GBM Chapter I

8/8/2019 GBM Chapter I

1/72

DR. R K JAIN

Global Business Management:Session - I


2/72

Session Objectives

y Define international business and how it differs fromdomestic business

y Explain why companies engage in international business

y Introduce different international business modelscompanies use

y Describe the forces that affect international business


3/72

Questions For Discussion

y What constitutes a global company? Criteria?Examples?

y Drivers of globalization?

y Globalization good or bad?


4/72

What is International Business?

International business consists of transactionsthat are devised and carried out across national

borders to satisfy the objectives of individuals,companies, and organizations.


5/72

Need for International Business

y More and more firms around the world are goingglobal, including:

Manufacturing firms

Service companies (i.e. software services, banks, insurance,consulting firms)

Art, film, and music companies


6/72

Need for International Business

y International business: causes the flow of ideas, services, and

capital across the world

offers consumers with wide choices

permits the acquisition of a widervariety of products

facilitates the mobility of labor, capital,and technology

provides challenging employmentopportunities

reallocates resources, makespreferential choices, and shiftsactivities to a global level


7/72

Contributions of MNEs


8/72

Home-Country Losses

y Displaces jobsy Technology transferred abroady Loss of outputy Loss of exports

y Declining wagesy Replace local companiesy Loss of best resourcesy Destroy local entrepreneurshipy

Decrease local R&D undertakings

11-11


9/72

Home-Country Gains

y Increase in demand and wages for skilled-labor

y Lower prices

y Higher product demand

y More optimum use of production factors

y Use of unemployed resources

y Upgrading of resource quality

y Ability to observe foreign competitive conditions

11-12


10/72

Perspectives of International Business

y World

y Regions

y Country

y Industry

y Company

y Individual


11/72

Global Links Today11

y International business has created a networkofgloballinksthat bind countries,

institutions, and individuals with trade,financial markets, technology, and livingstandards.

For example, a reduction in cocoa production inGhana would affect individuals and economies

worldwide.


12/72

Reasons for Growth in International Business

y Rapid increase in and expansion of technologyy Transportation is quicker while costs are lowery Communication enables control from afary

Liberal government policies on trade and resourcesy Development of institutions that support international

tradey Consumer pressuresy Increased global competition


13/72

A few Institutions that Support International Trade

y General Agreement on Tariffs and Tradewww.gatt.org

y World Trade Organization (WTO)www.wto.org

y North America Free Trade Agreementwww.nafta.org

y European Union (EU)

europa.eu.inty Asia Pacific Economic Cooperation

www.apec.org

y Association of South East AsianNations

www.aseansec.org


14/72

Drivers of Globalization

y Market Drivers - customers & channels

y Cost Drivers - scale, sourcing, development efficiencies

y Political /Government Drivers - free trade, standards,regulation, development initiatives

y

Competitive Drivers increased intensity of competition,globalization

y Technological Factors - advances in ICT and Internet,


15/72

Why Engage in International Business ?

Enter new markets Improve overall profitability Test market

Increase Profitsand Sales

Guarantee supply of raw material Better components, services, products, Foreign capital Technologies Information

Acquire resources

Take advantage of the business cycle forproducts/services

Diversify among international marketsDiversify risk

Protect market (domestic and Foreign) Pre-empt competitionCompetitive

reasons


16/72

Seven Dimensions of Global Business

y Global Products & Services

y Global Market Participation

y Global Promotion Marketing

y Global Location of Activitiesy Global Competitive Maneuvers

y Degree of Global Ownership

y Degree of usage of global (non-home-country

personnel)

These are the Levers of Global Business Strategy


17/72

Types of International Business

Export-import trade

Foreign directinvestment

Licensing

Franchising

Management contracts


18/72

Environmental Forces Influencing Businesses

External Forces

y Competitive

y Distributive

y

Economicy Socioeconomic

y Financial

y Legal

y Physical /

Geographicaly Political

y Sociocultural

y Labor

y Technological

Internal Forces

Factors ofProduction

Capital

Machine and Man power Raw material

Land and buildings

Functional Activities

Finance

Production

Marketing

HR (Personnel)


19/72

Why International Business is different?

y Is exposed to external environmental forces at

Domesticlevel

All the uncontrollable forces originating in the home countrythat surround and influence the firm

Foreignlevel

All the uncontrollable forces originating in the home country

that surround and influence the firm Internationallevel

Forces emanating from the interaction between domestic andforeign environmental forces or between sets of foreignenvironmental forces


20/72


21/72

Environmental Forces and Global Business


22/72

Characteristics of a Global Company

y Focus/vision - complexity of world differences & similarities

y Orientation - Geocentric vs Poly or Ethno

y Mktg Strategy extension, adaptation, creation

y R&D Strategy - integrated across regions

y HRPolicy - best people

y NewProduct Development - global mkt needs

y Manufacturing - lowest cost for global needs

y Financial Policy - global sourcing

y

Investment Policy - cross-subsidizationy Operating Style/Communications - integrated, interactive across

& up

y Partnerships - competencies for world leadership

y Score Keeping - share of world mkt


23/72

Stages of Internationalization of an organization

Stage &

Company

1Domestic

2

International

3

Multi-

national

4

Global

5Transnational

Strategy Domestic International Multi-domestic

Global Global

Model N.A. CoordinatedFederation

DecentralizedFederation

CentralizedHub

Integrated Netwo

View of

the World

HomeCountry

ExtensionMarkets

NationalMarkets

GlobalMarkets or

Resources

Global Markets oResources

Orientation Ethnocentric Ethnocentric Polycentric Mixed Geocentric


24/72

Patterns of Internationalization

Figure 1.7Figure 1.7


25/72

Questions A Global Manager has to Answer

25

y How will an idea, good, or service fit into theinternational market?

y Should trade or investment be used to enter aforeign market?

y Should supplies be obtained domestically orabroad?

y What product adjustments are necessary to beresponsive to local conditions?

y What are the threats from global competitors,and how can these threats be counteracted?


26/72

Global Manager

Know

How to

Analyze

Problems

Improve

Logistics

Market

Effectively

Develop

World-Class

Products

Emphasize

Global

Awareness

Know the

Customer

The Keys

to

Success


27/72

Session 2 :The Global Business Environment


28/72

Objectives

y Understand & gain insight into the global businessenvironment economic, political, and culturalfactors that influence international business

y Discuss the theories that explain the reasons forcountries and organizations to engage in trade


29/72

Influences on International Business

y External Influences

Physical/Societal factors

Political policies andlegal practices

Cultural factors

Economic factors

Geographical influences

Competitiveenvironment

y Operations

Objectives

Strategy Means


30/72

Increased Uncertainties Associated withInternational Business

y General Environmental Uncertainties Political(War, Coup, Revolution), Government Policies (Price Controls,Repatriation, etc.) Macroeconomic (inflation, foreign exchange),

Social (concerns, protests),Natural (earthquakes)

y Industry Uncertainties Input Market (quality, supply),Product Market (consumer tastes, substitutes, complementaryproducts), Competitive (rivalry, new entrants, technology)

y Firm Uncertainties Operating (labour, input supply,production), Liability(product, environment), R&D, Credit,Behaviour


31/72


32/72

Management in International Business

y In additional to domestic businessmanagement skills, international

business management requires

Social science understanding

Political science appreciation

Legal awareness

And an innate ability in:

Anthropology Sociology Psychology Economics Geography

1-4


33/72

Political, Legal, & EnvironmentalInfluences


34/72

Political Risks for International Business

y Opinions of political leadership

y Civil disorder Economic conditions

Human rights violations Group animosity Procurement difficultiesWork stoppages Shipment delays

Property damage

y External relations between home and host country


35/72

Political Strategies for International Businesses

y Identify the exact issue Trade barrier? Environmental standards? Workers rights, etc?

y Define/determine the political aspect of the issue

y Assess the potential political action of other companies

y Identify important institutions and individuals

y Formulate strategies Key objectives Alternatives Probable effectiveness


36/72

Legal Environment

y Common law systems (tradition/precedent) India United States United Kingdom

y Civil law (rules of business are part of the countries code) Germany France Japan

y Theocratic law (based on religious precepts) Sudan Pakistan


37/72

Legal Issues for International Businesses

y Worker relations Health and safety standardsWorkweek

y Employment practicesy Antitrust prohibitionsy Contractual relationshipsy Environmental practices

y Patents, trademarks, and intellectual propertyprotection

y Taxes and reporting requirements


38/72

Economic Issues for International Businesses

y What type of economic system does the countryhave?

y

What is the size, growth potential, and stability ofthe market?

y Is the companys industry in that countrys public or

private sector? If public, does the government allow private competition?

If private, is it moving towards public ownership?


39/72

Economic Issues for International Businesses, cont

y Does the government view foreign capital ascompetition with or in partnership with public orlocal private enterprises?

y How does the government control the nature andextent of private enterprise?

y How much of a contribution is the private sectorexpected to make in assisting the governmentformulate overall economic objectives?


40/72

Key Economic Forces

y General economic frameworky Economic size and stabilityy Existence and influence of capital marketsy Factor endowments

y Indicators Growth Inflation Surpluses Deficits

y

Economic transitionsy Availability of economic infrastructure

4-5


41/72

Factor Conditions

y Inputs to the production process

Human resources

Physical resources

Knowledge

Capital

Infrastructure

y Factor conditions are especially critical for theproduction of goods


42/72

Demand Conditions

y Market potential Composition of home demand (nature of buyer needs)

Size of home demand

Growth of home demand

Internationalization of demand

y Demand conditions are

especially critical formarket-seeking

investments

Composition?Size?

Growth?Internationalization?


43/72

Gross National Income

y Tool to measure one country against another Size Demand

y

GrossNational Income (formerly the Gross NationalProduct)

y GNI is the market value of final goods and services newlyproduced by domestically owned factories of production.

y Countries with high populations and high per capita GNIare most desirable in terms of market potential


44/72

Importance ofPer Capita GNI

LowIncomeLowIncome745or less (in745or less (in2004)2004)

Developing/EmergingDeveloping/EmergingCountryCountry

High IncomeHigh Income9,266or more9,266or moreDeveloped/IndustrialDeveloped/IndustrialCountryCountry

Upper MiddleUpper MiddleIncomeIncome

2,9762,976--9,2059,205Developing/EmergingDeveloping/EmergingCountryCountry

Lower MiddleLower MiddleIncomeIncome

746746--2,9752,975Developing/EmergingDeveloping/EmergingCountryCountry

World BankWorld BankCategoryCategory

Per CapitaGNIPer CapitaGNI($)($)

CommonNameCommonName


45/72

Countries Classified by Economic System


46/72

Economic Freedom

y Market Economy: resources are primarily owned andcontrolled by the private sector, not the public sector

Consumer sovereignty is the right of consumers to decide whatto buy

Prices are determined by supply and demand


47/72

Economic Freedom, cont.

y Command Economy (CentrallyPlanned Economy):all dimensions of economic activity, includingpricing and production decisions, are determined by

a central government plan Government owns and controls all resources

Prices are determined by government


48/72

Economic Freedom, cont.

y Mixed Economy: Some degree of governmentownership and control

y No economy is purely market or command

y Economic systems are along a spectrum of freedomsy Most command economies are moving towards a

market economy


49/72

Economic Factors International Businesses MustAddress

y Inflation

y Surpluses

y Deficits

y Balance ofPayments

y External Debt

y Internal Debt

y

Privatization


50/72

Country Risk Ratings

y GNPPer Capita - (+)y Propensity To Invest - (+)y Reserves to Import Ratio - (+)y Current Account Balance - (+)

y Export Growth Rate - (+)y Export Variability - (mixed)y Net Foreign Debt To Exports - (-)y Debt Service Difficulty - (-)y Political Instability - (-)


51/72

Cultural Influences


52/72

What is Culture?

Culture the set of values, beliefs,rules, and institutions held by a

specific group of people.


53/72

Culture - learned norms based on attitudes, values,beliefs

y Approaches - ethnocentric, polycentric, geocentric

Areas Most Affected

y Business Protocol

y Communications

y Negotiations

y Marketing Mix

y

Mgt of JVs & Subs


54/72

Legal characteristics &

political structures

Education

PersonalCommunication

Religion

Societal Structure

Manners &

Customs

Beliefs &

Attitudes

Aesthetics

Culture

Components of Culture


55/72

GeertHofstede Framework

Individualism

versus

Collectivism

Power DistanceUncertainty

Avoidance

Achievementversus

Nurturing


56/72

Ethnocentricity

y Ethnocentricity is the belief that ones own ethnicgroup or culture is superior to that of others.

y Problem with Ethnocentricity:

It causes people to view other culture in terms of their own,causing them to overlook important human and environmentaldifferences among cultures.


57/72

Major Cultural Issues

y Problems arise in international business when:

Employees have subconscious reactions

Employees assume all societal groups are similar

A company implements practices of work less well thanintended

Employees encounter distress because of an inability toaccept or adjust to foreign cultural behaviors

Companies/employees are insensitive to foreignconsumer preferences

2-3


58/72

Cultural Orientations

y International businesses adopt an attitude towardsforeign cultures

Polycentrism: control is decentralized so regional

managers can conduct business in a local manner Ethnocentrism: belief that ones own culture is superior

and ignores important factors Geocentrism: a hybrid of polycentrism and

ethnocentrism, the middle ground

y Companies MUST evaluate their practices to ensurethey account for national cultural norms

2-18


59/72

Tolerance, Knowledge, & Skills

y ToleranceA sensitive awareness of the beliefs and practices

of other peoples that differ from or conflict withones own.

The first step in developing tolerance toward othercultures is to understand their histories.

y International Business Knowledge AndSkills The type of knowledge and skills required can

include the ability to design effective promotionalstrategies abroad, manage an international salesforce, manage risk in international financialmarkets, and communicate effectively acrosscultures.


60/72

Maintaining A Global Mindset

A. Maintaining a global mindset means keeping upon social, cultural, political, and economic eventsand trends.

B. Maintaining a global mindset means not allowingoneself to fall into the trap ofstereotyping groupsof people as a result of current events.


61/72

Key to Success

y Organizations must understand culturaldifferences

y Organizations must be culturally literatein order to avoid misunderstanding

y As companies enter into the internationalmarket, localizing business policies and

practices can help managers to succeed


62/72

Review of Culture

y Understand cultural environments

y Explain major causes of cultural difference andchange

y Examine behavioral factors influencing countriesbusiness practices

y Examine cultural guidelines for companies thatoperate internationally


63/72

Why Do Nations Trade?


64/72

International Trade Theories

y Mercantilism (between 16th and 18th centuries,Europe):

Is a complex political and economic arrangement thatpromoted exports and stifled imports

Government controls the direction, volume and

composition of trade

Eg: Japan


65/72

Cont.

y Theory of Absolute Advantage (Adam Smith, 1776)

Market Forces should control the direction, volume andcomposition of trade

Advocates free trade

Nations specialize in producing those goods/service for

which they have absolute production advantage, eithernatural or acquired

Results in efficient use of global economic and creationglobal wealth


66/72

Cont.

y Theory of Comparative advantage (David Recardo, 1817)

Market Forces should control the direction, volume andcomposition of trade

Advocates free trade

Nations specialize in producing those goods/service for whichthey have relative or comparative advantage, as the absolute

advantage of a nation may not be the same in case of allgoods/services

Influence of Exchange rate, Taste and preferences on trade candefies the theory of comparative advantage in some cases


67/72

Cont.

y Theory of Factor Endowment (Heckscher Ohlin,1933)

International and interregional differences in productioncosts occur due to differences in supply (availability) ofproduction factors

The direction, volume and composition of trade is influencedby the factor endowments of the nations engaging in trade

Nations engage in producing those goods/service which

require those factors that are abundantly available so that theproduction cost is less and hence such products can be sold ininternational markets

LeontiefParadox: US exporting relatively labor intensive

products in exchange for relatively capital intensive products.


68/72

Cont.

y Other theories

The Linder theory of overlapping demand (Stefan Linder)

International Product Life cycle (Raymond Vermon)

Technology Life cycle

Economies of scale and the Experience curve

Imperfect competition

First-Mover theory

National Competitive advantage from regional Clusters


69/72

Competitive Advantage ofNations


70/72

Summary of International Trade Theories

y International Trade occurs primarily because of relativeprice differences among nations. These differences stemfrom differences in production cost , which result from

Difference in factors endowments

Difference in level of technology that determine the factorintensities used

Differences in the efficiencies with which these factors

intensities are utilized Foreign exchange rates

However, taste differences and demand variables can reversethe direction of trade predicted by the theory


71/72

International Investment Theories

y Monopolistic advantage theory

y Product and factor market imperfections

y Financial factors

y International product life cycle

y Follow the leader

y Cross investment

y Internationalization theoryy Dynamic Capabilities

y Dunnings Electic theory of international production


72/72

Thank You

Documents

GBM Chapter I