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ARBUS301 - Course Notes.docx

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Arts and Business
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Mark Arnason

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ARBUS301/AFM333 Course Notes Week 1  Accenture o G6 (France, Germany, Italy, Japan, UK, US) o B6 (Brazil, China, India, Mexico, Russia, South Korea) o Number of emerging-market based multinationals has mushroomed over pass decade o G6 economies accounted for close to half of global consumption despite being 1/10 of population o China India = 123 million middle class in 2010 more than number of households in US o 33 million university educated professional in developing v. 14 million in developed o Emerging markets attract a larger share of foreign direct investment than developed markets, and drive an increasing share of outward investment flows o By 2020 500 million working population expected in emerging compared to 3.7 million in developed economies  Globalization of Markets o Two mega trends have altered the international business landscape: the globalization of markets or economies and technological advantages o Market globalization is a broad term referring to the interconnectedness of national economies and the growing interdependence of buyers, producers, suppliers and governments in different countries o Globalization allows firms to view the world as one large marketplace for goods, services, capital, labour and knowledge o Drivers and Consequences of Market Globalization  Drivers  Worldwide reduction of barriers to trade and investment o National governments have sought to reduce trade and investment barriers, which has accelerated global economic integration o The WTO has facilitated this o The WTO is a multilateral governing body empowered to regulate international trade and investment, and has been engaged in an ongoing liberalization of member states‟ economies since the late 1940s  Market Liberalization and Adoption of Free markets o The tearing down of the Berlin Wall in 1989, the collapse of the Soveit Union‟s economy that same year, and China‟s free-market reforms signalled the end of the 50-year Cold War between communist regimes and democracy. o It was the transition of command economies to market-driven economies that faciliatated their membership into the global economy o The East Asian nations, stretching from South Korea to Malysia and Indonesia, had already embarked upon an ambitious proram of market liberalization in the 1980s. India joined this trend of economic liberalization in 1991 o These events opened roughly one-third of the world to freer international trade and investment o With privatization of previously state-owned industries these countries have enjoyed greater economic efficiency simultaneously attracting foreign capital  Industrialization, Economic Development, and Modernization o Industrialization transitions emerging markets - Asia, Latin America and Eastern Europe from being low-value adding commodity producers, dependent on low-cost labour to sophisticated competitive producers and exporters of premium products (higher-value products) such as electronics, computers and aircraft o The adoption of modern technologies, improvement of living standards, higher discretionary income levels and adoption of modern legal and banking practices increase the attractiveness of emerging markets as investment targets and facilitate the spread of ideas and products  Integration of World Financial markets o Integration of world financial markets enables internationally active firms to raise capital, borrow funds and engage in foreign currency transactions wherever they go o Cross-border transactions are made easier partly as a result of the ease with which funds can be transferred between buyers and sellers through a network of international commercial banks o The globalization of finance enables firms to pay suppliers and collect payments from customers worldwide  Technological Advances as a Driver of market Globalization o Advances in technology provides the means for internationalization of firms o Advances in technology  Faciliatates the development and spread of new products and technologies;  Reduces the cost of doing business internationally;  Enables even smaller firms to go international  Helps coordinate worldwide activities;  Mitigates geographic distance by providing virtual interconnectedness with customers, subsidiaries, intermediaries, and suppliers o Phases of Globalization  The First Phase (1830-1880)  Introduction of railroads and ocean transport  Rise of manufacturing; cross-border trade of commodities, largely by trading companies  The Second Phase (1900-1930)  Rise of electricity and steel production  Emergence and dominance of early multinational enterprises  The Third Phase (1948-1970)  Formation of General Agreement on Tarrif and Trade; conclusion of world War II, Marshall Plan to reconstruct Europe  At war‟s end in 1945, substantial pent-up demand existed for consumer products, as well as for input goods to rebuild Europe/Japan  Among the leading economies, the US was least harmed by the war and became the world‟s dominant economy  Substantial government aid helped stimulate economic activity in Europe  Commonplace were high tarrifs, other trade barriers, with strict controls on currency and capital movements  Several industrialized countries, including Australia, the United States and the United Kingdom systematically sought to reduce international trade barriers  The result of this effort was the General Agreement on Tariffs and Trade (GATT) – the precursor to the World Trade Organization (WTO)  Early multinationals from this third phase of globalization originated from the US, Western Europe, and Japan  Firms like Philips, BP, Royal Dutch-Shell organized their business by establishing independent subsidaries abroad  Nestle, Kraft, John Deere, Caterpillar, Coca-cola, Chrysler, etc established strong trade names  US multinationals such as IBM, Boeing, Texas Instruments, Xerox spread out because of strength of technological/competitive advantages  Gillette, Kodak, Kellogg offered unique products  Gradually firms began to seek competitive advantage by locating factories in developing countries with low labour cost  The Fourth Phase (since the 1980s)  Radical advances in information communication, manufacturing and consultation technologies; privatization of state-owned enterprises in transition countries; remarkable economic growth in emerging markets  Growing global prsoperirty reaches emerging markets such as Brazil, India and Mexico  Huge increases in FDI, especially in capital and technology intensive sectors  Geographically distant yet electronically interconnected  Globalization of service sector in banking, entertainment, tourism and retailing  Mergers/acquisions such as GM acquiring Saab, Ford taking over Mazda, Benz taking over Chrysler o Consequences of Globalization  Societal Consequences of Market Globalization  Positive Consequences o Cross-border trade and investment opened the world to innovations and progress while increasing performance standards currently known as global benchmarking or world class  Negative Consequences o The transition to an increasingly single, global marketplace poses challenges to individuals, organizations and governments  Poverty is especially notable in Africa, Brazil, China and India where lower-income countries have not been able to integrate with the global economy as rapidly as others  Globalization has created countless new jobs and opportunities around the world, but it has also cost many people their jobs  Unintended Consequences of Market Globalization  Loss of national sovereignty o Power shifts to MNEs and supranational organizations; concentration of power by MNEs lead to monopoly  Offshoring and the flight of jobs o Globalization causes dislocation of jobs; firms shift manufacturing abroad in order to avoid workplace safety and healthy regulations  Effect on poor o Benefits of globalization are not evenly distributed  Effects on Natural environment o MNEs fail to protect the environment  Effect on national culture o Globalization results in loss of national culture values and identity  Firm Level Consequences of Market Globalization  Countless new business opportunities for internationalizing firms  New risks and intense rivalry from foreign competitors  More demanding buyers who source from suppliers worldwide  Greater emphasis on proactive internationalization  Internationalization of firm‟s value chain  Communications Technology o The most profound technological advances have occurred in communications, esp telecommunications, satellites, optical fiber, wireless technology and the Internet o The internet and Internet dependent communications systems such as intranets, extranets and email connects millions of people across the globe o The dot come boom of the 1990s led to massive investment in fiber-optic telecommunications cable o Transmitting voices, data and images is essentially costless making Boston, Banglore, and Beijing next door neighbours instantl o The internet opens up the global marketplace to companies that would normally not have the resources to do international business  Death of Distance o 1500-1840, human powered ships/horse drawn carriages – 10miles o 1850-1900, steamships/steam trains – 36-65 miles/h o 1900-today, motor vehicles, aircraft – 75-700 miles/h o 2000 and beyond – internet – speed of light  Implications for Management o Building interconnectedness „ global orcehstration‟ of value-chain activities o Exploiting knowledge o Search for maximum flexibility in manufacturing, sourcing and other value-adding activities o Relentless search for productivity gains and operational efficiency o Recognizing, cultivating and measuring key global strategic assets of the organization o Gaining and sharpening partnering capabilities  The World is Flat (Friedman) o Globalization 1.0  Countries globalizing  Old to new world trade: 1492-1800 o Globalization 2.0  Companies globalizing  The rise of multinationals 1800-2000 o Globalization 3.0  The power of individual to collaborate and compete globally  Software + Information + Connectivity = Power  Technology as a Driver of Change o The Pace of Change in Information Technology as an enabler of fundamental Business transformation  Growing Power  Declining Cost  Increased Accessibility  Increased familiarity and comfort  Reduced skill requirements  Dimensions of Market globalization o Integration and interdependence of national economies  The aggregate of reconfigured and integrated value-chain activities gives rise to economic integration  Governments contribute to this integration by:  Gradually lowering trade and investment barriers;  Increasingly harmonize their monetary nad fiscal policies within regional economic integration blocs (also known as trade blocs) e.g. EU  Establishing supranational institutions that transcend national borders and involve cooperation that seek further reductions in trade and investment barriers e.g. UN and WTO o The Rise of Regional Trading Blocs and Economic Unions  Since the 1950s, the emergence of regional integration through trade blocs and economic unions  Trade bloc: a free-trade area established by two or more countries thorugh multiple tax, tarrif, and trade agreements designed to reduce or eliminate barriers  E.g. NAFTA, APEC  In more advanced stages, barriers are also removed to the cross- border flow of capital and labour  Economic and Monetary Union: A single market with common currency. More advanced stages of economic integration  E.g European union and Euro o Growth of Global investment and Financial flows  FDI has grown dramatically  Firms and governments undertake global currency trading to finance cross-border trade and investment  The free movement of capital (denominated in dollars, euros, yen, and other world currencies) around the world is extending economic activities across the globe and fostering interconnectedness among world economies  Commercial and investment banking has become a global industry  The bond market has gained worldwide scope, with foreign bonds representing a major source of debt financing for governments and firms o Convergence of Consumer Lifestyles and Prefernces  Lifestyles and preferences are converging i.e increasingly standardized, resulting in global market segments  Transnational media contributes to the convergence of buyer preferences in part by emphasizing a particular lifestyle observed in the US, Europe, or elsewhere  While converging tastes facilitate the marketing of standardized products/services to global consumers, they also signal the loss of traditional lifestyles and values in indvidual countries o Globalization of production  Intense global competition has made eocnomies of scale a critical key success factor. Global players are forced to evaluate global sourcing to take advantage of national differences in the cost and quality of factor inputs  This explains why offshoring to low labour-cost locatiosn such as China, Mexico, Eastern Europe so popular  Services Shift: The Service sector is also global sourcing  Firms in retailing, banking, insurance and data processing are all establishing offshore facilities and relationships  E.g. the real estate giant RE/MAX established 5000 offices in over 50 countries  FDI distribution changed from manufacturing to services  International business: performance of trade and investment activities by firms across national borders  Globalization o Ongoing economic integration and growing interdependency of countries worldwide Week 2 – Globalization Trends and Directions (Chapter 2 (1,2)  Theories of Globalization o Classical Theories  Mercantilism  The belief that national prosperity is the result of a positive balance of trade – maximize exports and minimize imports  Absolute Advantage principle  A country should produce only those products in which it has absolute advantage or can produce using fewer resources than another country  Comparative advantage principle  It is beneficial for two countries to trade even if one has absolute advantage in the production of all products; what matters is not the absolute cost of production but the relative efficiency with which it can produce the product  By specializing in what they produce best and trade for the rest, countries can use scarce resources more efficiently  E.g. China is a low labour cost production, india‟s Bangalore offers IT workers, Dubai has a knowledge-based economy o Factor proportions (endowments) theory:  Each country should produce and export products that intensively use relatively abundant factors fo production and import goods that intensively use relatively scare factors of production  Foundation Concepts o Comparative advantage  Superior features of a country that provide it with unique benefits in global competition – derived from either national endowments or deliberate national policies o Competitive Advantage  Distinctive assets or competencies of a firm – derived from cost, size, or innovation strengths that are difficult for competitors to replicate or imitate  Perspectives of the Nation and the Firm o Comparative advantage  Is the concept that helps answer the question of all nations can gain and sustain national economic superiority o Competitive advantage  Is the concept that helps explain how individual firms can gain and sustain distinctive competence vis-à-vis competitors  Limitations of Early Trade Theories o Do not take into account the cost of international transportation o Tarrifs and import restrictions can distort trade flows o Scale economies can bring about additional efficiencies o When gov‟ts selectively target certain industries for strategic investment, this may cause trade patterns contrary to theoretical explanations o Today countries can access needed low-cost capital on global markets o Some services do not lend themselves to cross-border trade  How Nations Enhance Competitive Advantage o The contemporary view suggests that governments can proactively implement policies to enhance a nation‟s competitive advantage, beyond the natural endowments the country possesses o Governments can create national economic advantage by: stimulating innovation, targeting industries for development, providing low-cost capital, and through other incentives  National Industrial Policy o Proactive economic development plan implemented by the public sector to nurture or support promising industry sectors with potential for regional or global dominance. Public sector initiatives can include  Tax incentives  Monetary and fiscal policies  Rigiours educational systems  Investment in national infrastructure  Strong legal and regulatory systems o Ireland  Starting in 1980s irish gov‟t implemented a series of pro-business policies to build strong economic sectors. “Irish Miracle” resulted from  Fiscal, monetary and tax consolidation  Partnership with the industry and unions  Emphasis on high-value adding industries such as pharma, biotech and IT  Membership in the European Union; subsidies and investment received from the EU  Investment in education  Michael Porter‟s Diamond Model: Sources of National Competitive Advantage  Firm Strategy, structure and rivalry – the presence of strong competitors at home services as a national competitive advantage  Factor conditions – labour, natural resources, capital technology, entrepreneurship, and know how  Demand conditions at home – the strengths and sophistication of customer demand  Related and supporting industries – availability of clusters of suppliers and complementary firms with distinctive competences  Industrial Clusters o A concentration of suppliers and supporting firms from the same industry located with the same geographic area o Examples include: the Silicon Valley, fashion cluster in Northern Italy, pharma cluster in Switzerland, footwear industry in Pusan, South Korea, and the IT industry in Banglore India o Industrial clusters can serve as an export platform for individual nations  Classical Theories: International Product Cycle Theory o Each product and its associated manufacturing technologies go with three stages of evolution: introduction, growth, and maturity o In the introduction stage, the inventor country enjoys a monopoly both in manufacturing nad exports o As the product‟s manufacturing becomes more standard, other countries will enter global marketplace o When the product reaches maturity, the original innovator country will become a net importer of the product o Applicability to the contemporary global economy; Today the cycle from innovation to maturity is much shorter making it harder for the innovator country to sustain its lead in particular product  New Trade Theory o The argument that economies of scale are an important factor in some industries for superior international performance – even without any clear comparative advantage possessed by the nation. Some industries succeed best as their volume of production increases. o For example, the commercial aircraft industry has very high fixed costs that necessitate high-volume sales to achieve profitability  Four Reasons MNE‟s Invest Abroad o Market Seeking o Efficiency (Cost) Seeking o Resource Seeking (natural resources) o Knowledge Seeking  Why do Firms Internationalize o Seek opportunities for growth through market diversification o Earn higher margins and profits o Be closer to supply sources, benefit from global sourcing advantages or gain flexibility in the sourcing of products o Gain access to lower-cost or better value factors of production o Develop economies of scale in sourcing, production, marketing and R&D  The Nature of International Business o All value-adding activities include sourcing, manufacturing, and marketing can be performed in international locations o The subject of cross-border trade can be products, services, capital, technology, know how and labour  International trade – exchange of products and services across national border; typically thorugh exporting and importing  Exporting – sale of products or services to customers located abroad, from a base in the home country/third country  Importing or Global Sourcing - procurement of products or services from suppliers located abroad for consumption in the home country or third country  International Portfolio investment – typically short term. And is the passive ownership of foreign securities such as stocks and bonds for the purpose of generating financial returns  **Foreign direct investment (FDI) – typically long term. Is an internationalization strategy in which the firm establishes a physical presence abroad through acquisition of productive assets such as capital, technology, labour, land, plant and equipment o The Nature of FDI  FDI – is the ultimate commitment-level of internationalization and thus this text focuses primarily on FDI opposed to IPI  Large resourceful companies with substantial international operations are able to leverage FDI to:  Manufacture/assemble products in low-cost labour countries ie. India, Russia, Brazil, China, Mexico  Invest in western markets, even though they may originate from emerging economies themselves  Participants in International Business o **Multi-National Enterprise (MNE) – a large company with substantial resources that performs various business activities through a network of subsidiaries and affiliates located in multiple countries  i.e. Caterpillar, Kodak, Nokia, Four Seasons, Exxon, Toyota o Small and Medium sized enterprise (SME) – a company with 400 or fewer employees (US def‟n)  90-95% of all firms in most ecnomies  more SMEs participate in exporting, licensing and global sourcing  Drivers for innovation  1/3 of exports from Asia, ¼ of exports from affluent countries  more than 50% of national exports in Italy, SK, China o Born global firm – a young entrepreneurial company that intiates international business activity very early in its evolution, moving rapidly into foreign markets  Four Types of Risk o Commercial Risk  Firms potential loss or failure from poorly developed or executied business strategies, tactics or procedures  Weak partners  Operational problems  Timing of Entry  Competitive intensity  Poor execution of strategy o Country Risk  Potentially adverse effects on company operations and profitability hoels by developments in political, legal and economic environment of foreign country  Government intervention, protectionism and barriers to trade and investment  Bureaucracy, red tape, administrative delays and corruption  Lack of legal safeguards for intellectual property rights  Legislation unfavourable to foreign firms  Economic failures and mismanagement  Social and political unrest and instability o Currency risk  Risk of adverse unexpected fluctuations in exchange rates  Currency exposure  Asset valuation  Foreign taxation  Inflationary and transfer payments o Cross-cultural risk  A situation or event where a cultural miscommunication puts some human value at stake  Cultural differences  Negotiation patterns  Decision-making styles  Ethical practices  Organizational Participants that make International Business happen o Continuum of MNE Involvement  Import/Export  Licensing/Franching  Joint venture  FDI  Increasing levels of investment, commitment/permanence, benefit risk  Types of Distribution Channel Intermediaries  Distributor  Takes title ot the exporter‟s goods and performs marketing functions such as sales, promotion and after sales service  Serving as the extension of the firm in the foreign market, a distributor will also arrange for local transportation, clear products through customs, and provide advice to the focal firm regarding product adaptation, promotion and pricing  Agent or Manufacturer‟s Representative  Agent – unlike the merchant distributor an agent does not take title to the goods. Works on commission basis to bring the buyer and seller together. An agent operates under contract for a specified period of time and may represent either buyer or seller  Manufacturer‟s representative – works under contract by the exporter to represent and sell its merchandise in designated territories. It acts as a contracted sales person in a designated territory.  Retailer  Larger focal firms in consumer products may choose to sell directly to retailers, bypassing distributors  A retailer provides access to end users/customers  Some focal firms are: IKEA, Wal-Mart, etc  Trading Company  Based in the home country, a trading company is an intermediary that engages in imports and exports of a variety of products  Large trading companies such as Cargill are high-volume low margin resellers  Many trding companies deal primarily in commodities such as grains, minerals, coal and metals  Export management Company (EMC)  A more common intermediary in the US is the EMC which acts as an export agent on behalf of the focal firm  An EMC finds export customers, negotiates terms of sale and arranges for international shipping, typically for smaller exporters  Most EMCs specialize in specific industries and geographic areas  o Distribution Channel Intermediaries:  Specialize in physical distribution and marketing service; connect the focal firm with the end user in the foreign market  Assist the focal firm by providing logistics services such as warehousing and customer support  Especially ciritical to exporters who do not establish foreign presence themselves  Are based either in the home country or the foreign market  Examples of Contractual Exchanges o Licensor  Focal firm grants the right to the foreign partner to use certain intellectual property in exchange for royalties  Mega Bloks signed agreement with Disney that gives the SMe right to produce toys featuring Disney charactes o Franchisor  Focal firms grants the right to the foreign partner to use an entire business sytem in exchange for fees and royalties  KFC, subway etc. o Turnkey Contractor  Provide engineering, design, and architechtural services in the construction of airports, hospitals, oil refineries, and other types of infrastructure  These projects are typically awarded on bases of open bidding by the sponsor  Three gorges dam in China, Hong Kong Airport etc.  Build-own-transfer venture – an increasingly popular type fo turnkey contract in the developing economies where contractors acquire an ownership in the facility for a period of time until it is turned over to the client  International Collaboartive Ventures o In an ICV, partners pool their resources and share cost and risks of the new venture o Through an ICV, a focal firm can exploit partner‟s complementary technologies and expertise and avoid trade barriers, connect with customers abroad and configure value chains more effectively o ICV represents the middle ground between FDI and exporting; the firm externalizes value adding activities sucha s R&D or manufacturing o Two Types of ICV  Joint Venture – the focal firm creates and jointly owns a new legal entitiy together with foreign partners  Project-Based venture: Focal firm collaborates with foreign partners on a project with a relatively narrow scope and a well- defined timetable, without creating a new legal entity  Firms often form project-based ventures to share the cost and risk involved in knowledge intensive R&D projects  Facilitaors in International Business o Facilitatotrs assist the focal firm with specialized services required in cross-border transaction o They include: banks, international trade lawyers, freight forwarders, customs brokers, consultants, ad agencies, and market researchers o For example:  Logistics Services Provider is a transportation specialist that arranges for physical distribution and storage for the focal firm  DHL, FedEx and UPS  Custom Brokers are specialists that arrange for clearance of products through customs on behalf of the focal firm  International trade lawyers help navigate international legal environments – the best ones are knowledgeable about their client‟s industry, the laws and regulations of target nations (import licenses, trade barriers, IP concerns) and the most appropriate means for international activity in the legal/regulatory context  Lawyers play a critical role when negotiating joint venture, strategic alliance, franchising and licensing agreements  Insurance companies provide coverage against commercial and political risk  International business consultants advise firms on various aspects of doing business abroad and alert them to foreign market opportunities and problems  Tax accountants can advise companies on minimizing tax obligations resulting from multi-country operations  Market research firms are a potential key resource for identifying and targeting foreign buyers, by assessing info on markets, competitors, and methods of international business Week 3 – International Business Concepts and Frameworks (Ch. 1)  Understanding Emerging Markets o Distinction between advanced economies, developing economies, and emerging markets  Advanced economies – are post industrial countries characterized by high per capita income, highly competitive industries and well developed commercial infrastructure  Ie. Australia, US, Japan, New Zealand  Home to 14$ of world‟s pop‟n and account for over half of world GDP and half of world product trade and ¾ of world service trade  Political systems – democratic, multiparty systems of gov‟t  Economic systems – typically based on capitalism with relatively little intervention in business  Serious purchasing power; few restrictions on international trade  They host the world‟s largest MNE  Developing countries – are low income characterized by limited industrialization and stagnant economies  Ie. Low income countries with limited industrialization such as Bangladesh, Zaire, Nicaragua  17% live on less than $1 per day and 40% live on les sthan 2$ per day  Combination of low income and high birth rates tends to perpetuate poverty  Misnomer sometimes called underveloped/third world countries – these terms are imprecise bc, despite poor economic conditions the countries to end to be highly developed in historical or cultural terms  Emerging market economies – subset of former developing economies that have achieved substantial industrialization modernization and improved living standards and economic growth  ie. Bric  40% of world GDp and 30% of exports and receive over 20% of FDI  emerging markets enjoyed a GDP growth rate of 7% much faster than advanced economies  benefit from: low cost labour, knowledge workers, gov‟t support, low-cost capital, and powerful, highly networked conglomerates  Importance in the world economy increasing as attractive destination for exports, FDI, and sourcing  Evolving towards wealthy nation status o What makes emerging markets attractive for international business  Emerging Markets are attractive as target markets, manufacturing bases, and sourcing destinations  Emerging Markets as target Markets o Growing middle class (the largest emerging markets have doubled their share of world imports in the last few years)  Emerging Markets as manufacturing bases o Home to low-wage, high quality labour for manufacturing and assembly operations  Thailand ahs become an important manufacturing location for Japanese MNEs such as Sony, Sharp and Mitsubishi  Malysia and Taiwan – Motorola, intel, and Philips manufacture semi conductors there  Mexico and China – platforms for consumer electronics and auto assembly  Emerging markets as sourcing destinations o MNEs have established call centers in Eastern Europe, India and the Phillipines  Dell and IBM outsource certain technological functions to knowledge workers to india  Intel and Microsoft have much of their programming activities performed in Bnaglore, India o Estimating the true potential of emerging markets  Three practical approaches firms employ in assessing market potential of individual countries are:  Per-capita income  Size of middle class and  A mix of market potential indicators  Market potential may be assessed with aggregate country data, such as gross national income (GNI) or per capita GDP, expressed in terms of a reference currency such as the US dollar o Purchasing Power Parity Adjustment to per capita GDP  In relying on per capita GDP for comparison of different ocuntries, one should use purchasing power parity exchange rates rather than market exchange rates  PPP adjustment provides a more realistic indicator of purchasing power of consumers in emerging and developing economies  PPP adjusted per capita GDP more accurately represents the amount of products that consumers can buy in a given country, using their own currency and consistent with their own standard of living o Middle class as an indicator of market potential  The middle class represents the proportion of people in between the wealthy and the poor, has economic independece and consume many discretionary items indlucing electronics, furniture, automobiles, recreation and education  In emerging markets, the size and growth rate of the middle class serve as signals of a dynamic market economy  Demographic trends indicate that, in the coming two decades the proportion of middle-class households in emerging markets will become much bigger with enormous spending power o Emerging Market Potential Index (EMPI)  The EMPI combines factors that provide firms with realistic measure of export market potential:  Market Size: country‟s pop‟n, urban pop‟n  Market Growth rate: the country‟s real GDP growth  Market Intensity: private consumption and GNI represent discretionary expenditures of citizens  Market Consumption Capactiy: the percentage share of income held by the country‟s middle class  Commercial Infrastructure: characteristics such as number of mobile phone subscribers, density of telephone lines, number of PCs, density fo paved roads and population per retail outlet  Economic Freedom: the degree of gov‟t intervention  Market Receptivity: the particular country‟s inclination to trade with the exporter‟s country as estimated by the volume of import  Country Risk: The degree of political risk o Risks and Challenges of doing business in emerging markets  Challenges  Political stability o The absence of reliable gov‟t authorities adds to business costs, increases risks, and reduces managers‟ ability to forecast business conditions o Political instability is associated with corruption and weak legal frameworks that discourage investment o i.e Russia practices favour home-grown firms and threaten business of foreign firms  Bureaucracy and lack of ransparency o Burdensome administrative rules, as well as excessive requirements for licenses, approvals, and paperwork, delay business activities o Ie. AIG formed a joint venture with Indian conglomerate Tata, to enter India‟s underserved $8 billion insurance market and it took six years efore they were granted permission to sell property/life insurance o Excessive bureaucracy means lack of transparency ie legal and political systems are not open and accountable. Where anti-corruption laws are weak, bribery, kickbacks and extortion are common  Weak Intellectual property protection o Even if they exist, laws that safeguard intellectual property rights may not be enforced, or judicial process may be painfully slow o Argentina – enforcement of copyrights on recorded stuff is inconstant – laws against internet piracy are weak and ineffective o China, Indonesia, Russia – counterfeiting common o India – weak patent laws  Partner availability and qualifications o Foreign firm need to seek allicacnes with local partners in countries characterized by inadequate legal/political frameworks – gaining access to local market knowledge, supplier and distributor networks, key government contracts o Qualified partners not readily available. Often one ahs to contend with second-best or third best candidate and provide much technical and managerial assistance to upgrade partner‟s capacity  Dominance of family conglomerates o EM economies dominated by family-ownder rather than publicly owned businesses o Family conglomerate – large privately-owned company that is highly diversified and control economic activity and employment in emerging markets o SK wh o Strategies for doing business in emerging markets o Catering to economic development needs of emerging markets and developing economies  Regional Economic Integration o Regional integration and economic blocs  Regional economic integration – refers to the growing economic interdependence that results when countries within a geographic region form an alliance aimed at reducing barriers to trade and investment  50% of world trade today is under some bloc preferential trade agreement  Premise – mutual advantages for cooperating nations within a common geography, history, culture, language, economics or politics  Economic bloc – the result of regional economic integration – a geographic area that consists of two or more countries that agree to pursue economic integration by reducing tariffs and other restrictions to cross-border flow of products, services, capital and in more advanced stages labour o Types of regional integration  Members agree to eliminate tariffs and non tariff trade barriers with each other but maintain their own trade barriers with non member countries ie) NAFTA  Common external tariffs ie) Mercosur  Free movement of products, labour, and capital ie. Pre1992 Europe  Unified monetary and fiscal policy by a central authority ie) EU  Perfect unification of all policies by a common organization; submersion of all separate national institutions ie) doesn‟t exist yet but ideal o Leading economic blocs  The EU: features of a full-fledged Economic Union  NAFTA  MERCOSUR  ASEAN  APEC  CER o Why countries pursue regional integration  Expand Market size  Regional integration greatly increases the scale of marketplace for firms inside the economic bloc  Ie) Belgium from 10 mil pop‟n to 490 mil  Achieve scale economies and enhanced productivity  Expansion within an economic bloc gives member country firms the opportunity to gain economies of scale in production and marketing  Internationalization inside the bloc helps firms learn to compete more effectively outside the bloc as well  Labor and other inputs are allocated more efficiently among the member countries – leading to lower prices for consumers  Attract direct investment from outside the bloc  Compared to investing in stand-alone countries, foreign firms prefer to invest inc ountries that are part of an economic bloc as they receive preferential tratment for exports to other member countries  Ie) Gm, Samsung, Tata invested in EU  Acquire stronger defensive and political posture  Member countries with a strong defensive posture relative to other nations and world regions – this was one of the motives for the initial creation precursor to the EU o Drawbacks and ethical dilemmas of regional integration o Management implications of regional integration Week 4 – Concepts and Frameworks continued (Ch. 6,9,10,13) Week 5 – Thanksgiving Week 6 – Value Chains and Global Sourcing (Ch. 2,17)  Value Chains o Participants Organized by value chain activity o Global Value Chain for Dell Computers  Global Sourcing o Trends toward outsourcing global sourcing, and offshoring o Evolution of global sourcing o Benefits and challenges of global sourcing for the firm  Benefits:  Cost efficiency is the traditional rationale for sourcing abroad. The firm takes advantage of „labor arbitrage‟ – the large wage gap between advanced economies and emerging markets  One study found that firms expect to save an average of more than 50% off baseline costs as a result of offshoring  These saving tend to occur particularly in R&D, product design activities and back-office operations such as accounting and data processing  Faster corporate growth  Access to qualified personnel abroad  Improved productivity and service  Business process redesign  Increased speed to market  Access to new markets  Technological flexibility  Improved agility by shedding unnecessary overhead  Challenges  Vulnerability to exchange rate fluctuations  Partner selection, qualification and monitoring costs  Increased complexity of managing a worldwide network of production locations and partners  Complexity of managing global supply chain  Limited influence over the manufacturing processes of the supplier  Potential vulnerability to opportunistic behaviour or actions in bad faith by suppliers  Constrained ability to safeguard intellectual assets o Implementing global sourcing through supply-chain management o Risks in global sourcing  Less-then-expected Cost savings  Environmental Factors  Weak legal environment  Risk of creating competitors  Inadequate or low-skilled workers  Overreliance on suppliers  Erosion of morale/commitment among home-country employees o Strategies for minimizing risk in global sourcing o Implications of global sourcing for public policy and corporate citizenship Week 7 - Midterm  Midterm worth 70/80 marks  Week 8 – International marketing (Ch. 18) Global Marketing Strategy  A plan of action that guides the firm in o How to position itself and its offering in foreign market sand which customer segments to target; o The degree to which its marketing program elements should be standardized and adapted  Within Environment of international Business (diverse cultural, political, legal, monetary, and financial environment of the firm) o Global marketing strategy  targeting customer segments and positioning  International Marketing Program Standardization and Adaptation  Global Branding + Product Development  International Pricing  International Distribution  International Marketing Communications  Elements of Global marketing Program o Global marketing strategy also articulates the degree to which the firm‟s marketing program should vary across foreign markets o Key challenge is how to resolve the trade-offs between standardizing the firm‟s marketing program elements and adapting them for individual international markets o The issue of how best to coordinate international marketing activities across multiple markets also arises Global Positioning Strategy  Internationalizing firms aim for a global positioning strategy i.e., one in which the offering is positioned similarly in the minds of buyers worldwide  Starbucks, Volvo and sony are good examples of companies that successfully use this approach. Consumers around the world view these strong brands I nthe same way  Global positioning strategy is beneficial because it reduces international Standardization and Adaptation  Adaptation – refers to firm efforts to modify elements of the international marketing program to accommodate specific customer requirements in a particular market o Exemplified local responsiveness and is more appropriate in multi domestic industries. o Pursue when there are distinct:  National preferences  Laws and regulations  Living standard and economic conditions  National infrastructure o Advantages:  Meet needs of customers more precisely  Enjoy unique appeal  Comply with gov‟t regulations  Achieve greater success in combating customer resistance  Managers an opportunity o explore alternative ways of marketing the product or services  guide firm in its R&D efforts often leading to superior products for sale abroad and at home o Adaptation is costly  Adaptation may require substantial redesign of products, modification to manufacturing operations, lower pricing, and overhauled distribution and communication strategies  The costs add up when these changes multiple in numerous national markets simultaneously  Whenever possible, managers usually err on the side of standardization because it is easier and less costly than adaptation  Others adapt marketing program elements only when necessary, to respond to local customer preferences nad mandated regulations  Standardization – refers to firms efforts to make the marketing program elements uniform, with a view to targeting entire regions of countries, or even the global marketplace, with a similar product or service o Exemplifies global integration and is more appropriate in global industries o Pursue when:  Similar market segments exist across countries  Customers seek similar features  Products have universal specifications  Business customers have converging expectations o Advantages:  Cost reduction  Standardization reduces costs by enabling economies of scale in design, sourcing, manufacturing, and marketing. Offering a similar marketing program to the global marketplace or across entire regions is more efficient than having to adapt products and their marketing for each of numerous individual markets  Improved planning and control  Standardization provides for improved planning and control of value-adding activities. In case of Electrolux, for example, fewer offering mean that management could simplify quality control and reduce the number of parts that it stocks for repairing defective products  Ability to portray a consistent image and build global brands  A brand is a name, sign, symbol, or design intended to identify the firm‟s product and differentiate it from those of competitors.  Global brand – one whose positioning, advertising strategy, look, and personality are standardized worldwide. Standardization allows the firm to establish and project a globally recognized brand  Having a globally recognized brand helps increase customer interest and reduces the confusion that arises from proliferation of numerous adapted products and marketing programs  Marketing is more effective and efficient because the firm can serve larger global market segments that transcend multiple countries  Achieving a balance between adaptation + standardization is part of a broader corporate strategy that has the firm debating its position between global integration + local responsiveness o Good arguments in favour of both; up to manager to sort out the trade-offs in light of unique circumstances o Standardization helps reduce costs while adaptation helps firm cater to local needs/requirements  increasing revenues o Adapting different elements of marketing program  Often managers will engage in both standardization and adaptation simultaneously at varying degrees. They will make adjustments to some elements while keeping others intact  Ex. IKEA maintains product design uniform across markets while making modifications to size of beds/drawers OR emphasize its catalog as the principal promotional tool but supplement it with TV in mass-media oriented market like US o “one offering – one world” strategy is not workable  It is also rarely feasible or practical to follow a “one offering – one world” strategy across all dimensions of the marketing program  Automotive companies tried for years to market a “world car” that meets customer preference everywhere as well as complies with govt imposed technical specifications  Ambitious experiments (Ford mondeo) failed to meet the approval of customers and regulatory bodies  Flexibility and adaptability in design became necessary due to climate and geography (engine specifications) gov‟t regulations (emission standards) customer preferences (cup holders) + gas prices o Regional solutions may be more practical  As a compromise, some firms will pursue standardization as part of regional strategy where international marketing program elements  GM markets distinctive car models for each of China (Buick) Europe (opel, Vauxhall) and North America (Cadillac, Saturn)  Global= Saab, Chevy, Cadillac, Hummer  International = Opel (Europe, middle east), GMC (north America, middle east, Europe), Saturn (North America)  Local – Vauxhall(UK), Holden (Australia), Daewoo(Korea  Convergence of regional preferences, regional economic integration, harmonization of product standards and growth of regional media and distribution channels, all make regional marketing more feasible than pursuing global standardization  Lays in China Case Study  Factors Affecting International Pricing o Nature of the Product or Industry o Location of the production facility o Type of distribution System o Foreign market considerations o Internal to the Firm  Management‟s profit and market share expectations  Cost of manufacturing, marketing and other value-chain activities  The degree of control management desires over price setting in foreign markets o External Factors  Customer expectations, purchasing power, and sensitivity to price increases  Nature of competitors‟ offerings, prices and strategy  International customer costs:  Product/package modification; labelling and marking requirements  Documentation (certificate of origin, invoices, banking fees)  Financing costs  Packaging and container charges  Shipping (inspection, warehousing, freigh forwarder‟s fee  Insurance  Landed cost  Tariffs (customs duty, import tax, customs clearance fee)  Warehousing charges at the port of import; local transportation  Importer‟s cost  Value-added tax and other applicable taxes paid by the importer  Local intermediary (distributor, wholesaler, retailer) margins  Cost of financing inventory  Anticipated fluctuations in currency exchange rates  Three pricing strategies o Rigid cost-plus pricing o Flexible cost-plus pricing o Incremental pricing  Key steps to International Price Setting o Estimate “landed” price of product in foreign market by totalling all costs associate with shipping the product to customer‟s location o Estimate the price the importer or distributor will charge when it adds its profit margin o Estimate the target price range for end users. Determine:  Floor price (lowest acceptable price to the firm, based on cost considerations)  Ceiling price (highest possible price, based on customer purchasing power price sensitivity and competitive considerations o Assess the company sales potential at the price the firm is most likely to charge (between the floor price and ceiling price) o Select a suitable pricing strategy based on corporate goals and preferences from  Rigid cost-plus pricing  Fixed price for all export markets. Management simply adds a flat percentage to domestic price to compensate for the added costs of doing business abroad. The export customer‟s final price include a mark-up to cover transporting as well as profit margins for intermediaries and manufacturer  Flexible cost-plus  Includes any added costs of doing business abroad in its final price. Prices ar eadjusted to accommodate local market and competitive conditions,
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