International Business Strategies

Unit-3
Dr. Jayan P.A.
Assistant Professor,
School of Maritime Management
Indian Maritime University
Kochi
• Role of Strategy in International Business
• Strategy: A plan of action that channels an
organization’s resources so that it can
effectively differentiate itself from
competitors and accomplish unique an viable
goals.
• It is long-term oriented.
• Tactics are short-term oriented.
 Strategy in the International Context
(settings)
• A plan for the organization to position itself positively
from its competitors and configure its value-adding
activities on a global scale.
• It guides the firm toward chosen customers, markets,
products, and services in the global marketplace, not
necessarily in a particular international market.
• As a minimum, strategy in the international context
should help managers to formulate a strong international
vision, allocate scarce resources on a worldwide basis,
participate in major markets, implement global
partnerships, engage in competitive moves in response to
global rivals, and configure value-adding activities on a
global scale.
• How does an effective international strategy
begin?
• Share your thoughts.
• What is the role of strategy in creating
competitive in international business? It has
been argued that an effective international
strategy begins with developing a standardized
product that can be produced and sold the same
way in multiple countries.
• Kenichi Ohmae argues that delivering value to
customers worldwide is the overriding goal,
while other observes stress achieving strategic
flexibility.
 Exploit scale economies
• The idea of exploiting scale economies by
building global volume and delivering
synergies across the firm's different activities
is also relevant.
• Managers should build a strong worldwide
distribution system and use profits from
successful products and markets to subsidize
the development of other products and
markets.
 At one and the same time
• The most widely accepted prescription for
building sustainable, competitive advantage in
international business is that of Bartlett and
Ghoshal. They argue that managers should look
to “develop, at one and the same time, global
scale efficiency, multinational flexibility, and the
ability to develop innovations and leverage
knowledge on a worldwide basis”.
• They propose that the firm that aspires to
become a globally competitive enterprise must
seek simultaneously these three strategic
objectives—efficiency, flexibility, and learning.
• Efficiency: The firm must build efficient international
supply chains. Efficiency refers to lowering the cost of
the firm’s operations and activities on a global scale.
• Multinational enterprises (MNEs) with multiple value
chains around the world must pay special attention to
how they organize their R&D, manufacturing,
sourcing product, marketing, and customer service
activities. For example, automotive companies such
as Toyota strive to achieve scale economies by
concentrating manufacturing and sourcing activities
in a limited number of locations around the world.
• Flexibility: The firm must develop worldwide flexibility to
manage diverse country-specific risks and opportunities.
• The diversity and volatility of the international
environment is a special challenge for managers.
Therefore, the firm’s ability to tap local resources and
exploit local opportunities is critical.
• For example, managers may opt for contractual
relationships with independent suppliers and distributors
in one country while engaging in direct investment in
another.
• Or, the firm may adapt its marketing and human
management practices to suit its unique country
conditions.
• Changing environmental circumstances, such as exchange
rate fluctuations, may prompt managers to switch to local
sourcing or to adjust prices.
• Learning: The firm must create the ability to learn
from international exposure and exploit learning on a
worldwide basis.
• The diversity of the global environment presents the
internationalizing firm with unique learning
opportunities.
• Even though the firm goes abroad to exploit its
unique advantages, such as technology, brand name,
or management capabilities, managers can add to the
stock of capabilities by internalizing new knowledge
gained form international exposure.
• Thus, the organization can acquire new technical and
managerial know-how, new product ideas, improved
R&D capabilities, partnering skills, and survival
capabilities in unfamiliar environments.
 Strategy in Multidomestic and Global Industries
• Companies in the food and beverage, consumer products, and clothing and
fashion industries may often resort to a country-by-country approach to
marketing to specific needs and tastes, laws, and regulations.
• Industries in which competition takes place on a country-by-country basis
are known as multi-domestic industries. In such industries, each country
tends to have a unique set of competitors.
• By contrast, industries such as aerospace, automobiles, telecommunications,
metals, computers, chemicals, and industrial equipment are examples of
global industries, in which competition is on a regional or worldwide scale.
• Formulating and implementing strategy is more critical for global industries
than multidomestic industries.
• Most global industries are characterized by the existence of a handful of
major players that compete head-on in multiple markets.
• For example, Kodak must contend with the same rivals—Japan’s Fuji and the
European multinational, Agfa-Gevaert—wherever it does business around
the world.
• Similarly, American Standard (based in New Jersey, USA) and Toto dominate
the worldwide bathroom fixtures market.
• In the earthmoving equipment industry, Caterpillar (based in Illinois, USA)
and Komatsu (Tokyo, Japan) compete head-on in all major world markets.
 Agfa-Gevaert N.V. is a Belgian-German multinational corporation that develops, manufactures, and
distributes analogue and digital imaging products and systems, as well as IT solutions. The company has
three divisions. HQ: Mortsel, Belgium
AGFA’s logo below. The company established in 1867.
TOTO’s headquarters are in Kokura, a port town on the northern edge of Japan’s
Kyushu island. It is the mother factory and technology centre of a brand that employs
24,000 people worldwide. Under the expert eyes of highly skilled and experienced
designers and engineers, the factory produces the faucets, basins, showers, baths
and toilets that are prevalent throughout.
Headquarters of Komatsu
• INTERNATIONAL LOGISTICS
 Logistics
• Logistics is the management of the flow of goods between the
point of origin and the point of consumption in order to meet
some requirements, for example, of customers or corporations.
• The resources managed in logistics can include physical items,
such as food, materials, animals, equipment, and liquids, as well
as abstract items, such as time, information, particles, and energy.
• The logistics of physical items usually involves the integration of
information flow, material handling, production, packaging,
inventory, transportation, warehousing, and often security.
• The complexity of logistics can be modeled, analyzed, visualized,
and optimized by dedicated simulation software.
• The minimization of the use of resources is a common motivation
in logistics for import and export.
 CSCMP’s definition covers everything
• Note that the above definition of logistics is not
unified, although it might be indeed, in current
environment, a commonly acknowledged one.
• Council of Logistics Management (now renamed as
Council of Supply Chain Management Professionals)
referred to logistics as “the process of planning,
implementing, and controlling the efficient, effective
flow and storage of goods, services, and related
information from point of origin to point of
consumption for the purpose of conforming to
customer requirements,” which includes inbound,
outbound, internal, and external movements and
return of materials for environmental purposes.
What is Supply Chains/Supply Chains Management?
• Mentzer et al. which is rather broad, not confined to any
specific discipline area, and adequately reflecting the
breadth of issues that are usually covered under this term:
• “Supply chain management is defined as the systemic,
strategic coordination of the traditional business functions
and the tactics across these business functions within a
particular company and across businesses within the
supply chain, for the purposes of improving the long-term
performance of the individual companies and the supply
chain as a whole.”
• Supply chains simply means the sequence of processes
involved in the production and distribution of a
commodity. In other words, a supply chain is a system of
organizations, people, activities, information, and
resources involved in moving a product or service from
supplier to customer.
• The terms of “logistics” and “supply chain” are usually
comparative in academy and industry, since both of
them are closely relevant to the product circulation
during its whole life cycle, and both have been
regarded as the central unit of competitive analysis.
• Generally speaking, supply chain is a more broadened
conception with a wider range which can involve other
similar subjects, such as network sourcing, supply
pipeline management, value chain management, and
value stream management.
 International Logistics
• The concept of logistics focuses on the product flow.
• International logistics is the process of planning and managing the
flow of goods and products in your company's supply chain from
acquisition to customer purchase, where part of the process
involves crossing at least one international border.
• Also, international logistics means that “international logistics as
the process of planning, implementing, and controlling the flow
and storage of goods, services, and related information from a
point of origin to a point of consumption located in a different
country”.
• Global logistics refers to the flow of resources and information
between a business or source and the consumer. It is a
management process that analyzes how resources are acquired,
stored and transported. To be effective, the process requires
detailed analysis of a company's entire supply chain.
• Through the implementation of international
logistics, the firm can implement cost-saving
programs such as just-in-time (JIT), electronic
data interchange (EDI) etc.
• The two phases of the movement of materials
include:
• Timely movement of materials, parts, and
supplies
• Timely movement of the firm’s physical product
to its customers.
 Transportation Infrastructure
• A firm’s logistics platform is determined by a
location’s ease and convenience of market
reach under favourable cost circumstances.
• The public sector’s investment priorities,
safety regulations, tax incentives, and
transport policies can have major effects on
the international logistics decisions of firms.
• The logistics manager must learn about the
existing and planned infrastructures abroad
and at home and factor them into the firm’s
strategy.
 Green Logistics
• Green logistics refers to a logistics form
which plans and implements green transport,
green storage, green packaging, green
circulation processing, green recovery, and
other activities via advanced logistics
technology.
• It aims to reduce environmental pollution
and resource consumption arising from
logistics activity.
 International Shipping
• Liner service is service that operates within a
schedule and has a fixed port rotation with
published dates of calls at the advertised ports.
• The tramp service or tramper on the other hand
is a ship that has no fixed routing or itinerary of
schedule and is available at short notice (or
fixture) to load any cargo from any port to any
port.
• Bulk service: it is engaged in the transfer of dry
bulk commodities from rail and truck to dock.
 Air Cargo
• Airfreight is available to and from most
countries, including the developing world.
• Forty percent of the world’s manufactured
travel by air.
• Items that are high-value or high in size tend
to travel by air.
multimodal
 International Inventory Issues
• Inventories tie up a major portion of corporate
funds, therefore proper inventory policies shuld
be a major concern to the international
logistician
• Just-in-time inventory policies minimize the
volume of inventory by making it available only
when needed
• The purpose of establishing inventory systems
are:
• To maintain product movement in the delivery
pipeline
• To have a cushion to absorb demand
fluctuations
 International Packaging Issues
• One of the key value-added activities in logistics and
supply chains.
• Packaging is instrumental in getting the merchandise
to the destination in a safe, presentable condition.
• Because of the added stress of international shipping,
packaging that is adequate for domestic shipping may
be inadequate for international shipping.
• Packaging considerations that should be taken into
account are environmental conditions and weight.
• One solution to the packaging problem has been the
development of inter-modal containers.
• Cost attention must be paid to international
packaging.
 Storage facilities
• A stationary period is involved when merchandise become
inventory stored in warehouses.
• The location decision addresses how may distribution centers to
have and where to locate them
• Storage facilities abroad can differ in availability and quality.
• The logistician should analyze international product sales and
then rank order products according to warehousing needs.
• A warehouse is a commercial building for storage of
goods. Warehouses are used by manufacturers, importers,
exporters, wholesalers, transport businesses, customs, etc. They are
usually large plain buildings in industrial areas of cities, towns and
villages.
• The godown (especially in India) is a freight shed—any building
where goods or cargo are stored is called a godown.
• Transit shed: a building located on or near a pier (piershed) or wharf
(wharfshed) used for short-term storage of cargo in transit.
 What is Pier?
• Pier: a platform on pillars projecting from the
shore into the sea.
• A pier is a raised structure in a body of water,
typically supported by well-spaced piles or
pillars.
Pier
Another pic of pier
 Special Trade Zones
• Foreign trade zones are areas where foreign
goods may be held or processed and then re-
exported without incurring duties.
• Trade zones can be useful as transshipment
points to reduce logistics cost and redesign
marketing approaches
• Governments and firms benefit from foreign
trade zones.
 Centralized Logistics Management
• In international logistics, the existence of a
headquarters staff that retains decision-
making power over logistics is important.
• To avoid internal problems, both
headquarters staff and local management
should report to one person.
• This individual can contribute an objective
view when inevitable conflicts arise in
international logistics coordination.
 Decentralized Logistics Management
• When a firm serves many diverse
international markets, total centralization
might leave the firm unresponsive to local
adaptation needs.
• If each subsidiary is made a profit center in
itself, each one carries the full responsibility
for its performance.
• Once products are within a specific market
increased input from local logistics
operations should be expected and
encouraged.
Source: https://www.slideshare.net/Hammaduddin/international-logistics-12094180
 Supply Chains & Logistics in Internet Age
• Because of the internet, firms are able to
conduct many more global comparisons
among suppliers and select from a wider
variety of choices.
• When customers have the ability to access a
company through the internet, the company
must be prepared for 24-hour order-taking
and customer service.
• For all countries, but particularly in
developing nations, the issue of universal
access to the internet is crucial.
 Logistics & Environment (latest trend)
• Since environmental laws and regulations differ
across the globe, the firm’s efforts need to be
responsive to a wide variety of requirements.
• Reverse distribution systems are instrumental in
ensuring that the firm not only delivers the
product to the market, but also can retrieve it
from the market for subsequent use, recycling,
or disposal.
• Companies need to learn how to simultaneously
achieve environmental and economic goals.
• Think of ‘sustainable development’.
• International logistics DHL international as a
case study
International Accounting &
Taxation
• Multinational enterprises (MNEs) have long progressed beyond
import-export types of transactions.
• Executives of MNEs are called to make decisions and/or report
results based on reliable and timely information about accounting
and taxation.
• Accounting means the process of keeping financial accounts. Also,
it consists of a systematic process of identifying, recording,
measuring, classifying, verifying, summarizing, interpreting and
communicating financial information. It reveals profit or loss for a
given period, and the value and nature of a firm's assets, liabilities
and owners' equity.
• Taxation refers to the practice of a government collecting money
from its citizens to pay for public services. Without taxation, there
would be no public amenities or utilities. Taxation refers to the act
of a taxing authority actually levying tax. Taxation as a term
applies to all types of taxes, from income to gift to estate taxes.
• In order of combine results from various sites
around the global, it is necessary to use a
common methodology that considers each of
the local accounting and taxation regulations,
but still provides a global overview in a single
currency.
• Such analysis, regulation, and synthesis is critical
to managing an MNE by allowing business
results to be comparable and provide aggregate
results to mangers for decision making and to
shareholders for assessing the health and
potential of the company.
• The actual flow of assets across national
boundaries complicates the finance and
accounting functions.
• In particular, an MNE must cope with differences
in, among other things, inflation rates, currency
controls, exchange rate fluctuations, custom
duties, and corporate and individual taxation
rates. One also needs to consider cultural issues.
• A customs duty is a tariff or tax on the
importation (usually) or exportation (unusually)
of goods. Commercial goods not yet cleared
through customs are held in a customs area,
often called a bonded store, until processed.
• The financial executive has various traditional roles, including the measurement,
the analysis and the communication of financial information used by top
management.
• In addition, they are responsible for preparing the financial report for external
stakeholders such as shareholders, regulatory bodies, and tax authorities.
• In an international context, the role of a financial executive is expanded beyond
the traditional models.
• In particular, the international financial executive is required to evaluate
potential acquisitions overseas, manage cash flow across international
boundaries, hedge against currency, inflation and interest rate risks, and to seek
new international sources of financing.
• Thus, the current-day international financial executive must have a broader
perspective of international business than his domestic counterpart.
• Hedge against currency: Investments in overseas instruments, such as stocks and
bonds, can generate substantial returns and provide a greater degree of portfolio
diversification, but they introduce an added risk, that of exchange rates.
• Hedge means a way of protecting oneself against financial loss or other adverse
circumstances.
• Interest rate is the amount charged, expressed as a percentage of principal.
• Inflation is defined as a sustained increase in the general level of prices for goods
and services. It is measured as an annual percentage increase.
• The opposite of inflation is deflation, which is a decrease in the general price
level for goods and services.
• MNEs are challenged with various accounting
standards and practices globally.
• Financial statements in various countries are
different from one another.
• For example, it should be noted that North
American and European-based MNEs present
two different formats for their balance sheet.
 International Accounting
• On the one hand, the American-type balance
format carries the form of
• Assets = Liabilities + Shareholders' Equity
• On the other hand, the European format for a
balance sheet looks like
• Capital and Reserves = Fixed Assets + Current
Assets- Current Liabilities-Noncurrent
Liabilities
• Traditionally, accounting was defined as a service
activity which provides quantitative information,
primarily financial in nature, about economic entities
helping with economic decision making.
• The accounting function was focused on identifying,
recording, and interpreting economic events.
• The Financial Accounting Standards Board (FASB) is
the private sector voluntary organization that
determines accounting standards in the USA.
• The FASB requires that financial reporting provide
information for the purposes of investment and credit
decisions, assessment of cash flow projections, and
evaluation of MNE resources.
• The International Accounting Standards Committee
(IASC), which is composed of professional accounting
organizations, from over 100 countries, identifies the
following main users of financial information:
investors, employees, lenders, suppliers, customers,
government organizations and the general public.
• The identification of the main users of the financial
information is important as it influences the type or
format of the financial disclosure.
• As an example, Germany’s main users of financial
information have been the creditors: so the financial
reporting was focused on the balance sheet, which
details the MNE’s assets.
• In the USA, the main users of financial
information are investors: so financial
information is focused mostly on the income
or profit and loss statement. This
heterogeneity amongst users of financial
information across countries makes the
development of a uniform set of accounting
standards and practices challenging.
 Main Factors affects…
• The main factors affecting the development of international accounting
standards are practices are listed below:
1. Types of external users: Creditors, investors, and security exchange
officials can influence international accounting standards and practices
followed by an MNE. For example, investors as well as creditors affect
the development of accounting standards and practices. Investors are
much more influential in the USA and UK, while banks or creditors are
more influential in Germany, Switzerland, and Japan.
2. The nature of the MNE: This factor involves addressing questions such
as how many operating units there are, in how many different countries
or regions, the frequency at which transactions must be consolidated
and reported, the parent entity, and so forth.
3. Characteristics of the local environment: This factor involves
addressing questions such as what are the current and expected inflation
rates, the relative importance of public Vs private ownership in a given
sector, the rate of economic growth, and local cultural attitudes.
4. Academic influences: The involvement of academia in professional
accounting bodies, the introduction and application of innovative
reporting rations, standards or harmonization techniques to promote
better decision making, and transparency for shareholders.
5. Government: Regulators and lawmakers affect accounting
standards through legislation.
6. International influences: Standards and practices that were
instilled through the legacy of global empires. For example,
accounting standards in India are greatly influenced by the legacy
of the British Empire’s rule over that region. In addition, this
factor includes the development of regional financial information
disclosure standards and practices that evolve over time.
7. Accounting profession: The maturity of the profession in a given
market dictates the amount of guidance and oversight of the
profession and the development and sophistication of the
standards and practices.
8. MNE stakeholders: Managers, employees, and board members
all contribute to the development of the company’ standards and
practices as they generate requirements for the purposes of
reporting, control, and decision making.
 Cultural Differences in Accounting
• Refer cultural diversity and cultural diversity of business all over the world
• Culture affects accounting standards and practices. This is one reason for differences in
accounting systems across countries.
• Financial reports provide information to business in a form unique to the local environment and
thus the accounting system is environment-specific.
• There are five major environmental systems that influence cultural and social values, which in
turn determine the form of financial information: the economic system, the political system, the
legal system, the educational system, and the religious system.
• Do elaborate each system if there is long essay in the semester examination
• Level of technology, patent, copy rights, ownership concentration of businesses come under
economic system
• Chinese law differs from Western countries and Japanese law differs from India and Russia.
• The educational system influences the development of accounting standards and practices as it
dictates the level of literacy and capabilities of both the professionals who prepare the reports
and the stakeholders who read and use them. Where the educational level is high, both groups
are more sophisticated and professional with regards to the application of accounting standards
and practices.
• These environmental systems greatly influenced by local cultural values and beliefs which would
impact on local accounting, profession’s values and beliefs; local accounting standards and
practices.
• Cultural aspects in a particular region is that national boundaries and cultural boundaries may not
always coincide and an MNE must be sensitive to how it chooses to address and integrate
differences both globally and locally, where in some cases even the local culture may have a
number of versions, depending on the specific location within the country.
 Why the OECD in Accounting?
• The Organization for Economic Co-operation and Development (OECD) is an
international economic organization of 34 countries, founded in 1961 is a
significant organization supporting the harmonization of accounting because
most of the world’s largest MNEs are based in OECD member countries.
• The OECD’s efforts to harmonize international accounting standards are part of
the organization’s focus on economic growth and development.
• Of particular value are OECD’s surveys of accounting practices in member
countries and its assessment of conformity of such practices.
• Of particular interest to the development of international accounting standards is
the case of the USA. Since the US stock market is the largest stock market in the
world, the US accounting standards dominate.
• Since the international accounting standards—such as the ones issues by IASC—
should be accepted globally, it is mandatory that the US Securities Exchange
Commission (SEC) will accept these standards.
• One should note that in many countries around the world, apart from the USA,
nations have adopted the international accounting standards and published
them as their own national standards: such is the case for Singapore, Kuwait,
Thailand, and Mexico.
• In other countries, national standards have been structured using the
international accounting standards intensively: such is the case for Brazil, India,
Portugal, and Taiwan.
 TAXATION
• Taxation refers to the practice of a government
collecting money from its citizens to pay for public
services. Without taxation, there would be no public
amenities or utilities.
• Taxation refers to the act of a taxing authority
actually levying tax. Taxation as a term applies to all
types of taxes, from income to gift to estate taxes.
• MNEs are faced with the task of tax planning on an
international basis since it may affect profitability and
cash flow.
• Taxation is affected by some of the most strategic and
significant MNE decisions, including:
 MNE’s Decision
 FDI location
 International operations such as export/import licensing agreement
 Legal form of a new subsidiary
 Method of financing, including debt or equity
 Method of determining transfer prices
A licensing agreement is a legal contract between two parties, known as the
licensor and the licensee. In a typical licensing agreement, the licensor grants the
licensee the right to produce and sell goods, apply a brand name or trademark, or
use patented technology owned by the licensor.
A subsidiary is a company that is partly or completely owned by another. In other
words, a company controlled by a holding company.
Transfer pricing is the setting of the price for goods and services sold
between controlled (or related) legal entities within an enterprise. For
example, if a subsidiary company sells goods to a parent company, the
cost of those goods paid by the parent to the subsidiary is the transfer
price.
Debt is an amount of money borrowed by one party from another. A stock or any
other security representing an ownership interest. This may be in a private company
(not publicly traded), in which case it is called private equity.
 Transfer Pricing/Price
• Taxation is highly dependent on the locality in which the MNE operates.
In most cases. It includes both corporate and individual taxation systems.
• In order to gain tax advantages of exporting, an MNE based in the USA
may set up a foreign sales corporation (FSC) which engages in exporting
of products and services.
• An FSC may be qualified as such if it maintains a foreign office, operates
under foreign management, maintains a permanent set of books at the
foreign subsidiary, conduct foreign economic processes, and is defined as
a foreign corporation. In such a case, the foreign subsidiary, the FSC, is
exempt from US corporate tax.
• A similar reduction in the tax is applied towards MNE dividends.
• MNEs are using transfer prices in order to manage their tax rates
effectively. A transfer price is a price on goods and services sold by one
subsidiary of an MNE to another.
• Since the price between the two subsidiaries may be determined by
head office, it can be set such that the difference between the selling
and buying price is so small that it greatly reduces exposure to taxation.
• MNEs may also set arbitrary transfer prices for competitive reasons or
because of restrictions on currency flows.
• Another taxation issue is the issue of double
taxation. MNEs may have a problem when they
earn income in a foreign country and are
required to pay taxes in both the foreign country
and the parent’s home country.
• Within the country, there will be two or more
times tax will levied, i.e. cascading effect. Eg.
Sales Tax.
• In many countries law were put in place to allow
for credit for income taxes paid to a foreign
government. Such is the case for US-based
MNEs.
 Tax Planning for MNEs
• Since taxes affect both profits and cash flows, they should be
considered as part of the strategy of the MNE.
• If a US-based MNE decides to export, it can set up an foreign sales
corporation (FSC) to reduce its tax burden.
• When an MNE based in the USA decides to set up operations in a
foreign country, it may do so through the creation of a foreign
subsidiary.
• If the parent company expects the foreign-based operations to
show a loss for several years, it should incorporate this subsidiary
since the parent MNE can deduct the subsidiary’s losses against its
current year’s income.
• An MNE’s strategy may also lead to an investment decision that
involves the allocation of appropriate financing, both debt and
equity.
• It is clear that both debt and equity financing affect taxation.
• Funds invested in a subsidiary overseas should be defined
as being debt- or equity-financed funds, which will
determine the form of expatriation of the funds by way of
dividends and interest payments to the parent entity.
• Obviously, the tax rate on dividends and interest
payments may be different.
• An MNE which tries to maximize its cash flow worldwide
should record profits in tax-haven or low-tax countries.
• Tax haven: a country or independent area where taxes are
levied at a low rate. A tax haven is a state, country, or
territory where, on a national level, certain taxes are
levied at a very low rate or not at all. It also refers to
countries which have a system of financial secrecy in
place.
• Tax havens are countries that the Tax Office sees as having
less-than-transparent tax or financial systems.
 Tax haven(s)
• The point is--an MNE which tries to maximize its cash flow worldwide should record profits in
tax-haven or low-tax countries.
• This may be done by carefully assessing and selecting a low-tax country or location for the initial
investment, and setting up subsidiaries in tax-haven countries where it can receive dividends
and manage its transfer pricing strategy carefully.
• For example, a parent company can shelter income from one jurisdiction where taxation rates
are higher by using a tax-haven subsidiary located in a low-tax country.
• Common examples of tax havens are Luxembourg, the Channel Islands, and the Bahamas.
• Situated 10 to 30 miles off the north-west coast of France, the Channel Islands are not part of
the United Kingdom. They are dependent territories of the English Crown, as successor to the
Dukes of Normandy. The Channel Islands have two main administrative units, or Bailiwicks, of
Jersey and Guernsey. The Channel Islands are an archipelago in the English Channel off
the Normandy coast of France. They are divided into two British Crown Dependencies, the
Bailiwicks of Guernsey and Jersey. The former also includes the islands of Alderney, Sark and
Herm, and smaller islands are divided between the two bailiwicks.
• Luxembourg is located in the Western Europe. The Grand Duchy of Luxembourg - a small country
landlocked by Belgium, France and Germany - is a prominent financial centre. With roots
stretching back to the 10th century, Luxembourg's history is closely intertwined with that of its
more powerful neighbours, especially Germany.
• The Bahamas are a group of islands located in the Caribbean Sea in southeastern North America.
The Bahamas are in a chain of islands that includes Cuba, Turks and Caicos, and Hispaniola,
which contains the Dominican Republic and Haiti. The Bahamas are located not far from the US
state of Florida.
• Knowledge of taxation rates and taxation
systems may help MNE’s executives reduce
the overall taxation bill.
• Countries may have unique systems for
taxing earnings of foreign subsidiaries of
their domestic MNEs: for example, France
taxes only domestic source income, whereas
other nations; such as Germany and the UK,
tax the profits of foreign branches as well as
the dividends received from foreign
subsidiaries.
 VAT and MNEs
• In various countries around the world and in most Western European
countries a value-added tax (VAT) has been established.
• The VAT is a consumption-type tax, as it is dependent on the amount of
purchases that a company or individual buys. The VAT is collected by the
local corporate entities that sell goods and services in the local market.
The funds collected by the corporate entities are then transferred to the
local government taxation offices.
• VAT: A value-added tax (VAT) or goods and services tax (GST) is a popular
way of implementing a consumption tax in Europe, Japan, and many
other countries.
• It differs from the sales tax in that taxes are applied to the difference
between the seller-purchased price and the resale price. VAT is a multi-
stage sales tax levied as a proportion of the value added. It is collected at
each stage of the production and distribution process, and in principle,
its burden falls on the final consumer.
 VAT
• MNEs may deduct the VAT paid to local
suppliers from the VAT collected from its
local customers. As the name implies a VAT
means that each independent corporate
entity is taxed only on the value it adds at
each stage of the manufacturing process.
• Thus, for a company that is vertically
integrated, the tax rate applies to its net sales
since it owns the entire manufacturing
process end to end.
• The VAT rates vary from one country to
another despite efforts to harmonize it.
• Next Topic: International (Global) Human
Resource Management (HRM)
• What do you mean by human resources?
What is Human Resources Management
(HRM)?
• A Human Resource is a single person or employee
within your organization.
• Human Resources is also the organizational function
that deals with the people and issues related to people
such as compensation, hiring, performance
management, and training.
• A human-resources department (HR department) of an
organization performs human resource management,
overseeing various aspects of employment, such as
compliance with labour law and employment
standards, administration of employee benefits, and
some aspects of recruitment and dismissal.
• Human resource management refers to the activities an
organization carries out to use its human resources
effectively.
• These activities include determining the firm’s human
resource strategy, staffing, performance evaluation,
management development, compensation, and labor
relations.
• None of these activities is performed in a vacuum; all are
related to the strategy of the firm.
• HRM has an important strategic component.
• Through its influence on the character, development,
quality, and productivity of the firm’s human resources,
the HRM function can help the firm achieve its primary
strategic goals of reducing the costs of value creation and
adding value by better serving customer needs.
 Why Human Capital?
• Human capital typically refers to a more
narrow view (i.e., the knowledge the
individuals embody and economic growth).
• Likewise, other terms sometimes used
include "manpower", "talent", "labour",
"personnel", or simply "people".
• The strategic role of HRM is complex in a domestic
firm, but it is more complex in an international
business, where staffing, management development,
performance evaluation, and compensation activities
are complicated by profound differences in labor
markets, culture, legal systems, economic systems,
and the like.
• For example,
• Compensation practices may vary country to country
depending on prevailing management customs
• Labor laws may prohibit union organization in one
country and mandate it in another
• Equal employment legislation may be strongly
pursued in one country and not in another
• If it is to build a cadre of managers capable of leading a
multinational enterprise, the HRM function must deal with a host
of issues.
• It must decide how to staff key management posts in the
company, how to develop managers so that they are familiar with
the nuances of doing business in different countries, how to
compensate people in different nations, and how to evaluate the
performance of managers based in different countries.
• HRM must also deal with a host of issues related to expatriate
managers.
• Expatriate means a person who lives outside their native country.
• An expatriate manager is a citizen of one country who is working
abroad in one of the firm’s subsidiaries.
• It must decide when to use expatriates, whom to send on
expatriate postings, be clear about why they are doing it,
compensate expatriates appropriately, and make sure adequately
debriefed and reoriented once they return home.
 Role of HRM in an International Business
• It covers:
• Strategic role of HRM
• Four major tasks of the HRM function:
staffing policy, management training and
development, performance appraisal, and
compensation policy—strategic implications
of each of these tasks
• International labor relations and the
relationship between the firm’s management
of labor relations and its overall strategy.
• A major chunk of academic research suggests that a
strong fir between human resources practices and
strategy is required for high profitability.
• Superior performance requires not only the right
strategy, but also that strategy is supported by the
right organization structure/set up.
• Strategy is implemented through organization.
• For a firm to outperform its rivals in the global market
place, it must have the right people in the right
postings.
• Those people must be trained appropriately so that
they have the skill sets required to perform their jobs
effectively, and so that they behave the main driver of
the organization.
• Their compensation packages must create
incentives for them uses must measure the
behavior that firm wants to encourage.
• The human resource function, through its
staffing, training, compensation, and
performance appraisal system the firm uses
must measure the behavior that the firm
wants to encourage.
• The human resource through its staffing,
training, compensation, and performance
appraisal activities, has a critical impact upon
the people, culture, incentive, and control
system of the firm’s organization structure
(performance appraisal systems are part of
the control systems in an enterprise).
• Thus, human resource professionals have a
critically important strategic role.
• In short, superior human resources can be a sustained
source of high productivity and competitive advantage in
the global economy.
• At the same time, research suggests that many
international businesses have room for improving the
effectiveness of their human resource function.
• In one study of competitiveness among 326 large
multinationals, the study found that human resources was
one of the weakest capabilities in most firms, suggesting
that improving the effectiveness of international human
resource practices might have substantial performance
benefits. (R. Colman, “HR Management Lags Behind at
World Class Firms”, CMA Management, July-August 2002,
p.9)
• Four strategies pursued by international
businesses—a localization strategy,
international strategy, global standardization
strategy, and transnational strategy.
• How it is to be done?
• Any idea?
 Localization Strategy
• Localization is the process of adapting a product or
content to a specific locale or market. It is a kind of
adaptation to target markets.
• The famous example of a bad brand name translation
into Chinese is that of Coca Cola.
• KFC introduced a range of China-specific food
options to accompany the standard western fare. Pots
of Chinese porridge, traditional Chinese breakfast
breads, and a variety of rice-paired dishes all helped
establish KFC’s image and popularity in China.
• Why localization matters? Take examples of Apple,
Samsung and KFC.
• Amazon’s share of internet users worldwide, it’s safe
to say they’re doing something right in terms of
localization.
 International Strategy
• International business strategy refers to plans
that guide commercial transactions taking
place between entities in different countries.
• Typically, international business strategy refers
to the plans and actions of private companies
rather than governments; as such, the goal is
increased profit.
 International Strategy
• Walmart’s annual worldwide sales, for example, are
larger than the dollar value of the entire economies
of Austria, Norway, and Saudi Arabia.
• Although Walmart tends to be viewed as an American
retailer, the firm earns more than one-quarter of its
revenues outside the United States.
• Walmart owns significant numbers of stores in
Mexico (1,730 as of mid-2011), Central America (549),
Brazil (479), Japan (414), the United Kingdom (385),
Canada (325), Chile (279), and Argentina (63).
Walmart also participates in joint ventures in China
(328 stores) and India (5).Standard & Poor’s stock
report on Walmart. Even more modestly sized MNCs
are still very powerful.
 International Strategy
• If Kia were a country, its current sales level of
approximately $21 billion would place it in the top
100 among the more than 180 nations in the world.
• Multinationals such as Kia and Walmart must choose
an international strategy to guide their efforts in
various countries.
• There are three main international strategies
available: (1) multi-domestic, (2) global, and (3)
transnational
• Each strategy involves a different approach to trying
to build efficiency across nations and trying to be
responsiveness to variation in customer preferences
and market conditions across nations.
 Global Standardization Strategy
• Standardization seems to be a cost-driven strategy for marketers, as it leads to
leveraging the same template/product/service configuration globally, creating
economies of scale and cost savings.
• Standardization can also lead to development of single and unified
brand and corporate identity worldwide. This can lead to better global
recognition and provide global competitive advantage over competitors.
• Standardization can lead to having a rationalized product line which includes only
a few core global brands instead of multiple localized brands and brand
extensions.
• This could lead to a better allocation of resources, higher efficiencies, consistent
marketing, and higher profits
• When implementing a standardization strategy, companies assume homogenized
consumer needs. Thus investments in international market research related to
modifying the marketing mix are minimal. The marketing mix includes company
efforts related to four basic P’s of marketing: Product, Price, Place (distribution),
and Promotion.
• Companies following a standardized approach to marketing tend to have a
centralized global marketing program, and thus the need for coordinating,
managing, and controlling local subsidiaries for local marketing strategy is
minimized.
 Transnational
Transnational strategic management as iterations of
organizational learning and performance improvements.
The foundation of a transnational strategy is a global
vision, but with customized implementations for local
markets and regions.
The country environment is an important aspect of
transnational strategy.
In a March 2007 interview with Harvard Business School
Working Knowledge writer Sean Silverthorne, Harvard
professor Richard H.K. Vietor suggests that countries with
a sound fiscal and monetary environment, secure
property rights and anti-corruption policies attract
transnational companies.
The transnational strategy is a combination of the
global strategy, the multinational strategy and the
international strategy.
 Creating Value
• Firms that emphasize localization try to create value by emphasizing local
representatives; international firms, by transferring products and competencies
overseas; global firms, by realizing experience curve and location economies; and
transnational firms, by doing all these things simultaneously.
• The success requires HRM policies to be in tune with the firm’s strategy.
• For example, a transnational strategy imposes different requirements for staffing,
management development, and compensation practices than a localization
strategy.
• Firms pursuing a transnational strategy need to build a strong corporate culture
and an informal management network for transmitting information and
knowledge within the organization.
• Through its employee selection, management development, performance
appraisal, and compensation policies, the HRM function can help develop these
things.
• Thus, HRM has a critical role to play in implementing strategy.
• The experience curve is an idea developed by the Boston Consulting Group (BCG)
in the mid-1960s. It means that the more experience a firm has in producing a
particular product, the lower are its costs.
• Value creation/chain is the way in which primary and support activities
of an MNE are combined to provide products and services to increase
profit margins and add value to the goods or services.
 The Thump Rule is….
• “Your brand name and recognition is important.
However, to create a lasting and remarkable
impression, you must remember that you and your
brand are as good as the value you bring to the
marketplace.” - Bernard Kelvin Clive
• What are the heart and lungs of your company? What
keeps it living and breathing? Once you know this, this
is what will prevent you from losing sight of your core
values, leaving you more open to change other parts of
your business as needed.
• “Stick to what you know. Underpromise and
overdeliver. Because if you don't define your brand,
your competitors will.” -Richard Branson
• General Electric (GE), for example, is not just concerned with
hiring people who have the skills required for performing
particular jobs; it wants to hire individuals whose behavioral
styles, beliefs, and value systems are consistent with those of GE.
This is true whether an American is being hired, an Italian, a
German, or an Australian and whether the hiring is for a US
operation or a foreign operation.
• The belief is that if employees are predisposed toward the
organization’s norms and value systems by their personality type,
the firm will be able to attain higher performance.
• Next, individual assignments—4 students.
• Take up any MNEs and whether check are you ready to work with
the organization and explore whether your behavior styles,
beliefs, and value systems are consistent with the
firms/MNEs/Organization you have chosen. You have explain—
how it is, why and why not?
• Eg: Are you interested to work with Maersk? But Maersk is not
interested with few of you? Why?
 Staffing Policy
• Staffing policy is concerned with the
selection of employees for particular jobs. At
another level, staffing policy can be a tool for
developing and promoting the desired
corporate culture of the firm.
• By corporate culture, we mean the
organization’s norms and value systems
(something is desirable and worth to follow).
• Any example of corporate culture?
• Staffing policy entails (inevitable part) three
broad approaches: parent country national
(PCN), host country national (HCN), and third
country national (TCN).
• Examples of PCN, HCN and TCN.
 PCN, HCN and TCN
• A Parent Country National (PCN) is a person whose
nationality is the same as that of the firm, but
different from the country in which they are working:
for example, a Japanese manager working for a UK-
based subsidiary of a Japanese company.
• Host-country nationals (HCN), these employees are
hired for jobs in their own country. It is also called
local nationals. For example, a United Kingdom citizen
who is employed at Coca Cola's U.K. subsidiary is a
local national.
• (TCN): In an international firm, a TCN is a person
whose nationality is different from that of the firm,
and of the country in which the firm is operating. For
example, a UK manager working for an Australian-
based subsidiary of a Japanese company.
• Types of Staffing Policy.
• You have already studied in HRM paper.
• Explain it.
• Three types of staffing policies in
international businesses.
• The most attractive staffing policy is probably
the geocentric approach, although there are
several impediments to adopting it.
• What is geocentric approach in staffing
policy?
• A geocentric staffing policy seeks the best people for key
jobs throughout the organization, regardless nationality.
Eg. Google.
• It enables the firm to make the best use of its human
resources. Second, a geocentric policy enables the firm to
build a cadre of international executives who feel at home
working in a number of cultures.
• Firms pursuing a geocentric staffing policy may be better
able to create value from the pursuit of experience curve
and location economies and from the multidirectional
transfer of core competencies than firms pursuing other
staffing policies.
• What do you mean by ‘core competency’?
• A core competency is a concept in management theory introduced by, C.
K. Prahalad and Gary Hamel. It can be defined as "a harmonized
combination of multiple resources and skills that distinguish a firm in the
marketplace". Core competencies fulfill provides potential access to a
wide variety of markets.
• Something is unique to the particular organization.
• Eg: The unique algorithm makes Google’s as one the most sought after
search engines in the world.
• The unique ingredients of Coca-Cola makes the organization
distinguishes from other competitors.
• Toyota’s Just-in-Time (JIT) is unique in many ways.
• Mumbai Dhabbawalahs’ Lunch distribution follows the Six Sigma in a
unique way.
• Amul’s Supply Chain Management in dairy sector
• What makes Steve Job’s Apple i-phones so unique?
• Core competencies fulfill three criteria:
1. Provides potential access to a wide variety of
markets.
2. Should make a significant contribution to the
perceived customer benefits of the end product.
3. Difficult to imitate by competitors.
Again, for example, a company's core competencies
may include precision mechanics, fine optics, and
micro-electronics. These help it build cameras, but
may also be useful in making other products that
require these competencies.
 Core Competency matters along with Value Chains
• A core competency results from a specific set of skills
or production techniques that deliver additional value
to the customer. These enable an organization to
access a wide variety of markets.
• In an article from 1990 titled "The Core Competence
of the Corporation", Prahalad and Hamel illustrate
that core competencies lead to the development of
core products which further can be used to build
many products for end users.
• Core competencies are developed through the
process of continuous improvements over the period
of time rather than a single large change. To succeed
in an emerging global market, it is more important
and required to build core competencies rather
than vertical integration.
 What does Competencies mean in Business?
• A cluster of related abilities, commitments,
knowledge, and skills that enable a person
(or an organization) to act effectively in a job
or situation.
• Competence indicates sufficiency of
knowledge and skills that enable someone to
act in a wide variety of situations.
• As an individual, you have your own core
competency that makes you distinguishable
others and extremely relevant in job pursuit.
 Coming to other two…
• Ethnocentric approach: This kind of staffing policy is one in which
all key management positions are filled by parent-country
nationals. This practice was very widespread at one time.
• Firms such as Procter & Gamble, Philips, NV (a Dutch Company),
and Matsushita (Japan, consumer electronics) originally followed
it.
• In the Dutch firm Philips, for example, all important positions in
most foreign subsidiaries were at one time held by Dutch
nationals who were referred to by their non-Dutch colleagues as
the Dutch Mafia.
• In many Japanese and South Korean firms, such as Toyota,
Matsushita, and Samsung, key positions in international
operations have often been held by home-country nationals.
• According to the Japanese Overseas Enterprise Association, in
1996 only 29 percent of foreign subsidiaries of Japanese
companies had presidents who were not Japanese. In contrast, 66
percent of the Japanese subsidiaries of foreign companies had
Japanese presidents.
• The Polycentric Approach: This staffing policy recruits host-
country nationals to manage subsidiaries while parent-country
nationals occupy key positions at corporate headquarters.
• In many respects, a polycentric approach is a response to the
shortcomings of an ethnocentric approach. One advantage of
adopting a polycentric approach is that the firm is less likely to
suffer from cultural myopia.
• Myopia is nearsightedness, the inability to see beyond one's
immediate surroundings.
• Cultural myopia is the lack of interest in learning about
other cultures, or to recognize what's good in other cultures.
• A polycentric approach may less expensive to implement,
reducing the costs of value creation. Expatriate managers can be
very expensive to maintain.
• Language barriers, national loyalties, and a range of cultural
differences may isolate the corporate headquarters staff from the
various foreign subsidiaries.
• Eg. Food and detergents giant Unilever
 Expatriate Managers
• Expatriates are citizens of one country who are
working in another country.
• Sometimes the term inpatriates is used to identify a
subset of expatriates who are citizens of a foreign
country working in the home country of their
multinational employer. Thus, a citizen of Japan who
moves to the United States to work at Microsoft
would be classified as an inpatriate.
• What are the differences between an Overseas
Indians, Person(s) of Indian Origin (PIO) and Non-
resident Indians (NRIs)?
• Have you heard about Overseas Chinese? What are
they doing in Indonesia?
• Selection is just first step in matching a manager with
a job. The next step is training the manager to do the
specific job. For example, an intensive training
program might be used to give expatriate managers
the skills required for success in a foreign posting.
• Management development is a much broader
concept. It is intended to develop the manager’s skills
over his or her career with the firm.
• Cultural training, language training and practical
training etc must be given.
• An organization deals with Dangerous Cargo, the
personnel must be well-trained at the initial stages.
 Compensation
• Two issues are raised in every discussion of
compensation practices in an international business.
• One is how compensation should be adjusted to
reflect national differences in economic
circumstances and compensation practices.
• The other issue is how expatriate mangers should be
paid.
• From a strategic perspective, the important point is
that whatever compensation system is used, it should
reward managers for taking actions that are
consistent with the strategy of the enterprise.
• One can spot national differences in compensation.
Substantial differences exist in the compensation of
executives at the same level in various countries.
 INTERNATIONAL LABOR RELATIONS
• The HRM function of an international business is
typically responsible for international labor
relations.
• From a strategic perspective, the key issue in
international labor relations is the degree to
which organized labor can limit the choices of an
international business.
• A firm’s ability to integrate and consolidate its
global operations to realize experience curve
and location economies can be limited by
organized labor, constraining the pursuit of a
transnational or global standardization strategy.
• What is consolidation in international business?
• Consolidation is the process of combining and
integrating the financial results of foreign subsidiaries
into the financial statements of the parent firm.
• Prahalad and Doz cite the example of General Motors,
which gained peace with labor unions by agreeing not
to integrate and consolidate operations in the most
efficient manner.
• General Motors made substantial investments in
Germany—matching its new investments in Austria
and Spain—at the demand of the German metal
workers’ unions.
• One task of the HRM function is to foster harmony and minimize conflict
between the firm and organized labor.
• The Concerns of Organized Labor: Labor unions generally try to get better pay,
greater job security, and better working conditions for their members through
collective bargaining with management.
• Unions’ bargaining power is derived largely from their ability to threaten to
disrupt production, either by a strike or some other form of work protest (e.g.,
refusing to work overtime).
• This threat is credible only insofar as management has no alternative but to
employ union labor.
• A principal concern of domestic unions about multinational firms is that the
company can counter its bargaining power with the power to move production to
another country.
• Ford, for example, very clearly threatened British unions with a plan to move
manufacturing to Continental Europe unless British workers abandoned work
rules that limited productivity, showed restraint in negotiating for wage
increases, and curtained strikes and other work disruptions.
• Another concern of organized labor is that an international business will keep
highly skilled tasks in its home country and farm out only low-skilled tasks to
foreign plants. Such a practice makes it relatively easy for an international
business to switch production from one location to another as economic
conditions warrant. Consequently, the bargaining power of organized labor is
once more reduced.
• A final union concern arises when an international
business attempts to import employment practices
and contractual agreements from its home country.
When these practices are alien to the host country,
organized labor fears the change will reduce its
influence and power.
• This concern has surfaced in response to Japanese
multinationals that have been trying to export their
style of labor relations to other countries. For
example, much to the annoyance of the United Auto
Workers (UAW), many Japanese auto plants in the
United States are not unionized. As a result, union
influence in the auto industry is declining.
 Strategy of Organized Labor
• Organized labor has responded to the
increased bargaining power of MNCs by
taking three actions:
• 1) trying to establish international labor
organizations,
• 2) lobbying for national legislation to restrict
multinationals, and
• 3) trying to achieve international regulations
on multinationals through such organizations
as the United Nations.
• These efforts have not been very successful.
• In the 1960s, organized labor began to establish international trade secretariats (ITSs)
to provide worldwide links for national unions in particular industries.
• The long-term goal was to be able to bargain transnationally with multinational
firms.
• Organized labor believed that coordinating union action across countries through an
ITS. Virtually, the ITSs have had no real success.
• A further impediment to cooperation has been the wide variation in union structure.
Trade unions developed independently in each country.
• As a result, the structure and ideology of unions tend to vary significantly from
country to country, as does the nature of collective bargaining.
• For example, in Great Britain, France, and Italy many unions are controlled by left-
wing socialists, who view collective bargaining through the lens of “class conflict”.
• In contrast, most union leaders in Germany, the Netherlands, Scandinavia, and
Switzerland are far more moderate politically. The ideological gap between union
leaders in different countries has made cooperation difficult.
• Organized labor has also met with only limited success in its efforts to get national
and international bodies to regulate multinationals. Such international organizations
as the Geneva-based International Labor Organization (ILO) and the Paris-based
Organization for Economic Cooperation and Development (OECD) have adopted
codes of conduct for multinational firms to follow in labor relations. They also do not
provide any enforcement mechanisms.
• The guidelines are of only limited effectiveness.
• Refer the labor standards and the maritime labor standards.
 Mission and Impact of the ILO
• The Geneva-based International Labour Organization
(ILO) is devoted to promoting social justice and
internationally recognized human and labour rights,
pursuing its founding mission that social justice is
essential to universal and lasting peace.
Only tripartite U.N. agency, the ILO brings together
governments, employers and workers representatives
of 187 member States , to set labour standards,
develop policies and devise programmes promoting
decent work for all women and men.
Today, the ILO's Decent Work agenda helps advance
the economic and working conditions that give all
workers, employers and governments a stake in
lasting peace, prosperity and progress.
http://www.ilo.org/global/about-the-ilo/mission-and-
objectives/lang--en/index.htm
• Four strategic objectives at the heart of the Decent Work agenda:
• Set and promote standards and fundamental principles and rights at
work
• Create greater opportunities for women and men to decent employment
and income
• Enhance the coverage and effectiveness of social protection for all
• Strengthen tripartism and social dialogue (Underlying the ILO’s work is
the importance of cooperation between governments and employers’ and
workers’ organizations in fostering social and economic progress)
• The ILO encourages this tripartism (three type structure) within its
constituents -employers , workers and member States , by promoting a
social dialogue between trade unions and employers in formulating, and
where appropriate, implementing national policy on social, economic, and
many other issues.
 Next Topic:
•Marketing Strategy
• Any marketing strategy must be related to
the four Ps.
• What are they?
• And the marketing mix crosses the national
boundaries, one can frame the international
marketing strategies.
• Product
• Place
• Promotion
• Price
 Essentials of Global Marketing Strategy
• Essentials of global marketing strategy, including financial,
economic, political, and legal screening of products and
services.
Other strategic areas involve:
 Push and pull strategies as well as other distribution
issues.
 After-sale services and support, since it is a critical issue
when products are sold and must be supported all over
the world, across cultures, and time zones. There are
several cases where early internationalized firms found
themselves overextended and unable to live to their after-
sale services and support commitments.
 Other global marketing strategies, such as pricing
strategies.
What is pull and push strategy? Which company uses this
strategy?
 Push and Pull
• Push strategies include trade shows, showrooms, getting retailers
to stock a product, and creating a supply chain to facilitate
distribution.
• A pull strategy motivates customers to actively seek out a specific
product and it best for new products or in the case when a
manufacturer has a strong and visible brand.
• Push marketing is a promotional strategy where businesses
attempt to take their products to the customers. The
term push stems from the idea that marketers are attempting
to push their products at consumers.
• The term push stems from the idea that marketers are attempting
to push their products at consumers.
• The business terms push and pull originated in logistics and supply
chain management, but are also widely used in marketing, and is
also a term widely used in the hotel distribution business. Wal-
Mart is an example of a company that uses
the push vs. pull strategy.
• As the domestic market of a company becomes
increasingly saturated or increasingly competitive, many
companies look to new international markets as one
strategy to grow the business.
• Whether or not to decide to market products or services
to a foreign country, and if so, which one of those
products and services to market overseas, are critical
decisions for the international marketing manager. These
decisions carry significant consequences to the company
in terms of costs and management attention.
• Before taking such a critical decision, the company should
make it a point to evaluate carefully the markets it intends
to enter from a number of different, but interrelated,
perspectives.
 Target Market & Market Potential
• Need and Potential Screening:
• Potential: having or showing the capacity to develop into something in the
future.
• Market potential is the entire size of the market for a product at a
specific time. It represents the upper limits of the market for a
product. Market potential is usually measured either by sales value or
sales volume. For example, the market potential for ten speed bicycles
may be worth $5,000,000 in sales each year.
• Assessing whether there is a need for the company’s products or services in a
target market is especially challenging for the international marketing manager,
who should become familiar with an entirely new and perhaps significantly
different marketplace.
• Identifying a need does not imply that the potential consumers in that market
are necessarily aware of such a need.
• Through a close analysis of the local alternatives to the company’s products or
services, their product or service characteristics, and the business models behind
them, an understanding of the existing potential in the market can be developed.
 Competing Product or Service and Target Market

• If there is no competing product or service in

the target market, that may not mean there
is no potential for such a product or service.
• It simply requires a more indirect analysis to
understand the local problems or local
consumers’ needs that the company’s
product or service could address, and to
assess whether or not the local consumers
share these issues and would understand the
potential benefits.
 Need (s), Market Potential and Country Statistics
• Once the need has been clearly defined, the company can turn to
assessing the market potential through country statistics.
• For example, a company that chooses to sell wireless routers for
the home—used to connect one’s personal computer (PC) to the
Internet wirelessly—would be interested in collecting statistics on
the size of the population and their growth (i.e., total market),
the local average income in the country (i.., Can they afford the
product?), the penetration of PCs and Internet broadband
connections in the market (i.e., what percentage of the total
market represents an addressable market), consumer uses of the
Internet (i.e., how aware are the consumers of the benefits of
faster access to the Internet), and so forth.
• What is total market?
 What is Total Market?
• Total Market: A marketing approach followed by
corporations with their trusted internal and external
partners which proactively integrates diverse segment
considerations.
• Total market is referred to as the area of coverage for
which there is a demand for given product. All the
companies try to have their presence in the entire market.
• Requirements for total market strategy are a combination
of employment of a combination of prices, product,
promotion and distribution strategies of prices, product,
promotion and distribution strategies in different
segments, along with top management commitment to
cover the entire market and a strong financial backing to
tackle the competition and prices in course of this.
 Entry Strategies (Marketing Strategies)
• There are a number of entry strategies for
adopting a total market strategy
1. First in strategy
2. Early entry strategy
3. Laggard (slower than expected) strategy
 Marketing Strategies
• A number of product strategies to
supplement the total marketing strategy
1. Product positioning
2. Product scope
3. Product design
4. New product strategy
 Marketing Strategies
• Promotion strategies to supplement the total
marketing strategy
1. Promotion mix strategy
2. Media selection strategy
3. Advertising
 Marketing Strategies
• Distribution strategies to supplement the
total marketing strategy
1. Distribution scope
2. Multi-channel strategy

• Pricing strategies to supplement the total

marketing strategy
1. Skimming
2. Penetration
 Emerging Economies including India, China, Brazil and South Africa
• Take the case of emerging economies’ need and marketing
potential assessment.
• Emerging economies comprise more than half of the
world's population, account for a large share of world
output and have very high growth rates, which means
enormous market potential.
• They can distinguished by the recent progress they have
made in economic liberalization.
• Promising opportunities for trade are opening, as their
need for capital equipment, machinery, power
transmission equipment, transportation equipment, and
high-technology products is substantial and is increasing
rapidly.
• It may be clear that an appropriate marketing strategy
should include moving into an emerging economy.
 Take Retail Sector
• For each industry the assessment might be
different.
• Take the retailing industry—the findings by A.T.
Kearney may explain why at least 15 retailers
moved into new geographic markets, while
more than 10 retailers left countries in which
they were operating.
• Carrefour is withdrawing from several markets,
Tesco holds the record for being the fastest-
growing retailer outside its home market, while
Wal-Mart has been busily opening new stores
outside its home country every few days.
• What do you know about TESCO?
 Tesco
• Tesco PLC is a British multinational grocery and
general merchandise retailer with headquarters
in Welwyn Garden City, Hertfordshire, England,
United Kingdom.
• It is the third largest retailer in the world
measured by profits and fifth-largest retailer in
the world measured by revenues.
• Number of locations: 6,902 stores (As of Septe...
• Products: Supermarket; Hypermarket; Superstore
• Number of employees: 476,000 (2016)
• Net income: £129 million (2016)
• A mapping of the index, termed Global Retail
Development Index (GRDI), against an
economic and political stability dimension,
demonstrates the dynamics of international
business and the changing international
business environment.
• This index reveals that in Europe, the most
promising (showing signs of future success)
markets for retailers are moving further east.
 Next Topic:
OPERATIONS MANAGEMENT
including Production
Strategy/Global Production
Systems
• What is the ‘Operations Management’?
 OPERATIONS MANAGEMENT
• Operations Management (OM) deals with the set of
activities required to create goods and services through
the transformation of inputs to outputs.
• In other words, Operations management is an area
of management concerned with designing and controlling
the process of production and redesigning
business operations in the production of goods or services.
• OM is a very vast area.
• In the manufacturing firms these activities can be
identified readily in the creation of tangible products such
as a Dell laptop computer or a Nike tennis shoe.
• In organization that do not create physical products, the
production function may be less obvious, as is the case
with…
• transfer of funds at Citibank, the delivery of babies at
the Mount Sinai Hospital (New York City) ward or the
development of a promotional campaign by the BBDO
advertising agency (New York City).
• Operations management focuses on the operations
process itself. The term “operations manager” is
seldom used to label the operations management
function.
• For example, the operations manager at a company
like Dell, which assembles computers on a customized
basis, may be referred to as a production manager,
whereas the operations manager at a company like
Pixar (in California), which products full-length
animated movies, would be referred to as a creative
director.
In simple, OM is like...
• Operations management is concerned with
managing the operations function in an
organization.
• Operations is one of the major functions in
an organization along with marketing,
finance and human resources.
• The operations function requires
management of both the strategic and day-
to-day production of goods and services.
• For the most part, the title "Operations
Manager" is used in companies that produce
a tangible good—manufacturers on the
whole.
• In service-oriented businesses, the person
responsible for the operations manager role
is often called by another name.
• What it would be?
•
• One that addresses the service being offered,
examples include project manager,
consultant, lawyer, accountant, office
manager, data center manager, etc.
• TQM is a strategy for implementing and managing quality improvement
on an organizational basis, this includes: participation, work culture,
customer focus, supplier quality improvement and integration of the
quality system with business goals. Schnonberger identified seven
fundamentals principles essential to the Japanese approach:
1. Process control: SPC and worker responsibility over quality
2. Easy able -to-see quality: boards, gauges, meters, etc. and poka-yoke
3. Insistence on compliance: "quality first"
4. Line stop: stop the line to correct quality problems
5. Correcting one's own errors: worker fixed a defective part if he
produced it
6. The 100% check: automated inspection techniques and foolproof
machines
7. Continual improvement: ideally zero defects
• Dramatic changes were occurring in the service industries, as well.
Beginning in 1955 McDonald's provided one of the first
innovations in service operations. McDonald's is founded on the
idea of the production-line approach to service.
• This requires a standard and limited menu, an assembly-line type
of production process in the back-room, high customer service in
the front-room with cleanliness, courtesy and fast service.
• While modeled after manufacturing in the production of the food
in the back-room, the service in the front-room was defined and
oriented to the customer. It was the McDonald's operations
system of both production and service that made the difference.
McDonald's also pioneered the idea of franchising this operation
system to rapidly spread the business around the country and
later the world.[
• FedEx in 1971 provided the first overnight
delivery of packages in the U.S. This was based
on the innovative idea of flying all packages into
the single airport in Memphis Tenn by midnight
each day, resorting the packages for delivery to
destinations and then flying them back out the
next morning for delivery to numerous
locations. This concept of a fast package delivery
system created a whole new industry, and
eventually allowed fast delivery of online orders
by Amazon and other retailers
 Walmart
• Walmart provided the first example of very low cost
retailing through design of their stores and efficient
management of their entire supply chain.
• Starting with a single store in Roger's Arkansas in
1962, Walmart has now become the world's largest
company. This was accomplished by adhering to their
system of delivering the goods and the service to the
customers at the lowest possible cost.
• The operations system included careful selection of
merchandise, low cost sourcing, ownership of
transportation, cross-docking, efficient location of
stores and friendly home-town service to the
customer.
• What is cross-docking?
• Cross-docking is a practice in logistics of unloading
materials from an incoming semi-trailer truck or
railroad car and loading these materials directly into
outbound trucks, trailers, or rail cars, with little or no
storage in between.
• Cross docking is a logistics procedure where products
from a supplier or manufacturing plant are
distributed directly to a customer or retail chain with
marginal to no handling or storage time.
• Cross docking not only reduces material handling, but
also reduces the need to store the products in the
warehouse.
• Cross-dock operations were first pioneered in the US trucking
industry in the 1930s, and have been in continuous use in less-
than-truckload (LTL) operations ever since.
• The US military began using cross-docking operations in the 1950s.
• Wal-Mart began using cross-docking in the retail sector in the late
1980s.
• In the LTL trucking industry, cross-docking is done by moving cargo
from one transport vehicle directly onto another, with minimal or
no warehousing.
• In retail practice, cross-docking operations may utilize staging
areas where inbound materials are sorted, consolidated, and
stored until the outbound shipment is complete and ready to ship.
Although your needs may be specific, here are a few tips that will
make your life easier when setting up your cross docking rules.
 Advantages of retail cross-docking
• Streamlines the supply chain, from point of origin to point
of sale
• Reduces labor costs through less inventory handling
• Reduces inventory holding costs by reducing storage times
and potentially eliminating the need to retain safety stock
• Products reach the distributor, and consequently the
customer, faster
• Reduces or eliminates warehousing costs
• May increase available retail sales space
• Less risk of inventory handling
 Disadvantages of cross-docking
• Potential partners may not have the necessary
storage capacities
• An adequate transport fleet is needed to
operate
• A computerized logistics system is needed
• Additional freight handling can lead to product
damage
• Labour costs are also incurred because the
moving and shipping of stock happens
Factors influencing the use of retail cross-docks
• Cross-docking depends on continuous communication
between suppliers, distribution centers, and all points
of sale
• Customer and supplier geography, particularly when a
single corporate customer has many multiple
branches or using points
• Freight costs for the commodities being transported
• Cost of inventory in transit
• Complexity of loads
• Handling methods
• Logistics software integration between supplier(s),
vendor, and shipper
• Tracking of inventory in transit
 Amazon
• With the coming of the Internet, in 1994 Amazon devised
a service system of on-line retailing and distribution.
• With this innovative system customers were able to
search for products they might like to buy, enter the order
for the product, pay online, and track delivery of the
product to their location, all in two days.
• This required not only very large computer operations,
but dispersed warehouses, and an efficient transportation
system.
• Service to customers including a high merchandise
assortment, return services of purchases, and fast delivery
is at the forefront of this business.
• It is the customer being in the system during the
production and delivery of the service that distinguishes
all services from manufacturing.
Amazon develop integrated business operations that share information over its network for effectiveness.
 ISO
• In 1987 the International Organization for
Standardization (ISO), recognizing the
growing importance of quality, issued the ISO
9000, a family of standards related to quality
management systems.
• There standards apply to both manufacturing
and service organizations
 Production System
• A production system comprises both the
technological elements (machines and tools) and
organizational behavior (division of labor and
information flow).
• An individual production system is usually analyzed in
the literature referring to a single business, therefore
it's usually improper to include in a given production
system the operations necessary to process goods
that are obtained by purchasing or the operations
carried by the customer on the sold products, the
reason being simply that since businesses need to
design their own production systems this then
becomes the focus of analysis, modeling and decision
making (also called "configuring" a production
system).
• Whether the end product is a good or
service, the set of managed activities
responsible for the transformation of inputs
in an organization is referred to as
“operations management”.
• When performed by a global organization
across various countries, this set of managed
activities is referred to as global operations
management.
 Coming to products….
• In general, it is commonly accepted that goods
constitute tangible products whereas services consist
of mainly intangible products.
• In reality, many end products that are consumed in
the economy include an element of both.
• For example, tangible products such as computers
often include service components such as financing,
transportation or after-sales service, and support.
• Although there is no one definition of services, a
common description of the services sector is that it
comprises those economic activities that typically
produce intangible products such as education,
entertainment, government, lodging, financial, and
health services.
 The Nature of Services
• The main characteristics that distinguish services
from goods are following:
• Services are usually intangible, for example,
when you purchase counseling from a
psychiatrist.
• Services are often produced and consumed
simultaneously and there is no stored inventory,
for example, a hairdresser in a beauty salon
cannot store a “haircut”.
• Services are often unique, for example, the mix
of financial instruments that are used to finance
a home may differ from one individual to
another.
 Services contd…

• Services have high customer interaction, the

interaction with the client often limits or
precludes efforts of standardization which
make it necessary to design the product and
deliver the services accordingly.
• Services have inconsistent product definition;
there may be rigorous definitions (e.g., life
insurance) but the adaptation necessary to
the specific case of the individual makes each
application unique.
 Services contd…
• Services are often knowledge-based, as in
the case of education or legal assistance.
• Services are frequently dispersed; need for
frequent and close interaction with the
customer drives the need for the provider to
be located locally, even in a global setting.
• Why are we talking about services at length?
• Operational considerations are relevant.
What are those things?
• Operations management is a multi-disciplinary
field that focuses on managing all aspects of an
organization's operations.
• Efficiency, flexibility, learning (strategic goals)
• Business practices to create the highest level of
efficiency possible within an organization.
• Converting materials and labor into goods and
services as efficiently as possible to maximize
the profit of an organization.
• It is very simple to say and difficult to achieve in
an intended way.
Operations Management/Operations Manager
• They must also carry out a sales and marketing function,
an accounting function, and an administrative function to
manage employees and the business as a whole.
• Operations management focuses on the function of
providing the product or service.
• Their job is to assure the production of a quality good
and/or service.
• They apply ideas and technologies to increase productivity
and reduce costs, improve flexibility to meet rapidly
changing customer needs, assure a safe workplace for all
employees, and when possible assist in assuring high-
quality customer service.
• Transportation is operation.
• In some cases, documentation comes under operations.
• Joseph Orlickly and others at IBM developed
a push approach to inventory control and
production planning, now known as material
requirements planning (MRP), which takes as
input both the master production
schedule (MPS) and the bill of
materials (BOM) and gives as output a
schedule for the materials (components)
needed in the production process. MRP
therefore is a planning tool to
manage purchase orders and production
orders (also called jobs).
• Many of the MNEs that are manufacturers
also provide services such as after-sale
service and support.
• At the same time, there are many global
service organizations that may or may not
produce physical products.
• Examples of the latter are eBay, which
provides a global market place, or
amazon.com, a merchandising global dealer
that provides a service as well as delivers
actual shipments.
• Other pure service organizations that operate globally are
the major accounting and consulting firms such as
McKinsey & Company, Deloitte, or IBM Global Services
(IGS).
• Several global service MNEs typically employ thousands of
individuals and make use of technology systems in order
to provide customized local services while still exploiting
economies of scale.
• For example, IGS, the world’s largest information
technology services and consulting provider, employs
190,000 professionals in more than 160 countries and
provides services to clients in the area of strategy,
systems, and technology.
• All of these service organizations deal with operational
issues of designing and operating systems that support
their operations globally.
• Thus, for all MNEs and other international
organizations, operational considerations are
relevant whether they produce goods
(tangible products) or services (intangible
products).
• However, there are a number of differences
that are particular relevant to an operations
manager in each one of the various
organizations.
• Productivity is the key element in operations
management.
• How do you define ‘productivity’?
• Productivity means the effectiveness of productive effort, especially in
industry, as measured in terms of the rate of output per unit of input.
• Productivity is usually expressed as a ratio of output to inputs. It can be
expressed as units of a product (e.g. cars) per worker-hour (total number
of hours worked by all workers on that car). Given the cost of the
worker-hour, productivity can also measure the efficiency of a company.
• A measure of the efficiency of a person, machine, factory, system, etc., in
converting inputs into useful outputs. Productivity is computed by
dividing average output per period by the total costs incurred or
resources (capital, energy, material, personnel) consumed in that period.
• Efficiency is the (often measurable) ability to avoid wasting materials,
energy, efforts, money, and time in doing something or in producing a
desired result. In a more general sense, it is the ability to do things well,
successfully, and without waste.
• Efficiency is a measurable concept that can be determined by determining
the ratio of useful output to total input. It minimizes the waste of
resources such as physical materials, energy and time, while successfully
achieving the desired output. Eg. Port efficiency.
• The ongoing challenge for MNE’s operations
managers, whether they are dealing with goods
or services is to achieve the highest ratio of
outputs (goods and services) to one or more
inputs (labor, capital, and management).
• This ratio is a measure of productivity.
• Productivity measures are used for individuals,
teams, companies, and even a country’s ability
to improve its own standard of living in a
country be expected to improve.
 Increase in Output
• Improvements in productivity can be achieved either
through a reduction in inputs, while inputs remains
constant, or an increase in outputs while inputs
remain constant.
• When productivity increases, costs decrease and
wages may increase. In an economic sense, inputs are
typically land, labor, capital, and management which,
when combined, represent the operation system.
• It the management that creates this system for
transforming inputs to outputs and, thus, determines
the productivity of that system.
• How to improve the productivity of an MNE through
the global operations management function?
• How?
 Strategies and Global Operations
• More and more MNEs are pursuing global operations to take advantage
of national differences in the cost and quality of labor, talent, energy,
facilities, and capital.
• All these resources are combined to increase the MNE’s productivity.
Thus, it is becoming less and less meaningful to talk of “American”
products, “Italian” products of “Japanese” products.
• One can see that General Motors’ Pontiac Le Mans, which is perceived to
be an “American” car, has over half of its production activities occurring
outside of the USA. Most of the parts, assemblies, and production
services come from South Korea, Japan, Germany, Taiwan, Singapore,
England, and Ireland.
• “Going global” in production and operations is not only practiced by
traditional manufacturing industries such as automotive,
telecommunications and the like but also by service industries.
• Even the animation production industry is incorporating global suppliers
into its production process.
General Motors’ Pontiac Le Mans (1973 model)
General Motors’ Pontiac Le Mans
• The seven most common reasons that a
domestic, be it a manufacturer or service
provider, decide to enter into some form of
international operation are as follows:
• 1. Reduce costs:
• How costs can be reduced?
 Cost cutting/Cost Reduction Strategies
• Lower wage scales in foreign countries can help to
lower direct and indirect labor costs.
• Less stringent government regulations on a wide
variety of operations practices (e.g., environmental
control, health and safety, etc.) can directly reduce
the cost of operations in a foreign country.
• Opportunities to cut the cost of taxes and tariffs are
also a reason to establish operations in foreign
countries.
• In Mexico, the creation of maquladoras (free trade
zones) allows manufacturers cut their costs of
taxation by paying only on the value added by
Mexican workers.
• Outsourcing is another cost-cutting strategies.
 Cost-cutting
• If a US manufacturer, such as Hewlett-Packard
(HP), brings an $ 800 laptop computer to a
maquiladora operation for assembly work
costing $ 50, tariff duties will be charged only on
the $ 50 dollars of work performed in Mexico.
• Trade agreements have also helped reduce
tariffs and thereby reduced the cost of operating
facilities in foreign countries.
• The General Agreement on Tariffs and Trade
(GATT) has helped reduce tariffs from 40 percent
to 7 per cent over a period of 50 years.
• 2. Reduce risks: how?
 What is the NAFTA doing?
• Going global has become easier and less risky for international
operations because of international trade agreements.
• NAFTA, in addition to reducing tariffs, also seeks to promote
conditions of fair competition and increased investment
opportunities as well as provide for protection on certain
intellectual property rights (IPRs).
• For example, if an MNE wants to move a US production facility to
Mexico, it could apply under NAFTA for protection of investment
capital. This protection would obligate the US government to
underwrite the risk of financial loss for the MNE’s facility and help
reduce the cost of capital by obtaining a lower interest rate on the
loan to build it.
• Currently, the maquiladoras provide foreign operations a means
of dispensing with much of the complicated legalities of operating
a production facility in Mexico.
• 3. Improve the supply chain: The supply chain can
often be improved by locating facilities in countries
where unique resources are available. These
resources may be expertise, labor, or raw materials.
• For example, computer chip manufacturers are
locating many R&D facilities in Israel to take
advantage of the technical workforce and expertise in
advanced chip design technologies.
• Similarly, world athletic shoe production has migrated
from South Korea to Guangzhou, China. These
Chinese locations leverage the low-cost labor and
production competence in a city where 40,000 people
work making athletic shoes for the world.
• 4. Provide better goods and services: While the characteristics of
goods and services can be objective and measureable, such as
number of on-time deliveries, they can also be subjective and less
measureable, such as sensitivity to culture.
• As an MNE enters new regional markets it needs an ever better
understanding of the differences in culture and of the way
business is handled in different countries.
• Improved understanding as the result of a local presence permits
MNEs to customize products and services to meet unique cultural
needs in foreign markets.
• Also, proximity to foreign customers improves responsiveness to
customers’ changing product and service requirements.
• Customers who purchase goods and services from US firms are
increasingly located in foreign countries. Thus, locating a facility in
a foreign country provides these customers with quick and
adequate service.
• 5. Attract new markets: Because international operations
require local interaction with foreign customers, suppliers,
and other competitive businesses, international firms
inevitably learn about unique opportunities for new
products and services.
• Knowledge of these markets may not only help to
increase sales but also permit organizations to diversify
their customer bases and smoothen the business cycle.
• Global productions also add production flexibility, so that
products and services can be switched between
economies that are booming and those are not.
• Another reason to establish a production facility in a
foreign market is the opportunity to expand the product
life cycle. (Further market opportunity and extending life
of the product)
 GE’s Strategy
• 6. Improve operations: Jack Welch, the legendary CEO
of General Electric once said: “Global companies must
seek out the best ideas from anywhere!”.
• Learning does not take place in vacuum. Because the
world is full of ideas, MNEs serve themselves and
their customers well when they remain open to the
free flow of ideas.
• For example, General Motors found that it could
improve operations by jointly building and running,
with the Japanese, an auto assembly plant in San
Jose, California.
• This strategy allows General Motors to contribute its
capital and knowledge of US labor and environmental
laws while the Japanese contribute production and
inventory ideas.
 Tapping the Talent and Skills
• 7. Attract and retain talent: Global organizations can attract and
retain better employees by offering more employment
opportunities. They need people in all functional areas and in
areas of expertise worldwide.
• For example, Sweden’s leading pharmaceutical companies are
building research and production facilities near American
universalities and pharmaceutical institutes so that they can
better recruit and retail skilled researchers and technicians
important to the development of new drugs.
• A new competing mobile operator in Italy located its network
group in Rome in order to be able to “seduce” other technical
staff from its entrenched competitors (all who have their network
groups stationed in Rome)
• These are some of the most common motivations for MNEs to
seek competitive advantage through globalization of operations.
• The initiative for global operations typically comes from one of
the two sources:
• either the domestic or local company
chooses to compete in markets abroad due
to some realization of a competitive
advantage vis-s-vis their global peers or
global competition is forced upon a company
with the market entry of foreign competitors
to the domestic company’s local customer
base.
 Impact of Global Trends
• Historically, operations and logistics costs
accounted for up to 25 percent of the total cost
of goods sold.
• Clearly, any reductions in these costs can bring
significant profits directly to the bottom line.
• In Europe, a study by A.T. Kearney showed a 50
percent reduction in logistics and freight cost
averages (from 14 per cent to 7 percent) over a
period of 9 years.
• In addition, in recent years companies have
begun to recognize operations as a significant
competitive weapon for revenue generation and
customer loyalty.
 3 Distinct Global Trends
• The renewed view of operations and logistics
has been driven by three distinct global
trends:
1. increased global competition;
2. the fast pace of technological development;
and
3. a new emphasis on customer-focused
enterprises.
• 1. Increased global competition: With advent of the World Trade
Organization (WTO), and regional free trade agreements (e.g.,
NAFTA, EFTA/EU Common Market, Asia, South America), local
companies are suddenly finding themselves competing for
customers in their home markets against foreign competitors in
addition to their traditional adversaries.
• For example, GM is now competing not only with Ford and
Chrysler (1925, Detroit, Michigan, United States) but also with
Japanese and European imports.
• In addition to the sheer number of new players, the rules that
foreign competitors bring to the game can be very different.
• Foreign firms operate under different conditions than local firms
and may face fewer limitations or have greater access to critical
resources, giving them a distinct competitive edge over the
domestic firm.
• 2. Fast pace of technological development:
Another major factor shaping global operations is the
increased pace of technological development.
• These changes impact the manufacturing
environment through changes in both product as well
as process design.
• An increasing rate of technological development leads
to more frequent product introductions and in some
cases the creation of whole new industry sectors.
• Developments in computing and communications
have significantly driven both new product
development and manufacturing and distribution
through increased automation, more powerful
information systems, and the capabilities for online
monitoring and control of global operations.
• 3. Customer focus—quality, speed, and flexibility:
Traditionally, production, operations, and logistics were
treated as cost centres that absorbed much of a firm’s
resources, a necessary evil.
• The focus was to meet schedules and produce and deliver
the product or service at the lowest possible cost. When
competition was primarily based on price, this was a
consistent approach to viewing the operational functions.
• In today’s global environment, increasing competition and
the complexity of global operations are highlighting a
number of ways that the operational functions can be used
to provide a competitive advantage to the firm beyond
simply minimizing cost. These advantages can be
summarized as: quality, speed, and flexibility.
 Japanese Way
• As Japan demonstrated so convincingly in the 1980s,
quality has become a competitive weapon for both
gaining market share and developing loyal customers
to a particular product and brand.
• With product life cycles dropping and the global
competition for innovation, time to market from
concept to commercial realization has become one of
the key differences between profitable initiatives and
failures.
• Finally, as customers demand more and more
personalized goods and services, the push towards
mass customization and shorter life cycles requires
manufacturing groups to adopt far more flexible
practices. These practices strive to balance between
efficient and customizable products and services.
 STRATEGIC IMPORTANCE
• The importance of operations and logistics for
supporting world class MNEs has been gaining more
prominence as enterprises increasingly address both
global supply opportunities as well as compete in a
world market for their products and services.
• In recent years the operations function in general has
assumed increasing strategic importance as a
competitive weapon.
• Nowhere has this been more acutely demonstrated
than in the advent of e-commerce and the failure of
most of the online businesses to survive due to a
failure to met customer expectations for quality,
delivery and after-sales support.
• In spite of claims that the Internet is a medium
for commerce and exchange that truly has no
boundaries, many MNEs have learned the hard
way that without dealing with the operational
realities of providing both tangible and
intangible products one can never succeed as a
global organization.
• Using a superior operational strategy and
procedures, Amazon.com has become a global
leader in its field.
• What are the essential elements of the global
operational strategy of the company like
Amazon.com?
• Amazon.com. Inc. (NASDAQ: AMZN), a Fortune 500
company based in Seattle, opened on the world wide web
in July 1995 and today offers the world’s largest selection
of merchandise as a one-stop Internet shopping
operation.
• Amazon.com seeks to be the world’s most customer-
centric company, where customers can find and discover
anything they might want to buy online, and endeavors to
offer its customers the lowest possible prices.
• Amazon.com and other sellers offer millions of unique
new, refurbished, and used items in categories such as
beauty, health and personal care, jewelry and watches,
gourmet food, sports and outdoors, apparel and
accessories, books, music, DVDs, electronics and office,
toys and baby, and home and garden.
• What is gourmet food?
Gourmet is a cultural ideal associated with the culinary arts of fine food and drink, or haute cuisine, which is
characterized by refined, even elaborate preparations and presentations of aesthetically balanced meals of
several contrasting, often quite rich courses. The term and its associated practices are usually used positively
to describe people of refined taste and passion.

• The term gourmet can refer to a person with

refined or discriminating taste who is
knowledgeable in the craft and art of food
and food preparation.
• Gourmand carries additional connotations of
one who simply enjoys food in great quantities.
• An epicure is similar to a gourmet, but the word
may sometimes carry overtones of excessive
refinement.
• A gourmet chef is a chef of particularly high
caliber of cooking talent and skill.
Lobster is considered by some as a gourmet food
due to its high price. Below is lobster creole
Foie gras with Sauternes wine
Oysters with caviar
• Amazon.com and its affiliates operate seven retail
websites: www.amazon.com, www. Amazon.co.uk,
www.amazon.de, www.amazon.fr,
www.amazon.co.jp, www.amazon.ca, and
www.joyo.com .
• Today, global operations is clearly recognized as a
major competitive weapon to be leveraged not just
with the objective of cost competition but also in the
generation of a strong global brand and the
generation of revenues through ever-greater
responsiveness, quality, and personalized service.
• In fact, a sound global operations strategy is critical to
the successful execution of any of the classic
competitive advantages of differentiation, cost
leadership or quick response.
• How successfully translate the MNE’s vision
and mission into an executable competitive
advantage through global operations?
• There are interdependent areas and role of a
operations manager matter.
• How is to be done?
• Appropriate planning and resources
management worldwide is necessary to
support the global value chain for the MNE
and is a major factor in determining the
costs, profit margins, and other operational
metrics, such as worldwide and local
productivity and quality levels.
• One of the most difficult planning decisions
facing the global productions managers is the
selection of facility locations for plants,
subsidiaries, distribution outlets, and
regional headquarters that support the
global market.
• Generally, there are two broad approaches to
selling products abroad: locating all
operations in the home country and
exporting to all markets or locating certain
operations in the host country.
• The advantage of locating facilities and plants in
the home country is that it is simpler to manage
because the manufacturing firm does not have
to face the challenges of overseas operations.
• In the initial stages of growth, when the size of
the total market and the market share of the
company are relatively small, such a strategy
works well.
• As the company grows, it will need to develop
an international operational and manufacturing
base to compete with regional competitors, to
comply with protectionist pressures or to better
serve its global customers.
 Preferring One Region: Why
When considering locating a plant in a host country,
the most common reasons for preferring one region
over another are:
1. Access to low-cost production input factors
2. Proximity to the target market
3. Access to technological resources
4. Cost and availability of management
5. Access to better or cheaper raw materials,
component parts, etc.
6. More favorable energy policies, political
environment, regulations, and bureaucracy
7. Strong economic development of a country
8. Fit with the local culture, local work, and business
ethics
• In addition, an MNE is often faced with the
trade-off between centralizing all production
globally in order to achieve economies of
scale or decentralizing some facilities by
market in order to pursue a differentiation
strategy for delivering customized products
through close interaction between the
marketing, development, and manufacturing
departments within a particular market.
 Offshore
• MNE’s often have many potential locations
around the world from which to choose a site
for a facility.
• One of the most common reasons to create an
offshore facility (situated at sea some distance
from the shore) is the need to reduce the cost
structure of a selected product or service.
• However, this should be balanced against the
potential lower-quality workmanship and lower
productivity which may exist in some developing
countries.
 High-paying Occupations, Minimum Wages & Emerging Economies
• In addition, the impact of offshore operations on the cost
structure of an MNE is not straightforward.
• There is recent evidence that MNE’s pay a wage premium
that averages about 14 percent for high-paying
occupations in emerging economies.
• Wages and salaries generally are closely correlated with
the level of gross domestic product (GDP). However, the
correlation is much weaker for managers’ salaries.
• This means that labor markets are global but only for
certain high-paying professions and for certain
internationally-oriented countries.
• There is also a gap in minimum wages across countries
that should be considered: for example, the minimum
wage in Greece is about one-fourth of other, well-
developed countries.
 What is ‘lead time’?
• The location of service MNEs may also be dependent upon the type and quality level
of service MNEs may also be dependent upon the type and quality level of service
required, but, for manufacturing MNEs, supply issues are more important: the greater
the distance between manufacturing facilities and target markets, the longer it takes
for customers or receive shipments.
• Long supply periods—namely, long lead times—may mean delays that are
compensated for by maintaining larger inventories in target markets with the resulting
storage, handling and insurance costs.
• Transportation costs, which, on some merchandise types, may account for 10 per cent
of the value of the merchandise, are also positively related to the distance from main
markets.
• Lead time: the time between the initiation and completion of a production process.
Lead time is the amount of time that elapses between when a process starts and its
completion.
• Lead time is examined closely in manufacturing, supply chain management and project
management, as companies want to reduce the amount of time it takes to deliver
products to the market.
• For example, the lead time between the placement of an order and delivery of a new
car from a manufacturer may be anywhere from 2 weeks to 6 months. In industry, lead
time reduction is an important part of lean manufacturing.
• Order cycle time refers to the time period between placing of one order and the
next order. It is the time period between two orders that are placed. The time period
between placing of an order and receiving it is called the order lead time
 Economic Justifications for Location Decision(s)
• Most location decision business cases are based on
demonstrating the economic benefits of performing a
particular business activity, or set of activities, in a
different location. Theses benefits must outweigh the
costs of having to manage a project or process
multinationally.
• To enjoy the economic benefits of different locations, an
MNE can either undertake the specific activities in the
location itself or outsource the specific activities to a local
company while ensuring close monitoring, control, and
interfaces with its own sites.
• Almost any activity undertaken by the business could be a
candidate for this, including R&D, assembly and
production, financial or advertising services or marketing
and sales.
• Three example below:
• 1. A company that designs precision ice
hockey equipment chose to do the design in
Sweden, the financing of the operation in
Canada, assembly of the products in the USA
(ie., Cleveland, Ohio) and Denmark, while
marketing it across North America and
Europe. In addition, this equipment used
alloys whose molecular structure was
researched and patented in the USA (i.e.,
Delaware) and produced in Japan.
In ice hockey, players use specialized equipment both to facilitate the play of the game and for protection as this is a
sport where injuries are common therefore, all players are encouraged to protect their bodies from bruises and
severe fractures.
• 2. Boeing (www.boeing.com), an airplane
manufacturer, designed one of its aircrafts in
the USA (i.e., Seattle, Washington) and Japan,
sourced the tail cones from Canada, tail
sections from China and Italy and engines
from Britain. The entire plane was finally
assembled back in the USA (i.e. Seattle).
• What is tail cones and tail sections?
• Where is Seattle in the USA?
Seattle is a city found in Washington, The United States of America.
Tailcone Boeing 787
Tailcone
The Tailsection plunging into the water
Tailsection Air Berlin
• 3. A company outsourced the development
of their advertising campaign to a
professional services firm that conceived the
campaign in Britain, shot the footage in
Canada, dubbed it back in Britain and sent it
for final editing in New York.
• Dubbed means to change the sounds and
speech on a film or television programme,
especially to a different language.
• In general, a major part of each of the decisions outlined in
the examples above was the recognition that each activity
done in a particular location was being done more
productively.
• In general, the productivity of a particular location for any
given activity is primarily a function of two factors—labor and
capital.
• Language differences can lead to translation needs, and
cultural differences can affect management practices etc.
• Local tax or labor law differences
• Long-distance management can create communication and
coordination challenges
• Extra productivity can often come with significant overheads
• The challenge for the multinational manager is to investigate
and consider all this before making a FINAL DECISION.
• Over time, operations management has grown in
scope and increased in importance.
• Today, it has elements that are strategic, it relies on
behavioral and engineering concepts, and it utilizes
management science/operations research tools and
techniques for systematic decision-making and
problem-solving.
• As operations management continues to develop, it
will increasingly interact with other functional areas
within the organization to develop integrated answers
to complex interdisciplinary problems.
• Indeed, such interaction is widely regarded as
essential to long-term business success for small
business establishments and multinational
corporations alike.