Session 1

INTERNATIONALBUSINESS PGP II
R. Rathish Bhatt
Apple’s Value Chain
 Exhibit 1.1: A Framework

(INTERNATIONAL)
COMPETITIVENESS

FIRMS POLICY- GOVERNMENTS

(Business, (Competition,
Competitive) STRATEGY Industrial)

THEORY

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The Nature and Scope of International Business

• International Business (IB) deals with the

nature, strategy and management of
international business enterprises and their
effects on business and national performance
(e.g., efficiency, growth, profitability,
employment).
• IB is interdisciplinary. It draws, among others,
on economics, politics, sociology, marketing,
management (human resources, strategic).

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 Some definitions (i)

• FDI is the control of production which takes place in one

country (‘host country’) by a firm based in another country
(‘home country’). FDI is the defining feature of the
multinational corporation (MNC).
• Globalisation refers to the increasing integration of markets
(exchange) and production, to include the mobility of resources
(capital, labour, ‘organization and knowledge’).

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 Some definitions (ii)

• A firm is an organisation which produces

commodities for sale in the market for a
profit, and allocates resources (such as capital
and labour) without direct reliance on the
price mechanism (the market) on the basis of
internal entrepreneurial decisions (hierarchy).
• An MNC is a firm which controls production in
countries other than (and including) its home
base.

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 Some definitions (iii)
• The market (price mechanism) is an
institution of resource allocation, based on
voluntary exchanges (transactions) by
individuals, motivated by preferences and
market prices.
• The state is an institution which allocates
resources and influences the organization of
economic activity through a legal monopoly
on force.

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• International trade is the production of a product or
service in one country and its sale to a buyer in
another country.
– www.imf.org
– www.wto.org
• Trading blocs facilitate international trade..
Globalization is awareness, understanding and
response to global developments and linkages.
(Czinkota)
• It is the global strategy involving the integration of
world-wide operations and the development of
standardized products and marketing approaches.
(Deresky)
 What is Globalization?
• Involves designing and operating systems to work with people
around the world to ensure sustained competitive
advantage…….makes trade easier and more efficient
• Globalisation of Markets
• Globalisation of Production and Services
– Sourcing of goods and services from around the globe
– Eg. Airbus A380
– Eg. MRI scans in India
• Creation of trade blocks and FTA’s and the reduction of trade
barriers…taxes and tariffs.
• Exemplified by McDonalds, Walmart, Boeing etc
• Benefits….reduction of transaction costs……etc
• Has seen the emergence of the Global Manager
Globalization the interconnectedness
and uniformity

• The standardization of the business world and inter-

dependent economies
• Standardization of rules and regulations and standards
• Promoted by FTA’s and trade bloc expansion
• We now talk of a world economy…….
• Globalization facilitates the movement of people
capital and resources…………(for good or evil)
• Creation of world wide organizations and “watchdogs”
• Increases in human trafficking and spread of disease
 Globalization in practice

• In practice……………….
• Globalization means that people all over the
world eat Mars Bars, drink Coca Cola or Johnny
Walker (or both), use Nokias, listen to jazz, drive
Toyotas, wear Nikes, watch Hollywood movies,
use Gillette, apply Nivea, and smell the same
aftershaves or perfumes…. wear blue jeans and
eat pasta and Big Macs……………………and , may
also study in an International University ….and
education is being standardized !!!
 What are trade blocs?
• Based on Czinkota’s definition:-
• Trade blocs are formed by agreements among
countries to establish links that facilitate the
movement of goods, services, capital and labor
across borders.

A trade bloc is a large free trade area formed by one or

more tax, tariff and trade agreements.
• Typically trade pacts that define such a bloc specify
formal adjudication bodies, e.g. NAFTA trade panels.
This may include even a more democratic and
participative system, as the EU and its parliament.
 TRADE BLOCS
• They are usually between countries that are geographically
close to each other, they involve “free” trade areas and
degrees of economic integration
There is a maze of acronyms
EU, ASEAN, ANCOM, CACM, CARICOM, COMESSA,
• ECOWAS, GCC, NAFTA etc etc

• Trade Blocs are about Economic Integration…

• free trade areas
• customs unions common markets +
• economic union.
• Forms of economic alliances.
 Free Trade Agreement (FTA)

• An FTA is an agreement between two or

more countries to create a free trade
area; that is an area in which all barriers
to trade among them are removed or
modified, although sometimes only for
certain specified goods and services.
 What is a Free Trade Area?

• A region or area in which barriers to

trade are removed with respect to all of
some commodities. Eg NAFTA CAFTA
TAFTA EU
• http://www.aseansec.org/
1. European Union (EU)
2. European Free Trade Association (EFTA)
3.Caribbean Community (CARICOM)
4.Economic Community of West African States (ECOWAS)
5.Economic and Monetary Community of Central Africa
(CEMAC)
6. East African Community (EAC)
7.South American Community of Nations (CSN)
8.Gulf Cooperation Council (GCC)
9.Southern African Customs Union (SACU)
10.Common Market for Eastern and Southern Africa (COMESA)
11.North American Free Trade Agreement (NAFTA)
12.Association of Southeast Asian Nations (ASEAN)
13.South Asian Association for Regional Cooperation (SAARC)
14.Eurasian Economic Community (EurAsEC)
15. Agadir Agreement
16. Central American Common Market (CACM)
17. Pacific Regional Trade Agreement (PARTA of PIF)
18.African Economic Community (AEC)
19.The Bay of Bengal Initiative for Multi-Sectoral Technical and
Economic Cooperation. (BIMSTEC)
• Trade blocs share a common purpose and have many things in common
in terms of successful operation

You will also note what factors limit or

impede the success of trade blocs.
a trade bloc is effectively a large Free Trade
Agreement
• Trade blocs and Free Trade Agreements;
a trade bloc is a large free trade area.

Issues of economic integration

Regional regulation reduced tariff's,
favored treatment and preferences
• Equally not everyone is happy about trade blocs and big
businesses.
• Facts
• Rhetoric
• Informational, International Interactions
• Education
• Non-Market Strategy
– Collective actions by MNC’s
 Who will protect us from
protectionism?
• Adam Smith: Absolute Advantage
– What Happens when the other country can make
everything cheaper than we can?
• Richardo: Comparative Advantage
– Won’t free trade make it impossible to defend the
high domestic wage rate?
 Efficiency, Equity and Protectionism
• Standard of Living
• Do trade restrictions redistribute income from
richer people to poorer people?
• Is protectionism the best way to redistribute
income?
• Eg. American Automobile Industry (1981)
Does Protectionism really save job?
• high cost producers in one industry ->raises
costs in other industry
• Reactions by foreign nations
• Effect of trade barrier on currency.
Pankaj Ghemavat argued ‘semi globalisation’
as there are difference between countries and
culture. He observed that 90% of phone calls ,
web-traffic and investment around the world
remains local; ratio of domestic to international
trade is still substantial, borders and distance
still matters.
Moore and Rugman noted that while
companies source goods, technology,
information and capital from around the
world, business activity tends to be centred
in certain cities or regions around the world
and suggest that regions- rather than global
opportunity- should be the focus of strategy
analysis and organisation.
For the last 60 years, globalisation of business
has been interpreted as The expansion of trade
from developed to emerging economies. Today
business flows in both the directions.
The new phase of “ globality” is creating huge
opportunities- as well as threats- for developed
world multinationals and new champions from
developing countries alike.
Gupta, Govindarajan and Wang identify five
“imperatives” that drives companies to become
more global:

1. To pursue growth
2. Efficiency
3. Knowledge
4. To better meet customer need
5. To pre-empt or count competition
Growth:

In many industries, markets in developed

countries are maturing at rapid rates, limiting the
rate of growth. Developing countries offer
significant growth opportunities for
manufactures.
Efficiency:

Economies of scale creates a competitive

advantage. Economies of scale refer to
efficiencies related to supply side changes such as
increasing or decreasing the scale of production,
economies of scope refer to efficiencies related to
demand side changes such as increasing or
decreasing the scope of marketing and distribution
by entering new markets or regions or by
increasing the range of products and services
offered.
Knowledge

Foreign operations can be reservoirs of

knowledge. If locally created knowledge is
leveraged effectively, it can yield significant
strategic benefits to a global enterprises such
as :

• Faster product and process innovation

• Lower cost of innovation
• Reduced risk of competitive pre-emption
Customer needs and preferences

When customers start to globalise, a firm has little

choice but to follow and adapt its business model
to accommodate them. Multinationals such as
Coca-Cola, GE, Du-Pont increasingly insist that
their suppliers – from raw materials suppliers to
advertising agencies to personnel recruitment
companies- become more global in their approach
and be prepared to serve them whenever and
wherever required.
Competition

A competitor who globalises early may have a first

mover advantage in emerging markets, greater
opportunity to create economies of scale and scope
and ability to cross-susidize competitive battles.
Some Questions:
How should a multi product firm
choose the product line to launch it
into the global market? ie How to
choose a product?
What factors make some markets
more strategic than others?
What should companies consider in
determining the right mode of entry?
How should the enterprise
transplant the corporate DNA as it
enters new markets?
What approaches should the
company the company use to win the
local battle?
How rapidly should a company
expand globally?
Choice of products

When any multinational firm chooses to go abroad, it must ask itself

whether it should globalise the entire portfolio simultaneously or use a
subset of product lines.

Global expansion forces companies to develop at least three types of

capabilities.

• Learning about foreign markets

• Learning how to manage people in foreign locations
• Learning how to manage foreign subsidiaries.

Twin goals of choosing product lines are;

• Maximising the returns

• Minimising the risk
Figure 1 presents a conceptual framework to
identify those products, business units or lines
of business that might be preferred candidates
for early globalisation.

Any multiproduct firm that is starting to

globalise must remember that a logically
sequenced rather than random approach is
likely to serve as a higher-return, lower risk
path towards full-scale globalisation.
 Figure 1
A Framework for Choice of Products:
Attractiveness of Product Lines as Launch
Vehicles for Initial Globalization

Required Degree of Local 2 1

Moderately Most attractive
Low (Marriott Full-
attractive
service Lodging)
Adaptation

4 3
Least attractive Moderately
(Marriott Senior attractive
Living Services for
High

retirement
communities)

Low High

Expected Payoffs from Globalization

Choice of Strategic markets

Strategic importance depends on :

•Market potential
•Learning potentials

Market potential encompasses market sizes and expected growth for a

particular line of business.

Two drivers of learning potential of any market are:

•Presence of sophisticated and demanding customers for the particular

product or services.
•The pace at which relevant technologies are evolving. Thse
technologies emerges from – lead-edge customers, innovative
competitors, universities and other research centres
Figure 2
Drivers of a Market’s Strategic Importance

High
Potential
Market

Low

Low High
Learning Potential
No firms is truly global unless it is present in all
strategic markets. Entering a strategic market
depends on “ capability to exploit”.

The ability to exploit market depends on :

•The height of entry barriers

•Intensity of competition
 Figure 3

A Framework for Choice of Markets

Strategic importance of
High Phased-in entry Rapid
(create Entry
beachhead first)
Market

Opportunistic
Ignore for now
Low

Entry

Low High

Firm’s Ability to Exploit the Market

One attractive way for a company to develop
such capabilities is to first enter a beachhead
market: one that closely resembles the targeted
strategic market but provides a safer opportunity
to learn how to enter and succeed there.
Mode of Entry

Once a company has selected the country/countries to entre and

designated the product lines that will serve as the vehicle, it must
determine the appropriate mode of entry.

Choosing the right mode of entry is critical because the choice

once made is often difficult and costly to alter.

The entry mode rests on two fundamental questions:

1. The extent to which the firm will export or produce localy
2. The extent of ownership control over activities that would be
performed locally in the target market
Greater reliance on local production would be
appropriate under the following four conditions.

1. Size of local market is larger than minimum

efficient scale of production. The larger the size
of local market, the more completely local
production will translate into scale economies for
the firm while holding down tariff and
transportation costs. Eg. Bridgestone entry into
the US market by acquiring the local production
base of Firestone instead of exporting tires from
Japan.
• Shipping and tariff costs associated with exporting to the target market
are so high
• Need for local customisation of product design is high
• Local content requirements are strong
 Figure 4
Alternative Modes of Entry
Activities Performed in the Foreign
Degree of Ownership Control over

Honda’s initial entry Bridgestone’s

Honda’s
in to theinitial entry Bridgestone’s
acquisition of
100 %
U.S. market
in to the U.S. market USacquisition of
based Firestone
US based Firestone
Market

Ford-Mazda
Genentech-Hoffman
LaRoche
Champion
Champion paper
International’s
International’s paper
exports through KFC’s
0%

exports through
Independent brokers KFC’s in India
franchisees
Independent brokers franchisees in India

100% Exports 100% Local

Exports versus Local production

 Figure 5
Greenfield vs. Cross-border Acquisition

Market Growth Rate Greenfield Greenfiled

operations or operations
(Nucor’s entry into
High
cross-border
acquisitions Brazil)

Cross-border Greenfileld
acquisitions operations or
(Int’l Paper’s entry cross-border
Low

into Europe) acquisitions

Low High
Uniqueness of Corporate Culture
 Global Strategy

Develop
core Core Business Strategy
business
strategy

Internati-
onalize the
strategy

Globalize
the strategy
Country A
Country B Country C
 Framework of Global Strategy Forces

Position & resources of

business & parent
company Appropriate setting for
global strategy levers
• Major market participation
Benefits/
• Product standardization
coasts of
• Activity concentration
global
• Uniform marketing
strategy
• Integrated competitive
moves

Industry globalization
drivers
• Market factors
Organization’s
• Cost factors
ability to
• Environmental factors
implement a global
• Competitive factors
strategy
 Globalization Dimensions/ Global strategy Levers

Dimensions Setting for Pure Setting for Pure Global

Multidomestic Strategy Strategy

Market participation No particular pattern Significant share in major

product offering Fully customized in each markets
Location of value-added country Fully standardized
activities All activities in each worldwide
country Concentrated- one
activity in each (diff)
country
Marketing approach Local Uniform worldwide
Competitive moves Stand- alone by country Integrated across
countries
 Globalization Potential of Industry
versus Globalization Strategy
High
National
strategic Business C
disadvantage
Business D
Globalization of Strategy

Balanced global &

national strategic
advantage

Business B
Global
Business A strategic
disadvantage
Low

Low Globalization potential of industry High