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260 Cards in this Set
- Front
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globalization
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shift towards more integrated and interdependent world economy
world is moving away from self-contained economies |
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globalization of markets
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merging of historically distinct markets into one huge global marketplace
falling trade barriers make it easier to sell internationally tastes and preferences are converging firms can create global markets by offering same products worldwide |
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globalization of production
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sourcing of goods and services from locations around the world to take advantage of cost differences and differences in quality of factors of production
companies compete by lowering cost structure and increasing quality |
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drivers of globalization
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falling trade barriers
tech. change |
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international trade
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when a firm exports goods and services to consumers in another country
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declining trade and investment barriers
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firms view the world instead of one country as their mkt.
firms can base production at optimal locations |
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role of tech. change in globalization
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important advances in microprocessors, internet, and transportation
lower transportation costs and info. processing costs |
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managing in the global marketplace
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different b/c:
countries are different wider range of and more complex problems firms must work around various govts. converting currencies |
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political economy
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stress the political, economic, and legal systems of a country are interdependent; they interact and influence each other and effect economic well-being.
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market economy
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all production activities are privately owned and production is determined by supply and demand
role of govt. is to encourage free and fair competition |
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command economy
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govt. plans the goods, as well as the quantity produced and the price that goods are sold at
all business are state-owned and resources are allocated for the good of society usually stagnant b/c of little desire to control costs and efficiencies |
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mixed economy
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certain sectors are left to private ownership and some are owned publicly
govt. usually owns firms that are considered important to national security |
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culture
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system of values and norms that are shared by a group and when taken together constitute a design for living
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values
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abstract ideas about what a group believes to be good, right, and desirable
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norms
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social rules and guidelines that show how people should act in certain situations
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society
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group of people who share a common set of values and norms
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culture, society, and the nation state
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no strict relationship b/t society and nation-states
nation states are political creations that can contain more than one culture a culture can also contain several nations |
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determinants of culture
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many factors including political and economic philosohpies, education, religion, language, and social structure
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social structure
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society's basic social structure
two dimensions: 1. individual vs. group 2. social stratas or classes |
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group
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association of 2+ people who have a shared sense of identity and interact in structured ways on the common grounds of eachother's behavior
societies differ on whether the group is considered the main building block of org. |
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individuals vs. groups
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in western societies, more focus on the individual which means less loyalty but more achievement -- dynamic economy
in asian cultures, more focus on the group; can also suppress creativity |
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social strata
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hierarchial basis on social categories
can be defined on basis of family, occupation, and income |
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social mobility
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refers to the extent that people can move from class to class
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caste system
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closed from of strata in which social position is determined by family a person was born into
often tied to occupation most rigid form of class system |
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class system
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less rigid strata
mobility is possible people can work their way up |
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class conciousness
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people perceive themselves in terms of their class and this shapes their relationship with people in other classes
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ethics
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accepted principals of right and wrong that govern conduct
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business ethics
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accepted principals of right and wrong that governs conduct of business people
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ethical strategy
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course of action that does not violate accepted principals
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employment practice ethics
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if work conditions in host nation are inferior to come nation, company should apply home or host country standards or something in between
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human rights ethics
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in developed countries rights are taken for granted but in undeveloped countries these may not exist
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environmental pollution ethics
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issues arise when laws in host nation are inferior to those of home nation
tradgedy of commons |
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corruption
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some economists believe that side-payments, black mkt., and smuggling, can speed up business approval
can reduce returns on business invtestments and stop economic growth |
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US foreign corrupt practices act
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outlawed bribes
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convention on combatting bribery of foreign public officials in international business transactions
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adopted by OECD; obliges him member states to make bribery of foreign officials a criminal offense
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social responsibility
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companies should take social consequences of economic decisions into account when making decisions that they should choose the ones with the best outcome
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noblesse oblige
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honorable and benevolent behavior that is the responsibility of successful companies
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ethical delimas
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none of the alternatives seem ethically acceptable
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free trade
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govt. does influence what it's people can buy through quotas or duties
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merchantalism
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belief that it is better for a country to have a surplus of trade -- to export more than they import
advocates govt. intervention to achieve this zero sum game: gain from one country results in loss from another |
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absolute advantage
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when one country is most efficient at at producing something
Adam Smith countries should produce what they specialize and then trade it |
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comparitive advantage
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David Ricardo
countries should specialize in production of of goods they produce more efficiently and buy what they produce less efficiently, even if it means buying something they could produce more efficiently than the place they are buying it from |
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hecksher-ohlin theory
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comparative advantage arises from differences in factor endowments
countries export goods that are created from factors that are abundant in their country |
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leontief paradox
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US should export capital-intense goods since they have some many resources, but the opposite is true
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product life-cycle theory
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raymond vernon
as products mature, location of sales and production change the US has an incentive to develop products because of its size and wealth; product would be sold and produced there initially and then exported; it would become popular in other countries and eventually be produced there product becomes more standardized, making cost competition; producers in countries where it can be produced the most cheaply might start producing and exporting to the US theory is becoming less valid due to globalization |
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new trade theory
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important for companies to gain economies of scale
this can increase variety of goods and decrease cost global mkt. may only be able to handle a small amt. of enterprises trade allows for specialization of production, ecnomies of scale, and greater variety of products at lower prices may be result of first mover advantages govts. should help nurture and protect firms where econmies of scale are important |
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national competitive advantage -- porter's diamond
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porter tried to explain who countries have success in certain industries; 4 attributes:
- factor endowments: nation's position concerning factors of production - demand conditions: nature of home demand for product - relating and supporting industries: presence of absence of supplier industries or related industries; sucessful industies tend to be grouped into clusters - firm strategy structure and rivalry: conditions governing how companies are created and organized govt. can affect demand through product standards, influence rivalry through laws and antitrust acts, impact availabilty of workers and infrastructure |
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specific tarriffs
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fixed charge levied on a fixed unit
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ad valorem tariffs
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levied as a proportion of the value of the good
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tarriffs
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increase govt. revenue, provide protection to domestic producers, and force comsumers to pay more for certain imports
pro-producer, anticonsumer -- reduce the efficiency of society |
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subsidies
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govt. payments to domestic producers
consumers usually absorb the cost help domestic producers in two ways: - help them compete against low-cost foreign imports - help them gain export mkts. |
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import quotas
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directly restrict qty. of good that can imported
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tariff rate quota
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hybrid of quota and tariff
lower tariff is applied to goods within quota |
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voluntary export restraints
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quotas on trade put into place by the exporter govt.
often done out of request of importing govt. |
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quota rent
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extra profit made when supply is artificially limited by import quota
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local content requirement
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demand that some qty. of a good be produced domestically
benefits domestic producers, but consumers face higher prices |
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administrative policies
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rules designed to make it hard for imports to enter a country
hurts consumers by denying them access to possibly superior products |
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antidumping policies
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dumping: selling goods in a foreign mkt. below their costs of production or below fair mkt. value; allows firms to unload unsold goods; firms can drive domestic producers our of business and then increase prices
laws are designed to punish firms who engage in this |
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uruguay round at WTO
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at GATT, began in 1986
talks focused on: services and intellectual property, services, intellectual property, and agriculture, help make WTO more effective at policing WTO encompassed GATT along with sister organizations general agreemet on trade and services (GATS) and argument on trade-related aspects of intellectual property rights (TRIPS) |
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future of WTO: unresolved issues and doha round
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current agenda: rise of antidumping policies, protectionism in agriculture, lack of protection of property rights, continued high tarrifs on nonagricultural goods and services
new round of talks at doha in 2001 - agenda: cutting tarrifs on industrial goods and services, reducing barriers to cross-barrier investments, limiting use of anti-dumping laws |
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foreign direct investment
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occurs when firm invests directly in new facilities to produce and/or market in a foreign country
once a company undertakes one, it becomes a multinational |
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greenfield investment
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establishing a wholly new operation in a foreign country
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acquistion
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merging with an existing company
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host-country benefits of FDI
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1. resource transfer effects: FDI can supply capital, technology, etc. that may not be available otherwise
2. employment effects: creates new jobs 3. balance of payment effects: record of a country's payments to and receipts from other countries; can help a country acheive current account surplus 4. effects on competition and economic growth: FDI increases competition, driving down prices and increasing welfare 4. |
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host-country costs of FDI
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1. adverse effects on competition with host country companies
2. adverse effects on balance of payments: caused when FDI imports inputs from abraod 3. percieved loss of natl. soveirgnty and autonomy 3. |
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home country benefits
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- effect on balance of payments: inward flow of money to home country
- employment effects that arise from outward FDI - gains from learning valuable skills foreign mkts. |
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host country costs
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- initial cash outflow to start up FDI
- if purpose of FDI is to serve home country from a low cost labor location - if FDI is a substitute from direct exports - ca hurt employment if FDI is a substitute for domestic production |
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international trade theory of FDI
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home country concerns negative effects of offshore production may not be valid
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regional economic integration
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agreements between countries in a region to reduce tariff and non tariff barriers to the free flow of goods and services and factors of production
designed to promote free trade but world may actually be moving towards having trade blocs compete against each other |
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levels of economic intergration
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least to most integrated
free trade area customs union common market economic union political union |
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free trade area
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eliminates barriers to trade among member countries, but each member determines their own practices for trading with countries outside of the block
european free trade association NAFTA |
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customs union
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elimination of trade barriers and adoption of common ext. trade policy
andean pact |
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common market
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no barriers to trade with members, same ext. trade policy, and free flow of factors of production
MERCOSUR |
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economic union
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free flow of factors of production, same ext. trade policy, common currency, harmonized tax rates, common monetary and fiscal policy
EU |
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political union
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central political apparatus that coordinates economic, social, and foreign policy of member states
US is an imperfect example |
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regional economic integration in europe
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EU has 27 members
european free trade area has 4 members EU is supposedly the world's next political superpower |
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establishment of the euro
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maastricht treaty
2nd largest currency sector in the world only to the US dollar easy to have one currency for trading, helps european businesses learn to lower costs, should help boost development, increases range of investment oppurtunities volatile trading history with the US dollar |
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enlargement of the european union
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many countries have applied
bulgaria and romania joined making it 27 the countries that have applied would not be able to participate until 2007 |
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foreign exchange mkt.
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converting currency from one country into currrency of another
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functions of foreign exchange mkt.
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used to convert currencies
used to hedge against foreign exchange risk |
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currency conversion
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companies use foreign exchange mkt. when they receive payments in foreign currencies, when they must pay a foreign company in their currency, when they have spare cash they wish to invest, when they are involved in currency speculation
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foreign exchange risk
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possibility that unpredicted changes in future exchange rates will have adverse consequences
a firm protects itself by hedging |
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forward exchange
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when two parties agree to execute a deal at some point in the future
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currency swap
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simultaneous purchase and sale of a given amt. of foreign exchange for two different dates
transacted between international businesses and banks and between govts. done when it is desirable to move on currency into another with limited foreign exchange risk |
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transaction exposure
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extent to which income from individual transactions is influenced by fluctuations in foreign exchange values
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translation exposure
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impact of currency exchange rates changes on reported financial statements of the company
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economic exposure
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rate at which future economic earning power is affected by changes in economy
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reducing translation and transaction exposure
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to minimize, companies can buy forward, use swaps, leading and lagging payables and receivables
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lead strategy
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attempting to collect receiveables early when currrency is about to decpreciate or paying before currency appreciates
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lag strategy
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delaying collection if currency is supposed to appreciate or vice versa
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reducing economic exposure
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distibute assets to protect firm
ensure assets are not too concentrated in unstable countries |
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international monetary system
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instituational arrangements that countries adopt to govern exchange rates
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floating exchange rates
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when a country allows foreign exchange market to determine relative value of currency
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pegged exchange rate
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country fixes its currency to a reference currency
popular among smaller nations moderates inflationary pressures |
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dirty float
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when a country tries to hold value of currency within some range of reference currency
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fixed exchange rate system
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countries fix their exchange rates against eachother
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european monetary system
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fixed exchange rate in europe that occurred before the euro
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case for floating exchange rates
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offers monetary autonomy and automatic trade balance adjustments
removing obligation to keep exchange rate parity restore govt. autonomy limited ability to expand or contract monetary supply under fixed system under bretton woods, if there was a permanent deficit the IMF had to agree to devalue currency |
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case for fixed exchange rates
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supporters of fixed exchange rate focus on monetary discipline, uncertainty, and lack of trade balance and exchange rates
helps protect against inflation speculation with floating E/R can cause incertainty prob. wont work, as proved by bretton woods |
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currency board
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countries commit to changing their currency on demand into another at a fixed rate
for this to be credible currency board holds reserves equal to the fixed exchange rate of at least 100% of currency issued |
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benefits of global capital market
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global markets
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functions of global capital mkt.
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investors: corporations with surplus cash, people, and nonfinancial institutions
borrowers: people, companies, and govts. mkt. makers: financial service companies that connect borrowers and investors - commercial banks - indirect - investment banks - direct |
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attractions of global capital mkt.
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additional supply of funds that mkts. supply
lower cost of capital b/c the pool is larger helps people diversify portfolios less risky b/c movement of mkt. across mkts. is not correlated |
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growth of global capital
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two factors:
1. growth of info. tech.: 24 hr./day training 2. deregulation of govts.: many countries have dismantled capital controls making it easier to invest |
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eurocurrency mkts.
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any currency banked outside of its country of origin
2/3 are eurodollars; euroyen and europounds, and euroeuro are also really popular. |
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growth of eurocurrency mkt.
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began in 1950s when eastern countries were afraid that eastern block countries were afraid that the US would seize their holdings -- so they deposited their dollars in euruope
london is center of eurocurrency mkt. grew again when US discouraged banks from lending to nonUS residents so people turned to euromkt. to get dollars during the OPEC price increased, they kept their money in london to keep it from being seized |
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attractions of eurocurrency mkt.
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not regulated by govt.
banks can offer higher interest rates and can charge lower interest rates to borrowers spread between depositing and lending rates is higher which increases competition |
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drawbacks of the eurocurrency mkt.
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eurocurrency mkt. is unregulated -- higher risk of bank failure
companies are exposed more to foreign exchange risk |
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global bond mkt.
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grew rapidly during the 1980s and 90s
most common type is fixed rate bond two types: 1. foreign bonds: sold outside of the borrower's country in the currency of the country of which they are issued 2. eurobonds: underwritten as syndicate of bank and placed in country's other than the one in which the currency was denominated |
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attractions of global bond mkt.
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lacks regulatory interference -- cost of issuing is lower
less stringent disclosure requirements more favorable from a tax perspective |
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strategy
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actions professors take to attain goals of the firm
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profitability
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rate of return firm makes on invested capital
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profit growth
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percent of increase of profits over time
expanding internationally can help increase this |
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value creation
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difference between V and C
V: price firm can charge C: cost of making product the higher the value customers place on products, the higher they can charge |
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differentiation strategy
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adding value to product so that customers are willing to pay more
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strategic positioning
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pick a position on the efficiency frontier
configure internal operations to support that position have the right organization structure to execute strategy |
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operations
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value chain composed of a series of distinct value creation activities, including production, marketing, materials management, R&D, HR, infosystems, and firm inrastructure
organized into primary activites: R&D, production, marketing, sales, customer service support activities: HR, logistics, info. tech. |
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global expansion, profitability, and profit growth
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expand by selling in international mkts.
realize location economies by dispersing activities to places where they can be done most efficiently realize greater cost economies from experience effects by serving economy from a central location reducing the costs of value creation earn a greater return by leveraging and skills developed in foreign operations and transferring then to other entities |
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leveraging core competencies
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success of firms that expand internationally is depends on their goods and services and their core competencies: skills within the firm that others cannot imitate
they enable firms to reduce cost and create value in a way that premium pricing is possible |
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location economies
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when firms base value creation activities where economic, political, and cultural activities are conducive to performance at that place
helps firms lower the costs of value creation and achieve low cost production, and differentiate their product firms create a global web where value is maximized and cost in minimized downsides: transportation costs, trade barriers, and political risks |
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experience curve
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systematic reductions in production costs that have been observed to occur over the life of a product
by moving down the experience curve, firms reduce the cost of creating value firms can move down the experience curve by using a single plant to serve global mkts. |
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learning effects
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cost savings of learning by doing
as labor productivity increases, firms find the most efficient way of doing tasks, and mgt. learns how to manage more effectively |
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economies of scale
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cost reductions that come from producing a large amt. of the product
sources: - spreading FC over a large volume - using production facilities more effectively - increasing bargaining power with suppliers |
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types of competitive pressures
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pressures for cost reductions and pressure for local responsiveness
conflict b/c pressures for cost reduction require firms to reduce unit cost, but being locally responsive can increase cost |
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pressures for cost reductions
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greatest in industries where product serves universal needs and cost is the main competitive weapon
or major competitors are based at low cost locations or there are low switching costs for consumers or there is persistent access capacity |
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pressures for local responsiveness
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arise from differences in consumer tastes and preferences
or differences in traditional practices in infrastructure or differences in distribution channels or differences in host govt. demands |
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global standardization strategy
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increasing profitability and profit growth by reaping cost reduction that come from economies of scale, learning effects, and location economies
goal: to produce low cost strategy on a global scale makes sense there there is strong need for cost reductions by little need to localization |
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localization strategy
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increasing profitability by customizing goods that meet customer tastes and preferences in different mkts.
localization strategy makes sense when there is strong need for localization but little cost pressure |
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transnational strategy
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trying achieve both low costs and differentiation for multidirectional flow of skills between subsidiaries
when cost pressures and pressures for local responsiveness are intense |
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international strategy
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taking products first produced in the domestic mkt. and then selling them locally with minimal customization
when there are low cost pressures and low pressures for local responsiveness |
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evolution of strategy
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international strategy is not viable in the long term
firms need to shift to global standardization of transnational to survive localization firms may eventually have to switch to transnational if competition increases |
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organizational architecture
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firms entire organization, including their structure, control systems, and incentives, processes, org. culture, and people
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organizational structure
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formal division of company into subunits
the location of decision-making structures -- centralized vs. decentralized |
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control systems
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metrics used to measure performance in subunits and judge how members are performing
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incentives
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ways to reward appropriate mgt. behavior
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processes
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manner in which decisions are made and work is performed
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org. culture
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norms and value systems shared among members of the company
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people
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employees
also strategies used to recruit, compensate, and retain employees |
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org. structure
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3 dimensions:
vertical differentiation horizational differentiation integrating mechanisms |
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vertical differentiation
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where decision-making power is concentrated
centralized: facilitiates coordination, makes sure decisions go along with goals of the company, avoiding duplication of work, giving top mgt. chance to decide how work is done decentralized: relieves decision-making burden, motivates people, more flexible, can result in better decisions, can increase control best to centralize some decisions and decentralize others |
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horizontal differentiation
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how firm divides itself into subunits
usually based on function, type of business, geographic area most firms begin with no formal structure but as firms grow, they split into functions reflecting value creation activities decisions are usually centralized if firm diversifies products, further differentiation may be necessary international strategy, product differntiation, global matrix are types |
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international division
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when firms expand internationally they usually have an international division
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worldwide product divisional structure
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when firms expand from international division
adopted by domestic firms that have domestic product division allows for worldwide coordination helps realize location and experience curve economies facilitates transfer of core competencies does not allow for local responsivesness |
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worldwide area structure
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adopted by undiversified firms whose domestic structures are based on functions
favored by firms with low diversification divides world into autonomous geographic regions decentralized authority allows localization and is consistent with localization strategy |
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global matrix structure
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attempt to minimize limitation of w/w area structure and w/w product divisional structure
allows for differentiation among products and geographic area dual decision making based on product and geographic can be beauractic and slow can result between conflict between areas and product divisions |
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decisions on entering foreign mkts.
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which mkts. to enter
when to enter and on what scale which entry modes to use |
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entry modes
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exporting
licensing joint ventures wholly owned subdsidiaries acquistions |
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factors that effect which mkts. to enter
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transportations costs, trade barriers, political risks, economic risks, costs, firm strategy
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wholly owned subsidiary
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firm owns 100% of stock
firms do this by setting up a new org. or acquiring an established one good: reduce risk of losing control of core competencies, give tight control, maybe required to realize location and experience curve economies bad: firm bears full cost and risk of setting up company |
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exporting
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large and small firms do it
on the rise thanks to less trade barriers due to the WTO and regional economic agreements exporting firms must: identify mkt. oppurtunities, deal with foreign exchange risk, deal with import and export financing, understand challenges of dong business in foreign mkts |
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pros of exporting
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helps increase mkt. size
large firms usually seek export opportunities |
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issues of exporting
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many small firms wait for the world to come to them and many firms fail to realize the potential of the mkt.
smalller firms are usually intimidated by it |
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pitfalls of exporting
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poor mkt. analysis and understanding of competition
lack of customization for other mkts. poor distribution poor campaigns underestimization of differences in foreign mkts. and the amt. of paperwork needed problems with financing |
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improving export performance
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countries sometimes directly help
export mgt. companies can also help |
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internal comparison of export oppurtunities
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big impediment is unawareness of the opportunies that are out there
firms need to collect info. germany and japan are both goods about this sogo sasha: large japanese trading houses american firms have far less resources |
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exporting information sources
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US dept of commerce has the most info.
int. trade administration and the foreign commercial serves agency can provide "best prospects" list dept. of commerce also sponsors trade events to help people see the opportunities that are out there small business administation provides a lot of assistance local and state govts. can also provide support |
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export strategy
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to reduce risks:
firms can hire EMC to help identify opportunities and navigate through the paperwork focusing on one or a few mkts. at first entering initially on a small scale recognizing time and commitment involved developing good relations with distributors and customers hiring locals to establish a presence considering local production |
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letter of credit
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issued by bank at request of importer
states bank of importer will pay spec. amt. of money to exporter on presentation of goods both parties are likely to trust a reputable bank |
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draft
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aka bill of exchange
order written by exporter instructing importer to pay spec. amt. of money at a spec. time - sight draft: presentation requires payment - time draft: allows delay in time to pay |
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bill of lading
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issued to exporter by common carrier transporting the merchandise
3 purposes: receipt, contract, document of title |
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countertrade
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firms turn to this when means of payment are difficult, costly, or nonexistent
barter-like arragements that facilitate trade when money is not able to be used |
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incidence of countertrade
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emerged in 1960s when the soviet union and communist states in europe had unconvertible currencies
grew in the 1980s as developing nations had little capital to purchase imports also a increase after the asian financial crisis on 1997 |
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barter
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direct exchange of goods b/t parties w/ no cash involved in the transaction
most restrictive type of countertrade usually on one time only basis with an untrustworthy party |
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counterpurchase
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recipricol buying agreement
occurs when firm agrees to purchase a certain amt. of materials back from the country after the sale is made |
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offset
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same as counterpurchase in the way that one party agrees to purchase goods from a another based on the percentage of the proceeds
difference: party can fulfill obligation with any firm in the country to which the sale was made |
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buyback
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firm builds plant in a country and agree to take a certain percentage of output as payment of the contract
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switch trading
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use special trading house as third party in the countertrade agreement
when a firm does a counterpurchase or offset, they end up with counterpurchase credits which can be used to purchase goods from the country occurs when trading house buys firms trading credits and sells them to a firm that can better use them |
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five questions of global production
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where should production activities be located?
what should be the long-term strategic goal of foreign production sites? should the firm own foreign production activities or outsource them? how should a globally dispersed supply chain be manged and that is the role of internet info. tech. in the mgt. of global logistics? should the firm manage global logisitcs itself or outsource this? |
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productiona
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activities involved in creating the product
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logistics
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procurement and physical transmission of material through the supply chain, from suppliers to customers
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how firms can lower costs and improve quality
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lower costs: disperse production to where activities can be performed efficently, manage global supply chain efficently to match supply and demand
improve quality: get rid defective products from the supply chain |
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six sigma
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program that aims to reduce defects, boost productivity, eliminate waste, and cut costs throughout company
production must be 99.99966% accurate almost impossible modern successor to TQM |
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total quality mgt.
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mgt. should embrace the fact that mistakes, defects, and poor quality should be eliminated
more time should be allowed for supervisors to work with employees requires comittment of everyone in company |
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ISO 9000
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EU requires the quality of a firm's manufacturing processes and products be certified under the ISO 9000 before they can access the firm's mkt.
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two main production and logistics objectives:
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1. production and logistics must be able to meet demands for local responsiveness
2. production and logistics must be able to quickly respond to shifts in customer demand |
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three factors of where to produce
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technological factors
country facts product factors |
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country factors
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firms should find locations conducive to their performance
issues that affect location decisions: availability of skilled labor, trade barriers, expectations of exchange rate changes, transportation costs, FDI regulations |
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techonological factors
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type of technology firm uses in manufacturing can affect location decisions
three characteristics: - fixed costs: if costs are high, may make sense to use single plant, if costs are low may be good to have them at different locations; producing at multi. locations allows for more local responsiveness - min. efficient scale: level of output at which most plant-level scale economies are exhausted; high scale = less locations; low scale = more locations - flexibility of technology: lean production; lower set-up times, greater utilization of more machines for better scheduling, better quality control at all stages of manufacturing process |
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mass customization
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firm can afford to customize products at a range to meet demands of local mkts. but still control costs
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flexible machine cells
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allows firms to increase efficiency by improving capacity and reducing WIP
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when to concentrate production at a few locations
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fixed costs are high
min. efficient scale of production is high flex. manufacturing opps. are available |
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when to produce at multiple locations
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fixed costs and min. efficicent scale are low
flex. manufacturing opps. are not available |
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product factors:
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value to weight ratio: if value to weight ratio is higher it makes sense to produce at one place and vice cersa
whether product serves a universal needs: need for local responsiveness falls increasing attractiveness of producing from one area |
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location production facilitiaties
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1. concentrating them in optimal location and serving the world mkt. from there
2. decentralizing them in various regional or national locations that are close to major mkts. |
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make-or-buy decisions
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choosing which decisions to do in house and which to outsource
more complex for international business |
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advantages of make
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vertical integration (making component parts in-house)
lower costs: if firm is most efficient at producing facilitates investments in highly specialized assets = asset whose value is contingent on a relationship persisting: in house makes sense when big investments are required protect propriety technology facilitate scheduling of processes: |
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advantages of buy
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greater flexibility: firm can change suppliers if circumstances dictate; important esp. with trade barriers and exchange rate issues
helps drive down firm's cost structure: firms avoid issues involved with coordinating subunits and difficulties helps firm capture the orders of international customers: outsourcing can help firms get more business from suppliers' countries |
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logistics
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activities necessary to get materials to a manufacturing facility, through manufacturing processes, and out through the distribution system to the end user
objectives: manage global supply chain at lowest cost for best meeting customer's needs; help firms establish competitive advantage through superior customer service |
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just-in-time inventory
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economizing inventory holding costs by having materials arrive at plant just in time to enter production processes, not before
generate cost savings b/c it lowers HCs can help boost quality by getting defects out of production process problem: leaves no buffer in case supply or demand shifts |
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marketing mix
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choices that the firm offers to its targeted mkt.
composed of: - product attributes - dist. strategy - communication strategy - pricing strategy |
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globalization of mkt. and brand
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levitt: argued world mkts. are becoming similar and localization is less necessary
however mkts. are still different based on culture and economic differences trade barriers and product standards can also make it impossible to sell standardized products |
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distribution strategy
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how company chooses to deliver products to the consumer
critical element of mkting mix depends on firm's mkt. entry strategy firms that manufacture locally can sell to the consumer, retailer, or wholesaler firms that export have the same options plus selling to an import agent |
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differences in distribution systems
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retail concentration
channel length channel exclusivity channel quality |
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retail concentration
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concentrated system: few retailers supply most of the mkt.
fragmented: many retailers -- no one has a major mkt. share developed countries usually have more concentration while developing countries are more fragmented |
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channel length
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number of intermediaries b/t the producer and consumer
when producer sells directly to the consumer, the channel is short countries with fragmented retail systems tend to have longer channels while concentrated retail systems have shorter ones internet is helping to shorten channel length fragmented = more expensive |
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channel exclusivity
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difficult for outsiders to access
Japanese is a very exclusive one people are now more willing to violate exclusivity |
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channel quality
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expertise, competencies, and skills of established retailers in a nation and their ability to sell and support the products of international businesses
better quality in developed countries firms may need to devote resources to including channel quality |
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choosing a distribution strategy
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determines which channel firm will use to reach customers
depends on relative costs and benefits of alternatives there is usually a link to profit margin and length since each step usually adds a price markup -- can lead to lower profit margins when price is important shorter channels are better long channel can be good in fragmented system since it economizes selling costs and can offer access to more exclusive channels firm may need to consider improving channel if necessary |
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communication strategy
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how firm communicates depends on its choice of channel
channels include direct selling, sales promotion, direct marketing, advertising |
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barriers to communication
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can be affected by: cultural barriers, source and country of origin effects, noise levels
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cultural barriers to communication
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message that means one thing in one country may mean something else in another
firms need to use cross-cultural literacy and local people when figuring out ad campaigns |
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source effects
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receiver evaluates message based on status or image of the sender
firms can counter this by deemphasizing foreign origins occurs when country has bias against foreign firms not all bad |
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country of origin effects
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extent to which place of manufacturing influences product evaluation
not all bad |
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noise levels
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amt. of other messages competing for the consumers' attention
ex: US has high noise levels |
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push strategy
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emphasizes personal selling
better for industrial products or complex new products or when channels are short or when print or media advertising is not readily available costly, requires large sales force |
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pull strategy
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emphasizes mass media advertising
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push vs. pull strategy
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choice depends on:
- product type and consumer sophistication: firms with consumer goods usually use pull since they are catering to a large mkt.. expceptions for undeveloped countries w/ low literacy; firms with industrial usually prefer push strategy so they can educate clients channel length: pull is better for longer dist. channels media availability: pull relies on access to media; push is better for countries with limited access some combination is also possible |
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pricing strategy
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3 things to consider:
case for price discrimination strategic pricing regulations that affect pricing decisions |
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price discrimination
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consumers in difference countries are charged different prices
firms hope it will boost profits for it to work: firm must be able to keep mkts. separate; different elasticities of demand must exist for each country |
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price elasticity of demand
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measure of the responsiveness of demand for a product to change in price
elastic: small change in price causes large change in demand inelastic: small change in price means small change in demand income level and competition are two important determinants for each country elasticities are usually greater for countries with lower incomes and more competition |
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strategic pricing
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3 aspects:
predatory pricing multipoint pricing experience curve pricing |
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predatory pricing
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using price to drive other competitors out of the mkt.
after all competitors have left, firm raises prices |
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multi-point pricing
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firm's pricing strategy in one mkt. may have an impact of on competitor's pricing strategy in another mkt.
aggressive pricing is one way people do this, by elliciting response from rivals in another mkt. mgt. must monitor pricing decision around the world |
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experience curve pricing
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firms further along experience curve have a cost advantage
involves charging low prices wordwide even it this means losses at first. helps to build local sales volume fast firms think this will help them move down the experience curve which leads them to eventually make big profits and have a cost advantage |
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regulatory influences on prices
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use of PD or strategic pricing may be limited by natl. or intnatl. regulations
ex: antidumping or competition policy |
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antidumping rules
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set price floor for export pricing and limit firm's use of strategic pricing
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competition policy
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most developed countries have rules to promote competition and restrict monopolies
they can regulate prices that a firm charges |
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HRM
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activities a company carries out to utilize its workers more effectively
ex: determining HR strategy, evaluation, mgt. development, compensation, staffing can help reduce costs of value creation and add value by better serving customer's needs more complex in int. business b/c of differences in countries |
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expatriate
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citizen of one country working abroad
HR decides who to send, how to train and compensate them, and how to reorient them when they return home |
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strategic role of international HRM
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firms must ensure that there is a fit between HR and strategy
employees need the right training, compensation, and appraisal for this to happen |
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staffing policy
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selection of employee who have skills needed to perform certain jobs
tool for developing corporate culture strong culture can help firm implement its strategy |
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ethnocentric approach
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fills key mgt. postions with parent country nationals
makes sense for firms w/ int. strategy makes sense when there is lack of skilled workers in host country, its the best way to have a unified culture, helps transfer value to foreign ops. via parent country nationals no longer popular b/c it limits advancement and leads to cultural myopia |
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polycentric staffing policy
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have home-country nationals manage subsidiaries and hire host country nationals for positions in host country
makes sense when pursuing localization strategy can minimize cultural myopia may be less expensive than ethocentric downside: host country nationals do not as much chance to be promotedl gap can form between host country and parent country workers |
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geocentric staffing policy
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seeks best people regardless of nationality
consistent with building a unified culture makes for globally std. firms or transnational firms immigration policies may get in the way of this enables firm to get best use out of HR cadre of executives who are fine with working in diff. cultures can be costly |
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expatriate failure
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premature return of expat. to home
16-40% fail in developed countries and 70% fail in undeveloped countries can cost between a qtr. of a million and million if expats. fail main reasons: inability of spouse to adjust, person's inability to adjust, other family related issues, managers' inability to cope w/ larger responsibilities, personal or emotional maturity in europe: main issue is spouse's inability to cope in japan: inability to cope with larger responsibilities, difficulties with new environment, lack of technical skills, inability of spouse to cope firms can avoid this through better selection procedures |
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4 dimensions that predict expat. success
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self orientation: expat's well-being, self esteem, confidence
others orienation: ability to interact effectively with host country people perceptual ability: understanding why others behave the way that they do cultural toughness: ability to adjust to the posting |
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global mindset
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acquired early in life
can be from having a bicultural family, living in foreign countries, or using foreign languages as a regular part of life |
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compensation of expats
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two key issues:
- how to adjust to go along with different economic factors and compensation factors -- how to pay expats |
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natl. differences in compensation
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huge differences across countries
firms must decide whether to pay according to prevailing stds. of equalize pay on a global basis hard with geocentric firms many firms have recently moved to global stds. |
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expat pay
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most companies use balance sheet approach
this equalizes purchasing power so expats. have same living stds. abroad and at home compensation - base salary: normally in same range as base salary at home; paid in home or local currency - foreign service premium: extra pay for working abroad - allowances: hardship, housing, cost of living, education, etc. - taxation: since expat will have to pay income taxes at home and abroead - benefits: same med. and pension benefits as at home |
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international labor relations
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key issue is the degree to which org. labor is able to limit the choices available in international business
firm's ability to pursue labor transnational of global strategy is linked to labor unions HRM needs to foster harmony with labor unions |
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concerns of organized labor
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multinationals can go agianst union bargaining power by threatening to move operations somewhere else
multinationals only farm out low-skill jobs so it would be easy to switch locations multinationals import contractual agreements and employment from home to influence unions |
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accounting practices abroad
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accounting is the language of business
stds. differ b/t countries this can make it hard to evaluate firms the international accounting standards board has is working to create international stds. |
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country differences in accounting stds.
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accounting systems evolve according to demands for acct. info.
differences make it hard to comepare financial info. of foreign firms 5 main issues: 1. relationships b/t businesses and capital providers 2. political and economic ties with other countries 3. the level of inflation 4. level of economic development 5. culture of the country |
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relationships b/t providers of capital
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ext. sources of capital: banks, govt., investors
an accounting system reflects importance of providers of capital ex: US and britain are more focused on investors; switzerland, germany,, and japan focus on banks; france and sweden prepare docs. w/ govt. in mind |
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auditing stds.
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process by which a person gathers evidence determining if financial accounts conform to to required accounting stds. and if they are reliable
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accounting stds.
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rules for preping financial statements
they define useful accounting info. |
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lack of comparability
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comparing from one country to another is hard b/c of different standards
growth of transnational financing and investment is promoting growth of transnational financial reporting |
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international stds. of accounting
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many foreign investors are now asking for greater consistency
common accounting stds. would facilitate a global capital mkt. int. accounting stds. board is a mojor proponent of standardizing 100 nations have adopted the stds. or permitted their use IASB is consistent with US stds. EU has asked for harmonized accounting one day the two main may be IASB and FASB |
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financial mgt
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involves three sets of decisions
investment decisions: decisions on what to finance financing decisions: decisions on how to finance those decisions money mgt. decisions: decisions about how to manage finance info. most efficiently decisions in int. business b/c of diff. currencies, regulations, economic and political risks, etc. good financial mgt. can be a source of competitive advantage firms with good fin. mgt. can add value more cheaply and improve customer service |
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investment decisions
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fin. mgrs. must quantify benefits, costs, and risks associated with investing in a foreign country
mgrs. use capital budgeting to o this |
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capital budgeting
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benefits, costs, and risks of investment
involves evaluating project cashflows over time and discounting them to figure out NPV if NPV is better than 0 firm should do project complicated in int. business b/c: disctinction must be made b/t project and cash flows of the company at home, political and econ. risk, connection b/t cashflows to the parent and the source must be recognized |
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project and parent cashflows
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cashflows of the project and the parent company are not the same
cash flows to the parent may be lower for reasons such as host country limits on repartriation profits, host country local investment requirements, etc. for parent company, key figure is the cash flow that it will receive not the cash flow the project brings in this is b/c cash received goes to dividends dividends, debt repayment, investments, etc. |
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adjusting for political and economic risk of financial mgt.
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political risk: chance that politics will cause changes in business environment and will hurt profit or other goals of the business
- higher in areas of political unrest - political change can result in expropriate of firms assets or economic collapse that renders assets worthless econ. risk: liklihood econ. mismgt. will cause changes in business environment and hurt profitability of business - biggest risk is usually inflation - inflation is reflected by falling currency values and lower project cash flows firms can treat risk by: raising discount rates where risk is high, lowering projected cashflows to account for unrest |
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global money management
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decisions to manage global cash resources efficiently
firms need to minimize cash balances and reduce transaction costs |
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minimizing cash balances
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firms need cash balances on hand for unexpected events or notes payable
to keep cash accessable its usually invested in money mkts that offer low interest rates if firms could invest for longer time frames, they could earn higher rates of interest problem: when they invest in money mk accounts they make less money but cash is more liquid; if they invest in L/T accounts, interest rates are lower but cash is not liquid |
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reducing transaction costs
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transaction costs: costs of exchange
every time firm changes cash from one currency to another they face these costs most banks also charge a transfer fee for moving cash from location to location multilateral netting reduces the amt. of transactions b/t subsidiaries and amt of transaction costs |
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money mgt. -- tax objective
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tax regimes vary from one country to another
many countries tax foreign earned income of companies based in that country double taxation occurs when income is taxed by home and host country many countries maintain rules to help minimize extra taxation |
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tax credit
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allows firm to reduce taxes paid to home govt. by subtracting amt. of taxes paid to foreign govt.
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tax treaty
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agreement b/t two countries that says what items of income will be taxed by the country in which the income is earned
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deferral principal
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parent companies are not taxed on foreign source income until they have actually received a dividend
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tax haven
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country with very low, or no income tax
firms can avoid taxes by creating wholly owned non operating subsidiaries in that country |
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ways firms can transfer liquid funds across the border
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dividend remittances
royalty payments and fees transfer prices fronting loans firms that use more than one of these are "unbundling" |
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dividend remittances
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most common method of transferring money back to parent is through dividends
attractiveness varies according to: - tax regs.: higher tax makes it less attractive - foreign exchange risk: dividends may speed up in risky countries - age of the subsidiary: older ones remit higher amt. of their earnings in dividends - extent of local equity participation: local owners' demands for dividends get in the way |
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royalty payments and fees
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renumeration paid to owners of technology, patents, etc.
most parent companies charge subsidiaries royalties for what they use can be levied as a fixed amt. per unit or percentage of revenues the fee is the compensation for professional services or expertise to subsidiary by parent these are usually tax deductable locally |
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transfer prices
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price at which goods and services are transferred betwee entities
can be manipulated to: - reduce tax liabilities by shifting earnings from high tax countries to low tax countries - move funds out of a place where currency is about to be devalued - move funds from sub. to parent when dividends are restricted by the host govt. - reduce import duties when ad valorem tarriffs are in effect these are common in firms who disperse production to create value and minimize costs can be bad b.c: - govts. think they are being cheated out of legitimate income - govts. think that firms are going against the law when transfer prices are used to circumvent restrictions of capital flows - complicated mgt. incentives and performance evaluation |
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fronting loans
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loans b/t parent and sub. channeled through financial intermediary, such as a bank
used to circumvent host country restrictions on remittance of funds from a foreign subsidiary to a parent company; to gain tax advantages |
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techniques firms use to manage global cash resources
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centralized depositories
multilateral netting |
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centralized depositories
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firms must maintain easily accessable cash balances
firms decide whether to hold balances at each sub. or at a central dep. why most firms use central deps.: - when they deposit larger amts., they earn higher interest - when they are located at major fin. centers, firm has accents to more invest opps. than the sub. would have - by pooling reserves firms can have a smaller amt. of ready cash and invest larger amts. in less liquid, high interest investments sometimes govt. regs. limit use of cent. deps. firms must also be aware of costs of moving money in and out of central deps. use of these are expected to increase thanks to globalization and reduced barriers |
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multilateral netting
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allows firms to reduce transaction costs associated with transactions b/t subs
is an extension of bilateral netting: ex: french sub owns mex. sub $6M and mex. sub owes french sub $4M -- bilateral settlement would be made with a payment of $2M under m/l netting, this idea is extended to all subs w/in company |
