Chapter Six

International
management

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
 export Plan

 An export plan is similar to a domestic marketing

plan with additional information on the
 markets to be developed
 marketing strategy for serving them
 tactics to make the strategy operational

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 Terms of Sale

 INCOTERMS: Universal trade terminology developed

by the International Chamber of Commerce

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 Incoterm 2000, 2010,2020 version

FCA

FOB

Ex- CIP CPT

work FAS CFR,CI
F
DAF

DES
DEQ DDU DDP

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 Incoterms 2010 :
EXW - Ex Works (named place):
FCA - Free Carrier (named place):
CPT - Carriage Paid To – Carriage Paid To (named place of
destination):
CIP - Carriage and Insurance Paid – Carriage and Insurance Paid
to (named place of destination):
DAT - Delivered At Terminal (named place of…..Terminal)
DAP - Delivered At Place (named place of…place of destination )
DDP - Delivered Duty Paid (named place of destination):

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 18-6

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 INCOTERM
Equivalent of Free on Board
 FAS
 Free alongside ship, port of call
 CIF
 Cost, insurance, freight, foreign port
 CFR
 cost and freight, foreign port
 DAF
 Delivered at frontier

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 Payment Procedures

 Payment terms offered by exporters to foreign

buyers
 Cash in advance
 When credit standing of the buyer unknown or
uncertain
 Open account
 When sale is made on open account
 Seller assumes payment risk
 Offered to reliable customers in
economically stable countries
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 Payment Procedures

 Consignment
 Goods shipped to buyer; payment made
when sold
 Payment risk assumed by seller
 Letter of credit (L/C)
 Document issued by buyer’s bank
 Promise to pay seller specified amount when
bank has received documents stipulated in
letter of credit

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 Payment Procedures

 Confirmed Letter of Credit (L/C)

 Correspondent bank in seller’s country agrees to
honor issuing bank’s L/C
 Irrevocable Letter of Credit (L/C)
 Once the seller has accepted L/C, buyer cannot
alter or cancel it without seller’s consent

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Letter of Credit Transaction

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Irrevocable LC at sight chart

6
Issuing bank paying bank

2
5
7 1
3
Buyer 4 Seller

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1
 Documents

 Air Waybill
 A bill of lading issued by an air carrier
 Pro Forma Invoice
 Exporter’s formal quotation: description of the
merchandise, price, delivery time, method of
shipment, ports of exit and entry, and terms of
sale

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 Export Payment Documents
 An export draft is an unconditional order drawn by the
seller that instructs buyer to pay the draft’s amount on
presentation (sight draft) or at an agreed future date
(time draft) and that must be paid before buyer
receives shipping documents

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Payment Risk/Cost Trade-Off

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 Official Procedures
for Importing and Exporting

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 Collection Documents
 Commercial invoice
 Origin of goods, export packing marks
 Clause stating goods will not be transshipped
 Consular invoice
 Purchased from the consul
 Prepared in local language
 Certificate of origin
 Issued by local Chamber of Commerce
 Inspection certificate
 Often required for grain, food, live animals
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 Export Shipments

 Containers
 Reduce theft and handling costs
 LASH (lighter aboard ship)
 Barges for shallow inland waterways
 RO-RO (roll on-roll off)
 Can drive onto vessel
 Air Freight
 Can arrive in one day

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 Marketing
Internationally

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
 Standardize, Adapt,
or Formulate Anew?
 Global standardization of the marketing mix
 Significant cost savings
 Longer production runs
 Standardized advertising, promotional materials,
and sales training
 Standardized corporate image
 Standardized pricing strategies
 Easier control and coordination
 Reduction of preparation time
 Often not possible

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 Product Strategies

 Product is central to marketing mix

 The total product includes the
 physical product
 brand name
 accessories
 after-sales service
 warranty
 instructions for use
 company image
 packaging

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 Types of Products

 Industrial Products
 Many can be sold unchanged worldwide
 If changes are required, they may be cosmetic
(language of instructions)
 In developing countries problems with
 overload of equipment
 maintenance
 Local legal requirements limit standardization

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 Types of Products
 Consumer Products
 Require greater modification to meet local
market requirements
 Some can be sold unchanged to certain market
segments
 Large automobiles, sporting equipment, and
perfumes
 Greater dissimilarity as you go down the
economic strata

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 Types of Products

 Services
 Marketing similar to that of industrial products
 Services easier to market globally compared to
consumer products
 Laws and customs may force changes

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 Promotional Strategies

 Promotion refers to any form of communication

between a firm and its publics
 Brings about a favorable buying action
 Achieves long-lasting confidence in the firm and
the product or service it provides

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 Promotional Strategies

 Distinct promotional strategies based on

combination of three alternatives
1. Marketing the same physical product
everywhere
 Same message

2. Adapting the physical product for foreign

markets
 Adapted message or

3. Designing a different physical product

 Different message

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 Six Common
Promotional Strategies
1. Same product-same message
 Avon, Maidenform
2. Same product-different message
 Honda’s campaign in America is different
than in Brazil
3. Product adaptation-same message
 In Japan, Lever Brothers puts Lux soap in
fancy boxes to encourage gift sales

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 Six Common
Promotional Strategies
4. Product adaptation-message adaptation
 In Latin America, Tang is sweetened and
promoted as mealtime drink
5. Different product-same message
 Customers can’t afford product in a market
 Companies produce distinct product
 Message similar
6. Different product for the same use-different message
 Welding torches rather than automatic welding
machines are sold in developing countries
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Global Brand Values

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 Channel Selection
 Direct or indirect marketing
 The first decision: use middlemen or not?
 Export sales may be done by local agents if
 management believes this is politically
expedient
 a country’s laws demand it
 Factors influencing channel selection
 Market
 Product
 Company
 Middlemen

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 Global Operations and
Supply Chain Management

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
 Supply Chain Management
 Supply chain management is the process of
coordinating and integrating the flow of
materials, information, finances, and
services within and among companies in the
value chain from suppliers to the ultimate
consumer

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 How Can Firms Lower Costs And
Improve Products?
 Firms can lower costs and improve products by
 improving existing operations
 opening new operations
 finding outside sources for inputs
 outsourcing
 Hiring others to perform some of the non-
core activities and decision-making in a
company’s value chain
 Offshoring
 Allocation manufacturing abroad

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Supply Chain Network: A Hypothetical
Example of an American Laptop
Computer Company

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 Outsourcing
 Outsourcing is an increasingly common option for
firms
 Outsourcing involves relocating some or all of a
business’s activities or processes outside of the
company
 Focus on core competencies
 Leverage skills of other companies
 Reduce costs
 Improve flexibility and speed of response
 Enhance quality

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 Outsourcing

 Firms can outsource in same or another country

 Offshoring: a foreign location for company
operations
 Choices increased by
 global access to vendors
 falling costs of interactions
 improved information technology and
communication

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 Logistics
 Logistics involves the movement of materials
 Must interface with sourcing, manufacturing,
design, engineering and marketing
 Packaging and transportation requirements can
greatly increase logistics costs
 Many companies outsource logistics

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 Standards for Global Operations
 Standards are documented agreements on technical
specifications or other precise criteria used
consistently as guidelines, rules, or definitions of the
characteristics of a product, process, or service
 ISO 9000 (International Organization for Standards)
most used in Europe for quality
 ISO 9001 most comprehensive standard

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 Human Resource
Management

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
 The Global Mindset

 Expatriates are people who live outside their country

of citizenship
 Global mind-set
 Combines an openness to and an awareness of
diversity across markets and cultures with a
propensity and ability to synthesize across this
diversity

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 International HRM Approaches
 Ethnocentric
 Hire and promote employees on the basis of the
parent company’s country frame of reference
 Polycentric
 Hire and promote employees on the basis of the
local context of the subsidiary frame of
reference

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 International HRM Approaches
 Regiocentric
 Hire and promote employees on the basis of the
specific regional context of the subsidiary frame of
reference
 Geocentric
 Hire and promote employees on the basis of ability
and experience without considering race,
citizenship, or narrow frame of reference

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 Recruitment, Selection
and Training
 Parent Country National (PCN) or Home Country
National
 Broadens their experience in IB
 Prepares top management team managers
 Protect proprietary knowhow
 Transfer knowhow to subsidiary
 Host Country National (HCN)
 Local expertise
 Local connections

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 Recruitment, Selection
and Training
 Third Country National (TCN)
 May be less expensive than employees from the
home country
 May have similar culture to that of the host country
 May have worked for another unit of the IC and be
familiar with policies, procedures and people
 Common approach in developing countries
 May not be welcome by host country
 More common as more companies take a
geocentric view

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 Expatriates and Family

 Nine of ten expatriate failures are family related

 Unhappy spouses are a major reason for early return
 An expatriate failure translates into a loss of a “million-
dollar corporate-training investment” in the executive
 Two-career families are a challenge for ICs

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 Culture Shock Phases

- There are five phases of culture shock

 Honeymoon
 Distress
 Acceptance
 Integration

- Reverse culture shock: Shock with original

culture.

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 Repatriation
 Reverse culture shock
 Returning expatriate’s skills and knowledge are
valuable but may be unappreciated
 Positions of responsibility similar to that of
expatriate position may not be available home
 Family adjustment at home can be problematic

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 Expatriate Services
 Health care programs exist to assist companies and
expatriates with
 claims administration
 language
 translations
 currency conversions
 service standardization
 www.ExpatExpert.com
 www.branchor.com

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 Expatriate Services
 Other expatriate services include
 banking services
 training
 culture and language
 house hunting, utilities hook-up, grocery and
hardware shopping
 long-distance care for relatives
 schools
 clubs, organizations, and memberships

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 Cost of Living and
Quality of Living Rankings
Living City Country Living City Country
Cost Quality
1 Moscow Russia 1 Zurich Switzerland
2 London United Kingdom 2 Vienna Austria
3 Seoul South Korea 2 Geneva Switzerland
4 Tokyo Japan 4 Vancouver Canada
5 Hong Kong Hong Kong 5 Auckland New Zealand
6 Copenhag en Denmark 6 Dusseldorf Germany
7 Geneva Switzerland 7 Munich Germany
8 Osaka Japan 7 Frankfurt Germany
9 Zurich Switzerland 9 Bern Switzerland
10 Oslo Norway 10 Sydney Australia
21 Sydney Australia 21 Perth Australia
22 Helsinki Finland 22 Montreal Canada
23 Stockholm Sweden 23 Nurnberg Germany
24 Douala Cameroon 24 Oslo Norway
25 Amsterdam Netherlands 25 Dublin Ireland
26 Madrid Spain 25 Calgary Canada
26 Shangha i China 27 Hamburg Germany
28 Kiev Ukraine 28 Honolulu United States
29 Athens Greece 29 San Franc isco United States
30 Almaty Kazakhstan 29 Helsinki Finland
29 Adelaide Australia
Note: Cost of living index includes cost of housing. Base City, New York City, USA = 100. Cost of Living
index is for 2007. Quality of Living index is for 2008.
Source: Mercer Human Resource Consulting, 2007 Cost-of-Living Survey,
http://www.mercer.com/costofliving#top50 (July 10, 2008); Mercer Human Resource Consulting, 2008
Quality of Living Survey, http://www.mercer.com/referencecontent.htm?idContent=1307990#Top50_qol (July 10, 2008). 18-50

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 International Accounting
and Financial Management

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
 International Accounting
 International accounting is important for
 managers for use in their decision making
 external constituencies’ decision making
 Investors
 Governments
 Lenders
 Suppliers
 governments as basis to levy taxes
 What constitutes useful data varies from country to
country

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 Convergence of
Accounting Standards
 Two groups working toward a harmonized set of
international accounting standards are the
 Financial Accounting Standards Board (FASB)
 U.S. Generally Accepted Accounting Principles
(U.S.GAAP)
 International Accounting Standards Board (IASB)
 International Financial Reporting Standards
(IFRS)

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 Cash Flow Management
Multinational Netting
 Multilateral netting occurs when subsidiaries transfer net
intracompany cash flows through a centralized clearing center

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 Cash Flow Management

 Leading and Lagging

 Timing payments early (lead) or late (lag),
depending on anticipated currency movements,
so these movements have the most favorable
impact

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 Foreign Exchange
Risk Management
 Transaction exposure refers to a change in the value
of a financial position created by foreign currency
changes between the establishment and settlement of
a contract
 Translation exposure refers to the potential change in
value of a company’s financial position due to
exposure created during the financial consolidation
process
 Economic exposure refers to the potential for the
value of future cash flows to be affected by
unanticipated exchange rate movements
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 Transaction Exposure

 Swap contract
 Spot sale or purchase of an asset against a future
purchase or sale of an equal amount in order to
hedge financial position

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 Transaction Exposure
Hedging

 Firms use hedging to reduce or eliminates financial

risk
 A forward market hedge refers to foreign currency
contract sold or bought forward to protect against
fluctuation
 A currency option hedge is the option to buy or sell
a specific amount of foreign currency at a specific
time
 A money market hedge involves borrowing and
lending in domestic and foreign money markets
simultaneously

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 Translation Exposure

 Translation exposure refers to the potential change in

the value of the company’s financial position due to
exposure created during the consolidation process
 Firms need to identify what currency exchange rate to
use for translation and consolidation
 Firms can use the current rate method or the temporal
rate method to convert currencies

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 Translation Exposure

 Spot and forward market swaps

 Use spot and forward markets to hedge foreign
currency exposure
 Parallel Loans
 Matched loans across currencies made to cover risk
 Bank Swap
 Swap made between banks to acquire temporary
foreign currencies

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 Translation Exposure
 Currency Swap
 Exchange of debt service of loan or bond in one
currency for debt service of loan or bond in
another currency
 Interest Rate Swap
 Exchange of interest rate flows to manage
interest rate exposure

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 Taxation and Transfer Pricing
 Income tax
 Direct tax levied on earnings
 Value-added tax (VAT)
 Indirect tax collected from parties as they add
value to product
 Withholding tax
 Indirect tax usually on passive income

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