in different jurisdictions but dealing with currencies beyond their home
countries.
The Eurocurrency market involves various participants, including multinational corporations,
financial institutions (such as banks and investment firms), central banks, governments, and
supranational organizations. These entities engage in borrowing, lending, trading, and investing
activities denominated in Eurocurrencies to manage liquidity, finance international trade, and
support cross-border investments.

Overall, the Eurocurrency market plays a vital role in facilitating international capital flows,
supporting global trade and investment activities, and providing flexible and efficient funding
sources for companies and financial institutions engaged in international operations.
2. International Bond Markets: International bond markets involve the issuance and trading of
debt securities (bonds) denominated in currencies other than the issuer's domestic currency.
These markets enable borrowers to raise funds from global investors, diversify funding sources,
and manage currency risk. International bonds may include sovereign bonds issued by
governments, corporate bonds issued by comp anies, and supranational bonds issued by
international organizations.
The international bond market comprises various participants, including issuers, investors,
underwriters, and intermediaries. International bond markets offer several sources of funds for
international operations. Such as; Sovereign Bonds, Corporate Bonds and Supranational Bonds.

International bond markets play a critical role in facilitating cross-border capital flows,
supporting economic growth, and providing issuers with access to diverse funding sources for
international operations, while offering investors opportunities for portfolio diversification and
fixed income investments in a global context.
3. Equity Securities and Stock Exchange Markets: Equity securities and stock exchange
markets serve as significant sources of funds for international operations, enabling companies to
raise capital by selling ownership stakes to investors.

Equity securities represent ownership interests in a company and entitle holders to a portion of
the company's profits and assets. Common types of equity securities include common stock and
preferred stock. Companies issue equity securities through initial public offerings (IPOs),
secondary offerings, or private placements to raise capital for various purposes, including
international expansion, acquisitions, research and development, and working capital.

Stock exchange markets provide centralized platforms where investors can buy and sell equity
securities issued by publicly traded companies. These markets facilitate liquidity, price
discovery, and transparency, allowing companies to access a broad base of investors and raise
capital efficiently. Major stock exchange markets around the world include the New York Stock
Exchange (NYSE), NASDAQ, London Stock Exchange (LSE), Tokyo Stock Exchange (TSE),
and Hong Kong Stock Exchange (HKEX).

Companies seeking funds for international operations can tap into global capital markets by
listing their equity securities on foreign stock exchanges through international equity offerings.
This allows companies to reach a broader investor base, enhance their visibility and credibility in
international markets, and diversify their sources of funding. International equity offerings may
involve issuing American Depositary Receipts (ADRs) or Global Depositary Receipts (GDRs) to
facilitate trading and settlement of shares in foreign markets.

By leveraging equity securities and stock exchange markets, companies can access capital from
global investors, fund international operations, and pursue growth opportunities in international
markets while managing risks and optimizing their capital structure.
4. International Financial Institutions: International Financial Institutions (IFIs) play a pivotal
role in providing funds for international operations, particularly for development projects,
infrastructure investments, and poverty alleviation efforts in emerging and developing
economies.

IFIs are multilateral organizations established to promote economic development, financial

stability, and poverty reduction worldwide. They provide financial assistance, technical
expertise, and policy advice to member countries to address development challenges and
promote sustainable growth. Major types of IFIs include: World Bank Group, International
Monetary Fund (IMF), Regional Development Banks.

IFIs offer various types of financial assistance and instruments to support international
operations and development initiatives such as Loans and Credits, Grants, Technical Assistance
and Risk Mitigation Instruments.
 IFIs play a vital role in mobilizing funds, promoting inclusive growth, and addressing global
development challenges through their financial assistance, technical expertise, and policy
support, making them a significant source of funds for international operations and development
initiatives.

PRICING STRATEGIES TO FOLLOW WHEN CURRENCY VALUE APPRECIATES

AND DEPRECIATES:
When currency values appreciate or depreciate, businesses need to adjust their pricing strategies
to maintain competitiveness, manage costs, and preserve profitability. Here are some pricing
strategies to consider in response to currency appreciation and depreciation:

Currency Appreciation:

1. Competitive Pricing: In a scenario of currency appreciation, where the domestic currency

strengthens against foreign currencies, businesses may consider lowering prices to remain
competitive in international markets. By reducing prices, companies can maintain market share
and stimulate demand for their products or services.
2. Value-Added Pricing: Instead of reducing prices outright, businesses can focus on enhancing
the value proposition of their products or services. This could involve offering additional
features, improved quality, or superior customer service without necessarily lowering prices. By
emphasizing value-added benefits, companies can justify maintaining higher price points despite
currency appreciation.
3. Cost Optimization: Currency appreciation may lead to lower import costs for businesses
that rely on imported raw materials, components, or finished goods. Companies can
leverage cost savings from favorable exchange rates to improve profit margins or invest
in product innovation, marketing initiatives, or expansion strategies.
4. Market Segmentation: Businesses can segment markets based on consumer preferences,
purchasing power, and sensitivity to price changes. By targeting different market
segments with tailored pricing strategies, companies can mitigate the impact of currency
appreciation on overall sales and profitability. For example, premium pricing may be
maintained for affluent customers, while discounting strategies could be applied to price-
sensitive segments.

Currency Depreciation:

1. Cost-Plus Pricing: In the face of currency depreciation, where the domestic currency weakens
against foreign currencies, businesses may need to adjust prices to reflect higher import costs.
Cost-plus pricing involves setting prices based on production costs, including materials, labor,
and overhead, plus a desired profit margin to ensure profitability despite higher costs associated
with currency depreciation.
2. Price Increases: When facing currency depreciation, businesses may opt to raise prices to offset
the impact of higher import costs and maintain profit margins. Price increases should be
carefully implemented to minimize adverse effects on sales volume and customer loyalty.
Effective communication and justification of price adjustments based on currency fluctuations
and cost pressures are essential to mitigate customer resistance.
1. Localized Pricing: Businesses operating in international markets can adopt localized pricing
strategies to account for currency fluctuations and market dynamics. This involves adjusting
prices in each market based on local currency movements, competitive factors, purchasing
power, and consumer preferences. By aligning prices with local market conditions, companies
can optimize revenue and profitability while mitigating the impact of currency depreciation.
2. Dynamic Pricing: Dynamic pricing strategies involve adjusting prices in real-time based on
changes in market conditions, demand levels, and competitive dynamics. Businesses can
leverage technology and data analytics to implement dynamic pricing algorithms that factor in
currency fluctuations, supply chain disruptions, and other variables to optimize pricing decisions
and maximize revenue in volatile environments.

In both scenarios of currency appreciation and depreciation, businesses should closely monitor
exchange rate movements, assess the impact on costs and pricing dynamics, and adapt their pricing
strategies accordingly to maintain competitiveness, profitability, and sustainable growth in
international markets.
#Explain With Examples Market Skimming And Penetration Pricing Strategies:

Market skimming and penetration pricing are two distinct pricing strategies that businesses
employ to enter or expand within a market. Here's an explanation of each with examples:

1. Market Skimming: Market skimming, also known as price skimming, involves setting a
relatively high initial price for a product or service and then gradually lowering the price over
time. This strategy is typically employed when a company introduces a new product or enters a
market with unique features, high demand, or limited competition. Market skimming aims to
maximize profits from the most price-sensitive customers early on before lowering prices to
attract a broader customer base.
Example: Apple frequently uses market skimming for its new product launches, such as iPhones,
iPads, and MacBooks. When Apple releases a new iPhone model, it initially sets a high price to
capture the early adopters and tech enthusiasts willing to pay a premium for the latest technology
and features. Over time, as demand subsides and competitors introduce alternative products,
Apple gradually reduces the price of the iPhone to reach a broader audience and maintain market
share.
2. Penetration Pricing: Penetration pricing involves setting a low initial price for a product or
service to attract customers and gain market share rapidly. This strategy is often used by
companies seeking to enter new markets, expand market share, or compete aggressively against
established competitors. Penetration pricing aims to stimulate demand, encourage trial purchases,
and establish a foothold in the market, with the potential to increase prices once a significant
customer base is secured.
Example: Netflix employed penetration pricing when it entered the streaming video market.
Initially, Netflix offered its streaming subscription service at a low monthly price, undercutting
traditional cable and satellite TV providers. By offering a compelling value proposition and a
vast library of content at an affordable price, Netflix attracted millions of subscribers and quickly
became a dominant player in the streaming industry. Once it established a sizable subscriber
base, Netflix gradually raised its subscription prices to reflect the value of its content and
investments in original programming.
In summary, market skimming involves starting with a high price and gradually reducing it,
targeting early adopters and maximizing initial profits, while penetration pricing involves
starting with a low price to gain market share quickly and stimulate demand. Both strategies have
their advantages and are used based on factors such as product differentiation, market conditions,
competition, and long-term business objectives.