MaNajemen Bisnis Internasional 2024.pptx

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1. PROF. CARUNIA MULYA FIRDAUSY, MA, M.Ec , Ph.D Professor of Economics University of Tarumanagara MaNajemen Bisnis Internasional

2. PART TWO COMPETING IN A GLOBAL MARKETPLACE

3. 10. GLOBAL STRATEGY This part of the course changes our focus from the environment of international business to the firm and the strategies managers adopt to assist firms compete effectively as international businesses. Managers, as agents of their firms are responsible to device strategies to engage international markets in ways that will sustain the firms growth and boost their profitability. Managerial strategies and tools used to support strategic choices, must be processed/analysed in the context of international business environment in order to create value for the firm. In short, managers must understand the implication of their strategic choices to the performance of their company.

4. GLOBAL STRATEGY The Strategy of International business ( Adapted from Daniel et al, 2007) Management Vision Strategy, Value creation Firm Performance External Influences Industry structure and drivers Competitive dynamics Economic conditions Political, legal, cultural and regulatory environment Technological standards and trends, customer orientations

5. GLOBAL STRATEGY Strategy and the firm A firm’s strategy is defined as the actions that managers take to attain the goals of the firm. Or the framework that managers apply to determine the competitive moves and business approaches that run the company. For example, the strategy of the firm may be management’s idea of how to attract customers, stake out a market position, conduct operations, compete effectively, create value and achieve goals. The fundamental goal of many firms is to maximize profit or increase the value of the firm.

6. GLOBAL STRATEGY A firm makes profit when its total revenue is greater than its total cost, that is: Profit= Total Revenue-Total cost Where total revenue represents the price per unit times the number of units sold. Total cost is the total cost incurred per unit times the number of units sold. Profitability may also be computed in terms of return on total assets or the return on net worth.

7. GLOBAL STRATEGY Strategy and value A firm’s strategy also refers to the efforts of managers to build and strengthen the company’s competitive position within its industry in order to create value. Value may be defined as the measure of a firm’s capability to sell what it makes for more than the costs incurred to make it. The amount of value customers place on the firm’s product (perceived value) and the cost of production determines the firm’s profits. The more value customers place on the firm’s goods and services, the higher the price the firm can charge for those products.

8. GLOBAL STRATEGY Operationally, companies create value either by making their products for a lower cost than any other firm in their industry (the strategy of low cost) or making those products that consumers are willing to pay premium price for ( the strategy for differentiation). Low costs and differentiation are two basic strategies for creating value and attaining a competitive advantage in an industry. Superior profitability goes to firms that can create superior value, and the way to create superior value is to drive down the cost structure of the business and/or differentiate the product in some way so that customers value it more and are prepared to pay a premium price (Porter, M. E., 1985)

9. GLOBAL STRATEGY The firm as a value chain - The value chain is the set of discrete activities the company performs to design, produce, market, deliver, to increase the value of its goods and services. -Specification of a firm’s value chain helps in the coordination of value-creating decisions of all departments. Managers are then able to target their insights and investments towards activities that create value for the firm. -Managers must decide how the firm will handle the functions and business processes that move a product from its conception, through its design, its sourced raw materials, intermediate inputs, marketing, distribution and its support to consumers. -Value-chain activities can be categorized into primary and support activities.

10. GLOBAL STRATEGY Primary activities -The primary activity reflect classical managerial activities of the firm, where there is an organisational entity with a manager in charge of a specific task that has clear lines of functional demarcation. -The primary activities are categorised into research and development (R&D), production, marketing and sales, and service. -R&D is concerned with the design of products and production processes. Through superior product design R&D can increase the functionality of product design and its attractiveness to consumers. R&D may also lead to efficient production processes, low production costs and create value for the firm. -The Production function can create value when activities are performed efficiently or when a high-quality products are produced that increase the value of the product to consumers.

11. GLOBAL STRATEGY The marketing and sale functions can increase a firm’s value through advertising and brand positioning. When a firm is able to discover consumer needs and communicate them to the R&D function to produce goods that meet those needs, it increases consumer satisfaction and perceived value of the firm. The enterprise’s service activity is the provision of after-sale services and support to customers. The quality of this service create a perception of superior value in the minds of customers, especially when customers problems are solved in an efficient manner.

12. GLOBAL STRATEGY Support Activities -The support activities of the value chain provide inputs that allow the primary activities to take place. -The material management (or logistics) function controls the transmission of physical materials through the value chain from procurement through production and delivery. -The human resource function ensures that the firm has skilled, trained and motivated personnel who are also well compensated to perform value-creation task. -Information systems refers to the electronic system that manage inventory, track sales, pricing and customer enquiries etc.

13. GLOBAL STRATEGY - The infrastructure of a firm includes the organisational structure, control systems and the culture of the firm. Top management of the firm may provide strong leadership that can shape the infrastructure of the firm and help increase performance and value for the firm and its customers. The role of strategy in international trade and investment is to give a firm competitive advantage. Strategy reduces the costs of value creation, and also differentiate product offerings that customers value and are willing to pay premium prices over and above the production costs. By this, the firm is expected to increase its profitability.

14. GLOBAL STRATEGY Profit from Global expansion Firms that expand globally increase their profitability through location economies, cost economies and by leveraging and applying their core competencies (distinctive skills) in new geographic markets. Location economies is the economies that arise from performing a value creation activity in the optimal location for that activity. -Taking advantage of differences in economic, political, legal and cultural factors, firms can either reduce or increase the costs of doing business in a particular country.

15. GLOBAL STRATEGY - Location economies is creating a global web of value creation activities with different stages of the value chain being dispersed to locations around the world, where perceived value is maximized or where costs of value creation are minimised. Cost economies refer to systematic cost savings that arise over the life of a product. A number of studies have attributed this to the experience curve. The experience curve refers to systematic production cost reductions that occur with every increase in accumulated output. Learning effects and economies of scale are the results of experience effects.

16. GLOBAL STRATEGY Learning effects refers to cost savings that occurs from learning to do things efficiently over time. Increase in productivity for example, may result from experience in performing tasks efficiently or reduction in processing time due to the use of advanced technology. - Cost savings may also be realized when firms are able to establish friendly business relationships with governments that leads to policies that lower corporate tax rates and flexible operating requirements. Economies of scale refers to reduction in unit cost achieved by producing a large volume of a product.

17. GLOBAL STRATEGY Economies of scale is the reduction in unit cost achieved when a firm is able to produce large volume of a product. -Fixed costs are the costs involved in setting up a production facility, or develop a new product. Fixed costs can be huge but may be recouped when products are produced in large quantities and distributed across a large area of the world. -The more rapidly cumulative sales volume is built up, the more rapidly fixed costs can be amortized, and the more rapidly unit costs fall. -Economies of scale can also be achieved when large firms employ specialized personnel or equipment.

18. GLOBAL STRATEGY Strategic significance of the experience curve The firm that moves down the experience curve most rapidly will have a cost advantage over its competitors. A firm that serves a global market from a single optimal location is likely to build accumulated volume more rapidly than a firm that serves only its home market or serves multiple markets from multiple production locations. A firm that serves from a single location may need to adopt an aggressive pricing and marketing strategy. Once a firm has established a low cost position, it can act as a barrier to new competition. Threats of communication, (e.g. language barriers), currencies and measurement systems can however, create weak links among globally dispersed value activities.

19. GLOBAL STRATEGY Core Competencies refer to skills, capabilities or technology within the firm that competitors cannot easily match or imitate. Core competencies are typically expressed in product development, manufacturing expertise, management unique quality etc. which forms the bedrock of a firm’s competitive advantage. They enable a firm to reduce the costs of value creation and/or create perceived value that can lead to premium pricing and also allow firm to increase sales and profits. Leveraging valuable skills can however, arise anywhere within the firm’s global network and not just at the corporate centre. This phenomenon creates important new challenges for the manager of multinational enterprises. The international business manager must take certain steps:

20. GLOBAL STRATEGY Must create incentive system that encourages local employees to acquire new skills. Must acknowledge that creating new skills involves some degree of risks and that not all new skills add value to the firm. Management must reward people for successes and not sanction them unnecessarily for taking risks that did not pan out. They must also act as facilitators to help transfer valuable skills within the firm. Firms that compete in the global marketplace face two types of competitive pressure: Pressure for cost reduction and Pressure to be locally responsive.

21. GLOBAL STRATEGY Pressures for Cost Reduction International businesses increasingly face competitive pressure to reduce cost. This requires firm to reduce costs of value creation by mass producing standardized product at an optimal location in the world to realize location and experience curve economies. Cost reduction pressures can be intense in industries producing commodity-type products (e.g. personal computer) where meaningful differentiation of non-price factors is difficult and price is the main competitive weapon.

22. GLOBAL STRATEGY Firms that produce products that serve universal needs (e.g. sugar)- where tastes and preferences of consumers in different nations are similar, experience cost reduction pressure. The intrinsic function of money (hard to find, difficult to save, and scarce supply) suggests that consumers everywhere seek to maximise their purchasing power by buying high quality products at the lowest possible price. Advances in communication and transportation technology steadily elaborate the infrastructure that converges consumer preferences across countries and ensures availability of standardized products worldwide. Increasing homogeneity of the global market is the results of compelling demand for standardization and global integration.

23. GLOBAL STRATEGY Standardization pressures in international business have increased as many countries join the global economy in general and the WTO in particular. In addition, emerging companies around the world have steadily added more efficient production capacity to global supply. To capture market share, these new entrants escalate cost pressure in an industry and then compels companies to minimize their costs by standardizing components of their value chain via global integration.

24. GLOBAL STRATEGY Pressures for local responsiveness International businesses are under constant pressure to tailor their operations to local market conditions. -Divergence in consumer tastes and preferences for example, often pressurizes international firms to design and make products that local consumers prefer, such as large cars in the US, ‘Maggi Shrimps’ in Ghana. -Divergence in infrastructure and/or traditional practices between countries have compelled firms to customize products to suit the distinct infrastructure and practices of different nations. This requires the delegation of manufacturing and production functions to foreign subsidiaries. For example warm clothes for temperate zones may not be necessary in tropical regions.

25. GLOBAL STRATEGY Differences in distribution channels A firm’s marketing strategies may have to respond to differences in distribution channels between countries. In Australia, a handful of retailers dominate the market, whereas in Ghana, large numbers of retailers control the market for almost everything. Host-Government demands Economic and political demands imposed by host country government may necessitate some degree of local responsiveness. Host government may have broad policy directives calling for economic nationalism, acts of trade protectionism to encourage local production and national product standards that can be met only by local operations.

26. GLOBAL STRATEGY Implications for business Pressures for local responsiveness imply that firms may not be able to realize the full benefits from experience curve and location economies. That is producing standardized products from a single location and marketing it worldwide. Customization limits firm’s ability to leverage the skills and products associated with a firm’s core competencies from nation to nation.

27. GLOBAL STRATEGY Strategic choices Firms use four basic strategies to enter and compete in international markets. These are international strategy, multidomestic strategy, global strategy and transnational strategy. International strategy Firm pursue international strategy when they leverage their core competencies to foreign markets. This model relies on local subsidiaries to administer business based on instructions from headquarters although local customisation of product offering and marketing strategy exists, it is limited.

28. GLOBAL STRATEGY Multidomestic strategy A multidomestic company customizes their product offering, marketing strategy and organisational policies to match different national conditions and demands. -Such firms decentralise decision making from headquarters to subsidiaries operations so that local executives have the authority to manage their responsibilities. -A multidomestic strategy makes sense when there are high need for local responsiveness and low need to reduce cost via global integration. It also lead to widespread duplication of management, design, production and marketing activities.

29. GLOBAL STRATEGY Global Strategy A global firm focuses on increasing profitability by reaping the cost reductions that emanate from experience curve effects and location economies. -The production, marketing and R&D activities of firms pursuing a global strategy are concentrated in a few favourable locations. -Global firms tend not to customize their product offering and marketing strategy but prefer to market a standardized product worldwide so as to reap maximum profit from economies of scale. -This strategy is inappropriate when demands for local responsiveness are high.

30. GLOBAL STRATEGY Transnational strategy -Transnational firms are those that plan to exploit experienced-based cost and location economies, transfer core competencies with the firm and pay attention to local responsiveness. -A firm that adopts a transnational strategy transfers skills and product offering from home firm to foreign firm, from foreign subsidiary to home country, and from foreign subsidiary to a foreign subsidiary, (Unilever). -A transnational strategy is necessary when a firm faces pressures for cost reductions, local responsiveness and significant opportunities for leveraging valuable skills within a multinational’s global network of operations.

31. GLOBAL STRATEGY Strategic Alliances refer to cooperative agreements between potential or actual competitors. Strategic alliances between firms from different countries are of significant importance to international business manager. Strategic alliances may span from formal joint ventures in which two or more firms have equity stakes, to short-term contractual agreements in which two companies agree to cooperate on a particular task, such as developing a new product.

32. GLOBAL STRATEGY Advantages of Strategic alliances - It may facilitate entry into a foreign market. -It allows firms to share the fixed costs and risks of developing new products or processes. -An alliance can bring together complementary skills and assets that neither company could easily develop on its own. -Alliance can help firm establish technological standards for the industry that will benefit the firm. For example, Phillips and its competitor Matsushita manufactured the digital compact cassette to set the industry standard for Sony and its mini compact disc.

33. GLOBAL STRATEGY Disadvantages of Strategic Alliances -Some critics have argued that strategic alliances give competitors a low-cost route to new technology, while some firms give away more than they receive in the alliance. The failure rate for international strategic alliances are found to be high (33%) due to financial and managerial problems. How then, do some alliances work?

34. GLOBAL STRATEGY Making Alliances Work The success of an alliance may depend on three main factors: partner selection, alliance structure, and the management of the alliance. Partner selection A good partner must have certain characteristics: Must help the firm achieve its strategic goals. The partner must have valuable capabilities that the firm lacks. Must share the firm’s vision for the purpose of the alliance. Divergent agendas will end in divorce. Must not exploit the alliance opportunistically for its own selfish ends. For example, acquiring technological know-how from the alliance without giving much in return. Firms with reputations for fair-play in alliances may be a good choice.

35. GLOBAL STRATEGY -In order to increase the probability of selecting a good partner, 1. Firms should collect as much as possible, important public available information on potential allies. 2. Firms must collect data from informed third parties such as investment banks, former employees, and firms that have had previous alliances with the firm. 3. Get to know the potential partner, familiarize with senior and middle management staff and ensure that the chemistry is right.

36. GLOBAL STRATEGY Alliance Structure The alliance should be structured in such a way that the firm’s risks of giving too much away to the partner are reduced to an appreciable level. There are four safeguards against opportunism by alliance partners. Alliances can be designed to make it difficult (if not possible) to transfer technology not meant to be transferred. The design, development, manufacture, and service of a product manufactured by an alliance can be structured so as to wall off sensitive technologies to prevent their leakage to other participant. Contractual safeguards can be written into an alliance agreement to guard against risk of opportunism by a partner.

37. GLOBAL STRATEGY 3. Parties to the alliance can agree in advance to swap skills and technologies that the other covets, thereby ensuring a chance of equitable gain. 4. The risk of opportunism can be reduced if the firm extracts a significant credible commitment from its partner in advance. Managing the alliance Following the selection and the appropriate structure for the alliance, it behoves on the firm to manage the relationship. An important factor in managing international alliances is for managers to be sensitive to cultural differences.

38. GLOBAL STRATEGY Firms will be able to maximize benefits from alliance if trust is built among partners, and also learn valuable skills and competences from partners. Building trust requires building interpersonal relationships between firm managers. This is referred to as relational capital. Getting to know each other facilitates harmonious relations between the firms In order to maximise the learning benefits of an alliance, a firm must try to learn from its partner and then apply the knowledge within its own organisation. Operational staff must be aware of the partner’s strength and weakness and what skills to acquire to bolster their firm’s competitive position.

39. 11. Entering Foreign Markets A firm contemplating foreign expansion has three basic decisions to make: Which foreign market to enter (location) When to enter (The timing of entry) Scale of entry and strategic commitments Location factor - A firm deciding on which market to enter is looking at the long-term potential profitability based on balancing the benefits, costs and risks associated with doing business in a particular country. - Economic benefits of doing business in a country are a function of factors such as size of the market, purchasing power of consumers and the future wealth of consumers. - Economically advanced, and politically stable democratic nations are less costly and less risky to do business in.

40. Entering Foreign Markets - The value an international business can create in a foreign market depends on the suitability of its products offering to the market and the nature of local competition. The ability of firm to apply a strategy of differentiation to its products can increase perceived value of potential consumers of a country leading to premium pricing. Timing of Entry Firms that enter growth markets before any competitors experience first-mover advantages and disadvantages. First-mover advantages include capturing customer demand and loyalty and establishing a strong brand name; the ability to build sales volume and ride down the experience curve; and the ability to switch costs that ties customers to the firm’s products.

41. Entering Foreign Markets - The first-mover disadvantages may include pioneering costs. Pioneering cost arise when a foreign firm spends effort, time and other expenses to learn the business systems of the foreign country, costs of promoting the product, and also if regulations change in a way that reduces the value of the early entrant’s investments. Scale of entry and strategic commitments -Entering a market on a large scale involves the commitment of significant resources. Large firms usually prefer to enter foreign market on a small scale and then slowly build as they become familiar with the market.

42. Entering Foreign Markets Entering a foreign market on a large scale has a strategic commitment. Strategic commitment as a result of a firm’s long-term commitment to the market may have significant influence on competition. - Competitors may pause their entry knowing they will not only compete with local firms but a successful foreign competitor. - The firm’s scale of entry will attract loyal customers and distributors who may have reason to believe that the firm will remain in business for the long run. - By committing itself on a large scale to a particular market, the firm may have fewer resources available to support expansion to other desirable markets.

43. Entering Foreign Markets Mode Of Entry Entry mode depends on ownership advantages of the company, location advantages of the market, and internalization advantages that results from integrating transactions within the firm. Ownership advantages are the firm’s specific assets, international experience, and the ability to develop either low-cost or differentiated products within the context of its value chain. Location advantages of a particular market are a combination of market potential and investment risk.

44. Entering Foreign Markets - Internalization advantages are the benefits of retaining a core competency within the company instead of opting to license, outsource or sell it. - Firms may use several modes of entry into foreign markets. These are exporting, turnkey projects, licensing, franchising, establishing joint ventures with host country firm, or setting up a new wholly owned subsidiary in the host country. Exporting requires a significantly lower levels of investment than other modes of international business. The lower risks of export typically results in a lower rate of return on sales.

45. Entering Foreign Markets - Exporting allows managers to exercise operational control but have little or no marketing and service control. Exporting helps firm avoid the costs of manufacturing operations in the host country. The firm may realize substantial scale economies from global sale as it produces from a centralized location. Drawbacks to exporting includes high transport costs, the threat of tariff barriers, and divided loyalty where a firm gives its marketing management to a local agent who also carry products of competing firms.

46. Entering Foreign Markets Turnkey Project is a project in which a firm sets up an operating plant for a foreign client and hand over the ‘key’ when the plant is fully operational. It is a way of exporting process technology to other countries. Turnkey projects are common in pharmaceuticals, and petroleum refining industries. Many oil-rich countries gain technical know-how in refining by limiting FDI and entering into turnkey projects with foreign firm. The selling firm earns a return on its valuable know-how. - Turnkey strategy is less risky as it is usually a short-term project.

47. Entering Foreign Markets - The firm that enters a turnkey deal may not have immediate long-term interest in the foreign country. The firm may take a minority equity interest in the operation in case the country later proves to be a major market. The firm may be creating a competitor in the firm it entered into the turnkey deal with. For example, many Western firms that sold oil refinery technology to firms in Saudi Arabia, Kuwait and other Gulf countries now find themselves competing with these firms in the world oil market. If the process technology the firm sold is a source of its competitive advantage, the firm would have then sold its competitive advantage to potential or actual competitor.

48. Entering Foreign Markets Licensing A licensing agreement is an arrangement whereby a licensor grants the rights to intangible property to another entity (the licensee) for a specified period, and in return, the licensee receives a royalty fee from the licensee. -Intangible property includes patents, inventions, designs, copyrights, trademarks. The licensee usually bears the development costs and risks associated with starting operations. This makes it attractive for firms unwilling to commit substantial financial resources to an unfamiliar or politically unstable foreign market. Licensing is also attractive when an overseas firm is prohibited by barriers to invest in a country.

49. Entering Foreign Markets The major drawbacks to licensing It does not allow a firm to realize experience curve and location economies as the local firm controls manufacturing, marketing and strategy required for global expansion. Licensing limits a firm’s strategic move to use profits earned in one country to support a different licensee operations in another country. A licensor may lose control of its technological know-how to another firm. Where this know-how constitute the basis of the multinational’s competitive advantage, it becomes a challenge for the firm.

50. Entering Foreign Markets The risks of licensing can however, be reduced by a cross-licensing agreement . An arrangement in which a company licenses valuable intangible property to a foreign partner and receives a license for the partner’s valuable knowledge in addition to the payment of royalty. -The establishment of a joint venture in which both partners have important stake can also reduce the risk of licensing. Franchising is a specialized form of licensing in which the franchiser not only sells intangible property (normally trademark) to the franchisee but insists that the franchisee agree to abide by strict rules as to how it does business.

51. Entering Foreign Markets -The franchiser will also often assist the franchisee to run the business on an ongoing basis and receive royalty representing a percentage of the firm’s revenue. -While licensing is often employed by manufacturing firms, franchising is employed by service firms such as McDonald’s. Franchising as an entry mode has advantages similar to licensing. Avoiding the risks and costs involved in opening a foreign market on its own, a franchiser is able to build a global presence quickly and st a relatively low cost and risk.

52. Entering Foreign Markets The major disadvantage of franchising is maintaining quality control that supports the firm’s brand name. Joint Ventures A joint venture is a firm that is jointly owned by two or more firms. When more than two firms participate the joint venture is sometimes called a consortium . Often, one firm controls more than 50 percent of the venture. International firms benefit from local partners knowledge of business, political, cultural, competitive conditions and possible government interventions. Development costs and risks are also shared by partners.

53. Entering Foreign Markets Joint venture allows the penetration of markets that are otherwise off-limits. It allows access to another company’s international distribution network. The drawbacks in joint venture may be the risk of giving control of a firm’s technology to a partner; does not give a firm tight control over subsidiaries for it to realize experience curve and location economies. Joint ventures often lead to conflicts if goals and objectives change.

54. A strategic alliance is a relationship whereby two or more entities cooperate (but do not form a separate company) to achieve the strategic goals of each. The single most important difference between strategic alliance and joint venture is that a joint venture involves the establishment of a separate entity whereas a strategic alliance normally does not. Strategic alliances can be established between a company and its suppliers, its buyers, and even competitors; sometimes each partner purchases the other’s stock

55. Entering Foreign Markets Wholly Owned Subsidiaries A wholly owned subsidiary is one in which a firm owns 100 percent of the stock. A firm can either set up a new operation in a foreign country (Greenfield venture), or it can acquire an established firm in the host country and use the firm to promote its products. Advantages of wholly owned subsidiaries Ability to protect technology Ability to engage in global strategic coordination, that is using profits from one country to support competitive attacks in another. Ability to realize location and experience economies The major disadvantage is the high costs and risks of setting up overseas operations.

56. Entering Foreign Markets Assignment: Investment decisions 1. Each group must choose a multinational company in Ghana to investigate. Information about the company may be available in the Ministry of Trade……. 2. Each group will be assigned two countries to be considered for investment. The group will decide which market it wants to enter, how it proposes to enter (joint venture, wholly owned, franchising, etc.) and why. A thirty-minute presentation to the class should take the form of a task force presenting its findings to a top management group. {See outline of international expansion decision}

57. 12. Exporting, Importing and Countertrade Exporting Exporting is a way of increasing a company’s revenue and profit base but firms are not proactive about seeking export opportunities. Small firms are particularly intimidated by the complexities and mechanics of exporting to countries where business practices, language, culture, legal and political systems are different. One major impediment to exporting is ignorance to foreign market opportunities. The way to overcome ignorance is to gather information. In Ghana, the Export Promotion council, Ministry of Trade and the Chamber of Commerce provide some export- related information. An exporter may spend months learning about a country’s trade regulations, business practices etc. before a deal can be closed.

58. Exporting, Importing and Countertrade In some countries, the services of export management companies (EMC) can be sought by first-time exporters. The EMC act as the export marketing department for their client firm. They also help the neophyte exporter identify opportunities and avoid common pitfalls. Common pitfalls include poor market analysis, poor understanding of competitive conditions in foreign market, failure to customize products to foreign customers’ needs, problems securing financing, and lack of effective distribution program.

59. Exporting, Importing and Countertrade Exporting strategy Enter on a small scale to reduce risks and costs of possible failure, add additional product lines once the exporting operations become successful, and hire locals to promote firm’s products. Hire an EMC or an export consultant to help identify opportunities and navigate through the web of paperwork and regulations. Focus on one market at a time and learn what it takes to succeed in that market before moving into another market. Entering many markets, a firm runs the risk of spreading its limited management resources too thin. Build strong relationships with local distributors and customers. Should consider establishing production facilities in the foreign market once exports reach a significant volume to justify cost-efficient local production.

60. Exporting, Importing and Countertrade Export and Import Financing International businesses are compelled to transact business with people they have never met and who abide by different legal, cultural, political systems, and who could be difficult to track down if they default in an obligation. The problems arising from lack of trust between exporters and importers may be solved by using a third party trusted by both to act as an intermediary, usually a bank. Banks use documentations such as letter of credit (L/C), documentary collection, advance payment draft and bill of lading as means of financing international trade. A letter of credit obligates the buyer’s bank in the importing country to pay a specified amount of money to a beneficiary (usually an exporter) on presentation of some prescribed documents. A letter of credit can be revocable, irrevocable or confirmed.

61. Exporting, Importing and Countertrade - A revocable letter of credit can be cancelled or altered by any of the parties while an irrevocable letter of credit cannot be cancelled or changed in any way without the consent of all parties. T he exporter may sometimes have a guarantee from a confirming bank. Usually, the opening bank seeks the confirmation of the L/C with a bank with whom it has a credit relationship. - A confirmed letter of credit is guaranteed by both the exporter’s bank and the importer’s bank A Draft (or a commercial bill of exchange) is an instrument in which one party (the drawer) directs another party (the drawee) to pay a specified amount of money at a specified time or date. The drawee may be an importer (individual or company), or a bank.

62. Exporting, Importing and Countertrade A sight draft is one that is payable to the drawee immediately or on presentation. A time draft will normally carry instruction for payment to be made at a specified time in the future- 30, 60 days. When a time draft is presented, the drawee have to accept it by stamping or writing a notice of acceptance on its face. The time draft then becomes like a promissory note. When a time draft is drawn on and accepted by a firm it is called a trade acceptance ; when it is accepted by a bank it is called a banker’s acceptance .

63. Exporting, Importing and Countertrade A Bill of Lading is a document issued to the exporter by the common carrier acknowledging receipt of merchandise described on the face of the document. A bill of lading also serves as a contract specifying that the carrier is obliged to provide transportation services in return for a stated charge. As a document of title, a bill of lading can be used to obtain payment or a written promise of payment before the merchandise is released to the importer. It can also be used as a collateral for a bank credit.

64. Advance payment is a financing in which an importer pays for merchandise before it is shipped. It is common when two parties are unfamiliar with each other; when the transaction is small; or the buyer is unable to obtain credit due to poor credit rating. Although prior payment eliminates the risk of non-payment, it creates the complementary risk of non-shipment after the imported had paid for the goods. Documentary collection is financing in which a bank acts as an intermediary without accepting financial risk. This method is common when there is an ongoing business relationship between two parties.

65. Exporting, Importing and Countertrade Countertrade is a batter-like agreement to trade goods and services for another goods and services when they cannot be traded for money. For example Ghana traded bauxite, gold to Yugoslavia, Romania in exchange for medical supplies and agric inputs. -Countertrade is often a solution for countries that have currency convertibility problems. Governments use non-convertibility to protect its foreign exchange reserves and use them to service international debt or for payments of essential imports. -Countertrade may be categorized into barter, counterpurchase, offset, switch trading and buybacks.

66. Exporting, Importing and Countertrade Barter is the direct exchange of goods and services between two parties without a cash transaction. Counterpurchase occurs when a firm agrees to purchase a certain amount of materials from a country to which a sale is made. Offset occurs when a firm agrees to purchase goods and services with a percentage of proceeds from an original sale. Switch trading occurs when a third-party trading house buys the firm’s counterpurchase credits and sells them to another firm that can better use them.

67. Exporting, Importing and Counter trade A buyback occurs when a firm builds a plant, supplies technology or training and agrees to take a certain percentage of the firm’s output as partial payment for the contract. An export credit insurance may be purchased by an exporter to cover losses in the event an importer defaults in payment. An importer in a strong bargaining position can play competing suppliers against each other and may forego a letter of credit. Class Test

68. 13. Global Marketing and R&D Standardization versus Adaptation The globalisation of markets and brands is linked to Theodore Levitt’s article that argued that due to the advent of modern communication and transportation technologies and travel, consumer tastes and preferences have converged, given rise to global markets for standardized consumer products. Levitt’s position has been challenged. Critics have argued that substantial cultural and economic differences exist that may constrain a firm’s ability to sell standardized product to a global market.

69. Global Marketing and R&D Consumers in different national markets demand products that reflect their taste. Cultural, political, legal and economic environments affect consumer preferences and industrial buyers worldwide. Certain products appeal to practically all cultures. For example, a passion for red wine is sweeping Asian markets such as Hong Kong, Singapore. Product standardisation is more likely when nations share the same level of economic development.

70. Global Marketing and R&D Market segmentation refers to identifying distinct groups of consumers whose purchasing behaviour differs from others in many important ways. Markets can be segmented by demography (sex, age, income, race), culture (social class, values, religion, lifestyle choices), and psychological factors (personality). Each segment is likely to exhibit different patterns of purchasing behaviour. International firms need to vary the marketing mix (the precise design of a product, the pricing strategy, distribution and communication strategy) from segment to segment. The existence of market segment that transcends national borders enhances the ability of an international business to view the global marketplace as a single entity and pursue a global strategy, selling standardized product worldwide.

71. Global Marketing and R&D MARKETING MIX Four elements constitute market mix. These are a set of choices that a firm offers to its targeted market: - Products attribute Distribution strategy Communication strategy Pricing strategy Many firms vary their marketing mix from country to country based on differences in national culture, economic development, product standards, distribution channel etc.

72. Global Marketing and R&D Products Attributes A product can be viewed as a bundle of attributes. -Products sell well when their attributes match consumer needs. Attributes include quality, taste, size, design etc. -Consumer needs vary from country to country depending on culture and the level of economic development. 1. Cultural Differences -Cultural differences (such as social structure, language, religion and education) among nations have important implications for marketing strategy. For example, canned tomatoes imported to Ghana is less sweet and more acidic than those imported to USA and Australia.

73. Global Marketing and R&D 2. Economic development Consumer behaviour is influenced by the level of economic development of a country. Consumers in highly developed countries tend to demand products that have additional attributes customized to their taste and preferences. Consumers in less developed nations, who prefer more basic products, may demand product reliability especially, for consumer durables as the product may constitute a large proportion of a consumer’s income.

74. Global Marketing and R&D 3. Product and technical standards Differences in technical standards also constrain the globalisation of markets. For example, some electrical appliances, cars etc are produced according to UK, or US standards. Distribution Strategy - A typical distribution system consist of a channel that includes a wholesale distributor and a retailer. -The system used for distribution of a product depends to a large extent on the firm’s entry strategy. -If goods are manufactured in a country, a firm may decide to sell directly to consumers, retailers or through wholesalers. Import agents may be used for imported goods.

75. Global Marketing and R&D There are three main differences in distribution systems among countries. These are: Retail concentration distribution systems among nations vary to the extent that only a few retailers supply most of the market ( concentrated retail system ) or many retailers consisting of small stores and no one distributor dominates the market ( fragmented retail system ). - Concentrated retail systems are mostly found in developing countries while fragmented systems are found in developed countries

76. Global Marketing and R&D 2. Channel length refers to a number of intermediaries between the producer and the consumer. A short channel may be the one in which the manufacturer sells directly to the consumer. In a long channel the producer may sell through an import agent, a wholesaler, a retailer. Fragmented retail systems tend to have longer channels of distribution. When the retail sector is concentrated, firms tend to deal directly with retailers as it is in UK, US and Australia The advent of the internet is helping to shorten channels in many markets.

77. Global Marketing and R&D Channel Exclusivity or an exclusive distribution channel is one that firms have difficulty in getting access to shelf space in supermarkets for their products. -This occurs when for example, retailers of foodstuffs prefer to stock and sell products of manufacturers whose famous brands have national reputation rather than unknown brands. - In Japan for instance, exclusivity depends on the relationship between the manufacturer and the distributors which often discourages them from carrying products of competing firms on their shelves. In Ghana, Coca Cola has such arrangements with some retailers to sell only their soft drinks in return for a fridge.

78. Global Marketing and R&D Choosing a distribution strategy a firm must weigh the relative costs and benefits of a particular system. The longer the channel, the greater the aggregate markup, the higher the price consumers are charged. A firm may choose to settle with a low profit margin or reduce the length of a channel if pricing is the competitive weapon and not market access. If market access is the goal, a long channel is appropriate which also cuts selling costs in a fragmented retail system. For example, import agent may have long-standing relationships with wholesalers, retailers and important consumers. Import agents can be any firm with strong local reputation.

79. Global Marketing and R&D Communication Strategy - A firm uses a number of communication channels ( direct selling, sales promotion, direct marketing and advertising ) to sell the attributes of a product to prospective consumers. A firm’s communication strategy is partly defined by its choice of channel. International communication occurs when a firm uses a marketing message to sell its products in another country. The effectiveness of a firm’s international communication may be jeopardized by cultural barriers, source effects and noise effect.

80. Global Marketing and R&D Cultural barriers Differences in culture makes it difficult to communicate messages intended to sell a product across nations. For example, many company -TV promotions have failed due to lack of meaning or insufficient understanding to message. In some cases, promotion materials become offensive to the people and may affect patronage. The type of message, the direction, and the method of presentation may be extremely diverse depending on the company, the product, and the country of operation.

81. Global Marketing and R&D To overcome cultural barriers, firms must develop cross-cultural literacy. - Firms must use local input such as local advertising agents, local sales force. Consider the commercial for the alcoholic drink ‘Pusher’. Firms must be aware that cultural differences limit a firm’s ability to use the same marketing messages and selling approach globally. Source and country of origin effect Source effects occur when the receiver of the message (consumer) evaluates the message based on the status of the sender. For example, Nigerians are notoriously known for corruption and dubious activities around the globe. Nigerian banks in Ghana could therefore, be perceived as potentially corrupt banks. A Nigerian bank in Ghana may counteract such notion by creating advertisements that dissociate itself from corruption and promote trust building among customers.

82. Global Marketing and R&D Country of origin effects is a subset of source effect. It occurs when the place in which a product is manufactured influence product evaluation. Many UK and USA goods have positive evaluations in Ghana while China made goods may have a negative one. A negative country of origin effect may occur when consumers lack detailed knowledge of the product. When a negative country of origin effect exists in a country, an international business can change this perception by using promotional messages that stress the positive performance attribute about the quality of its products.

83. Global Marketing and R&D Another barrier to effective communication is the noise levels . It refers to the amount of other messages competing for the attention of potential buyers. Noise levels vary from country to country and depends on the number of firms seeking the attention of consumers. Noise intensity is higher in highly advanced countries than it is in developing countries.

84. Global Marketing and R&D Effective communication Promotion is the presentation of messages intended to help sell a product or service. A firm’s communication strategy may be effective based on the method of presentation and the types and direction of message. Push and pull strategies are often choices firms make to promote products. A Push strategy uses direct selling strategy as a promotional mix and requires intensive use of sales force. A Pull strategy relies on mass media advertising to communicate message to potential consumers.

85. Global Marketing and R&D Factors that influence firms choices of push or/and pull strategies depend on: Product type and consumer sophistication Channel length Media availability Product type and sophistication A pull strategy is required in consumer goods industry trying to reach a large segment of the market. Or in advanced countries where consumers are sophisticated and have knowledge about similar products. A push strategy is favoured by firms that sell industrial or complex products, or products that are rarely used and consumers have little or no knowledge. Direct selling helps educate potential consumers about the features of the product and may be appropriate in less sophisticated economies.

86. Global Marketing and R&D Channel length The longer the distribution channel the more difficult it is to reach potential consumers. Using direct selling to push a product through many layers of a distribution channel may be very expensive. Using advertising to create consumer demand will allow intermediaries to carry the product. For example, in Ghana the proliferation of TV sets and recently, mobile phones have made advertising very popular through such media.

87. Global Marketing and R&D Media availability A firm’s ability to use a pull strategy is limited in some countries by media availability. Media restrictions may be by law or just poverty. For example, 70 percent of India population is rural, illiterate and poor with no access to televisions or radios. In such instance samples of product may be provided to potential consumers at religious gatherings or in market centres (at point of sale). Government regulations can also pose restrictions to the use of pull strategy. Cigarette advertising in Ghana?

88. Global Marketing and R&D Global Advertising Standardization of advertising programs has significant economic advantages. 1. It lowers the cost of value creation by spreading the fixed costs of developing the advertisement over many countries. 2. It may improve the quality of advertising at the local level since local agencies may lack such creative talents. 3. Prevent internationally mobile consumers from being confused by different brand images to a brand name. 4. It speeds up the entry of products into different countries.

89. Global Marketing and R&D Standardized advertising may be prevented by cultural diversity among nations. An advertising theme may not be appropriate everywhere because of differences in how well the product is known to consumers in a country, how it is perceived, and what appeals to the person who makes purchasing decisions. Advertising regulation may block standardized advertising. Varying national views on consumer protection, competitive protection, promotion of civil rights, standards of morality etc.

90. Global Marketing and R&D Firms deal with country differences by capturing some benefits of global standardization by maintaining some features in all its advertising and localising some features. Pricing strategy International pricing strategy is a very important component of international marketing mix. A price must be low enough to gain sales and assure short-term profits. A price must also be high enough to guarantee the flow of funds required to carry on other activities and achieve long-term competitive viability.

91. Global Marketing and R&D Three aspects of international pricing strategy Price discrimination - Price discrimination occurs when consumers are charged different prices for a firm’s product. Prices are usually lower in a competitive market than in a market where the firm has a monopoly. Price discrimination can help a firm maximize its profit if it can keep its national market separate, and when different price elasticity of demand exist in different countries. The inability of a firm to separate national market will give rise to arbitrage.

92. Global Marketing and R&D Arbitrage occurs when an individual or business capitalizes on a price differential for a firm’s product between two countries by purchasing the product in the country where prices are lower and reselling it in the country with high prices. The price elasticity of demand is a measure of responsiveness of demand for a product to changes in price. Demand is elastic when a small change in price produces a large change in demand. Demand is inelastic when a large change in price produces only a small change in demand.

93. Global Marketing and R&D Income levels of consumers and competitive conditions may affect elasticity of demand. Price elasticity tends to be greater in countries with low income levels. Consumers with limited income tend to be price conscious. Consumers bargaining power increases in countries where competition exist and consumers can switch to competitor’s product when a firm raises its price. Competitors thus cause high elasticity of demand. A firm may charge a high price for its product in a country where competition is limited.

94. Global Marketing and R&D Strategic Pricing refers to pricing method applied by firms aimed at giving a competitive advantage over competitors. Predatory pricing is the use of price as a competitive weapon to drive weaker competitors out of a national market. Firms can raise price and enjoy high profit once competitor is off the market. - Firms that practice predatory pricing strategy often has a profitable position in another market which it can use to subsidize aggressive pricing ot the market it is trying to monopolize.

95. Global Marketing and R&D 2. Multipoint Pricing Strategy Multipoint pricing becomes an issue when two or more international businesses compete against each other for market share and dominance in two or more national markets. Multipoint pricing occurs when a firm’s pricing strategy in one market impact on a rival’s pricing strategy in another market. - An aggressive pricing in one market may elicit a competitive response from a rival in another market.

96. Global Marketing and R&D 3. Experience curve pricing - Learning effects and economies of scale underlie the experience curve. Aggressive pricing and aggressive promotion can build accumulated sales volume and move a production down the experience curve rapidly. Firms further down the experience curve have a cost advantage over firms up on the experience curve. International business that pursue this strategy, price product low in order to build global sales volume as rapidly as possible, expecting to build future profit.

97. Global Marketing and R&D Government regulations and pricing - The ability of a firm to engage in either price discrimination or strategic pricing may be limited by national or international regulations. Anti-dumping regulations and competition policy are two major ways regulations affect pricing policy of a firm. Dumping occurs when the price of a good is lower in export market than in the domestic market. That is, a firm may sell a product for a price lower than the cost of producing it. Article 6 of GATT defines dumping as prices ‘less than fair value’ and causing material injury to a domestic industry’.

98. Global Marketing and R&D - Although charges of dumping normally results from deliberate efforts to undercut the prices of competitors in the domestic market, changes in exchange rates can cause international dumping. Anti-dumping tariffs punish producers in the offending nations by increasing the price of their products. Competition policy Regulations can be used to limit the price a firm can charge for its product in a country. Upper limit price control provide price stability in an inflationary economy. Lower-limit price control help local companies compete against less expensive imports of international companies or to ward off price wars.

99. Global Marketing and R&D Despite the debate on globalisation and the assumption that companies should standardise their marketing mix from country to country, companies continue to adapt to local conditions. Cultural and legal factors may compel firms to modify promotional campaigns or may require the creation of an entirely new product. Legal requirements may also compel a firm to produce locally to ease local unemployment or to spur local industry around the production line. There are however, significant opportunities for firms to standardize and centralize their production and sell worldwide.

100. Global Marketing and R&D NEW PRODUCT DEVELOPMENT The accelerated pace of technological innovation has fuelled competition while the rapid pace of new product development has dramatically shortened product life cycle. - Technological innovation is both creative and destructive. An innovation can make a host of new products possible and also make established products obsolete overnight. For example, the advent of hand-held mobile internet communication devices has destroyed the reliance on personal computers. - The ‘creative-destruction’ continuum unleashed by technological change makes it critical that a firm stay on the leading edge of technology otherwise, it lose out to a competitor’s innovations. - Firms must not only have leading-edge technology to survive but must apply the technology, develop new products to satisfy customer’s needs.

101. Global Marketing and R&D - Products must also be designed in ways that it can be manufactured in a cost-effective manner. Firm also need to foster close links between R&D, marketing and manufacturing departments. The ideas for new products are however, stimulated by the interactions of scientific research, demand conditions and competitive conditions. The Location of R&D New product development may be found in countries where: 1. Investments are intensified on basic and applied research and where development discovers new technologies and commercializes them.

102. Global Marketing and R&D 2. Underlying demand is strong. 3. Affluent customers with strong demand create potential new market. 4. Intense competition stimulates innovation The USA devoted a greater part of its GDP to R&D after WW 2, and with a large market and affluent consumers, continued to be the leading location where new products were developed and introduced. Countries such as Japan and the EU are closing the gap on US monopoly. Companies such as Sony and Sharp are driving product innovation in their respective industries.

103. Global Marketing and R&D Researchers had been of the view that centralised locations for R&D allowed firms to gather scientific and competitive information and eliminated duplication of innovation. Because leading-edge research is now carried out in locations around the world, the argument for centralising R&D activity in the US is much weaker than it was previously. The cost disadvantages of duplication outweigh the advantages of dispersion. To succeed in the high-tech industries today, it is necessary that new products are introduced simultaneously around the world.

104. Global Marketing and R&D Integrating R&D, Marketing and Production Although firms that are successful in developing new products earn substantial returns, research has shown that many R&D projects do not result in commercial products. In addition, new products developed fail to generate adequate return. The reasons are New products are developed before demand are sought. Failure to adequately commercialize promising technology. Inability to manufacture new product cost-effectively. Experts have suggested a tight cross-functional coordination and integration between R&D, marketing and production departments will:

105. Global Marketing and R&D Ensure product development projects are driven by customer demand and unmet needs. They are easy to manufacture Development costs are in check. Time to market is minimized The need to integrate R&D, and marketing to commercialize new technology becomes a problem to an international business as commercialization require the production of different versions of the product for different countries. International businesses need to establish a global network of R&D or basic research centres located in regions where valuable scientific knowledge is being created and where there is a pool of skilled research talents e.g. Silicon Valley in the USA.

106. Global Marketing and R&D Food for thought Some critics charge advertisers with creating wants among consumers rather than helping them satisfy needs. Select a product and describe how it creates wants in a developing country such as Ghana. Explain the ethical issues surrounding the decision of whether to market the product in developing countries. How is globalisation affecting international marketing activities?

107. 14. Global Manufacturing and Material Management Production refers to activities involved in creating a product i.e. Goods and services. Material management is the activity that controls the transmission of physical materials through the value chain, from procurement through production and into distribution. Logistics, as part of material management, refers to the procurement and physical transmission of material through the supply chain, from suppliers to consumers. A firm’s ability to perform its manufacturing function efficiently depends on a continuous supply of high-quality material inputs. There is therefore a close link between material management and manufacturing. For an international business, manufacturing and material management have important strategic objectives:

108. Global Manufacturing and Material Management 1. Dispersing manufacturing activities to locations around the world where each activity is performed efficiently can reduce costs of production. Cost may also be reduced when the supply chain is managed efficiently to match demand to supply, reduces inventory, invest less working capital in inventory and increases inventory turnover. 2. Increase product quality by removing defective products from both supply chain and manufacturing process. The objectives of reducing costs through increasing quality control may lead to increased productivity. This is because time is not wasted producing poor quality products that cannot be sold. Unit cost is also reduced. Warranty costs, rework costs and scrap costs are also reduced.

109. Global Manufacturing and Material Management Many firms today utilize total quality management (TQM) to improve product quality. TQM philosophy argues that management should embrace the philosophy that mistakes, defects, and poor quality materials are not acceptable and should be eliminated. TQM also suggests that the quality of supervision must be improved by allowing them more time to work with employees and by providing them with tools needed to do their jobs. Management must create environment for employees to recommend improvement or report problems without fear

110. Global Manufacturing and Material Management Employees should be trained in new skills to keep pace with changes in the workplace. International standards such as the EU’s ISO 9000 requires that the quality of a firm’s manufacturing processes and products must be certified under their quality standards. 3. Another objective for international businesses is that material management and manufacturing must be able to accommodate demands for local responsiveness. 4. Manufacturing and materials management must be able to respond quickly to a shift in customer demand. Firms that can adapt to changes in consumer demand gain an advantage.

111. Global Manufacturing and Material Management Location for manufacturing The decision of an international firm to locate its manufacturing activities to achieve the goals of minimising costs and improving product quality depends on certain factors: Country factors -Political economy, culture, differ from country to country. These differences influence the benefits, costs and risks of doing business in a country. Differences in factor costs allow certain countries to have comparative advantage for producing certain products than others.

112. Global Manufacturing and Material Management - All things being equal, a firm should locate its manufacturing activities where the economic, political, and cultural conditions in addition to relative factor costs are conducive to the performance of those activities. Location externalities such as skilled labour, and supporting industries help global concentration of certain activities in some locations. For example, availability of skilled miners in Ghana have attracted mining companies and is likely to attract relating jewellery industries. Factors such as trade barriers, transportation costs, and rapid changes in exchange rates can affect a nations attractiveness as a manufacturing base.

113. Global Manufacturing and Material Management 2. Technological factors The kind of technology a firm requires to manufacture its products may influence location decisions. Technological constraints may allow manufacturing activities in only one location or multiple locations. Three characteristics of manufacturing technology affect location decisions. These are fixed costs, minimum efficient scale and the flexibility of the technology. 1. Fixed costs of setting up a manufacturing plant may be so high that a firm must serve the world market from a single location or from a few locations. For example, a state of the art semiconductor chips manufacturing plant may cost over $1 billion and may be cost effective in one location, whereas low-level fixed cost may be economical in several locations and responding to local responsiveness.

114. Global Manufacturing and Material Management Minimum efficient scale The economies of scale concept states that as firms increases output, unit costs decreases as a result of specialisation (which increases productivity), and the efficient utilization of capital equipment. The benefits of economies of scale dwindles after a certain optimum level of output. The level of output at which most plant-level scale economies are exhausted is referred to as the minimum efficient scale of output. The implications of this concept is that:

115. Global Manufacturing and Material Management The larger the minimum efficient scale of plant, the greater the argument for centralising production in a single location. When the minimum efficient scale is relatively low, it may be economical to manufacture a product at several locations. The advantages of low fixed cost and the ability to accommodate demands for local responsiveness and hedge against currency risk will allow the manufacturing of the same product in several locations.

116. Global Manufacturing and Material Management Flexible manufacturing and mass customisation The central theme of economies of scale is the idea that the best way to achieve high efficiency and low unit costs is through mass production of a standardized output. Producing greater product variety from a factory implies shorter production runs, which also implies the inability to realize economies of scale. In other words, for a firm to increase efficiency and drive down unit cost is to limit product variety and produce standardized product in large volumes. The production efficiency view has however, been challenged by the rise of flexible manufacturing technology.

117. Global Manufacturing and Material Management The term flexible manufacturing technology (or lean production) covers a range of manufacturing technologies designed to (i) reduce set-up times for complex equipment (2) increase utilization of individual machines through better scheduling and (3) improve quality control at all stages of manufacturing process. - Research has shown that the adoption of lean production may increase efficiency and lower unit cost relative to what can be achieved by mass production of standardized output, while at the same time enable firm to customize its product offering.

118. Global Manufacturing and Material Management Mass customisation is the ability of a company to use flexible manufacturing technology to reconcile low-cost goals with product customization. Toyota’s flexible manufacturing system has been credited as most efficient in the world. Toyota has been able to reduce setup times for production equipment by making shorter production run efficiently and meet consumer demands for product diversity. The small production run also eliminated the holding of large inventories, and reduced wastes caused by large number of defects in the mass production system. Defects were traced to their source and the problem got fixed.

119. Global Manufacturing and Material Management Flexible machine cells are another common flexible manufacturing technology. A cell consist of a group of machinery with a common handler, and a centralized cell controller (computer). Each cell may have between four and six machines capable of performing a variety of operations and are used to produce a family of parts or products. Improved capacity utilization and reductions in work-in-progress inventory and in waste are the major efficiency benefits of flexible machine cells. Technological factors are making it feasible and necessary for firms to concentrate manufacturing facilities at optimal locations. For example, where fixed costs are substantial, and the minimum efficient scale is high, and/or flexible manufacturing technologies are available, manufacturing facilities could be concentrated at few locations.

120. Global Manufacturing and Material Management 3. Product factors There are two product features that affect location decisions: value-to-weight ratio and universal needs. Value-to-weight ratios are high for products that are expensive but have relatively low weight. Many electronic component and pharmaceuticals are in such category and that even when shipped around the world, transportation costs form a small percentage of total cost. Products with low value-to-weight ratio (sugar, paint, petroleum products) are likely to be manufactured in multiple location, close to major market to reduce transportation costs.

121. Global Manufacturing and Material Management Universal needs are products that the need for them are the same all over the world (Personal computers, mobile phones, and other industrial products). Since there are few national differences in consumer taste and preferences for such products, the need for local responsiveness is reduced which increases the attractiveness of concentrating manufacturing at an optimal location. Locating manufacturing facilities Two basic strategies for locating manufacturing facilities Concentrating them in a centralized location and serving the world market from there, or decentralizing them in various regional or national locations close to major markets. There is however, no clear-cut, straight jacket formula for location decisions of firms.

122. Global Manufacturing and Material Management In practice, differences in factor costs, technological factors, and product factors allow for concentrated manufacturing while a combination of trade barriers and volatile exchange rates points toward decentralized manufacturing. The strategic role of foreign factories First, many factories are established where labour costs are low. This strategy is to produce labour-intensive products at low cost. With adequate infrastructure, favourable tax and trade regime, and improvement in company’s capabilities, the strategic role of firms expands as they become important production centres for the global marketplace. The upward move in the strategic role of firms may stem from two sources of company’s capabilities:

123. Global Manufacturing and Material Management First, pressure to improve a factory’s cost structure and/or customize a product to the demands of consumers in a particular nation can star a chain of events that may ultimately lead to development of additional capabilities at the factory. Another source of factory’s capabilities may stem from increasing abundance of advanced factor’s of production in the country in which factory is located. Rapid development in transport and communication and other advanced infrastructure, improvements in the level of education of the people has made it easier for factories to take on greater strategic role.

124. Global Manufacturing and Material Management International businesses are moving away from a system in which foreign factories are viewed as low-cost manufacturing facilities and toward one where foreign factories are viewed as globally dispersed centres of excellence. In this new model, foreign factories take the role of regional or global market in which firms adopt transnational strategy. Transnational strategy is a belief that valuable knowledge does not reside in only the domestic operations but in global learning. Valuable knowledge can be found in subsidiaries as they improve their capabilities over time, and this might be of immense benefit to a whole corporation. Such process imply that factories should not relocate production just because some factors like wages have changed as valuable skills are accumulated. International managers must weigh the benefits of such skills on productivity and product design.

125. Global Manufacturing and Material Management Make or Buy decisions Sourcing decision of firms refers to whether a firm should make or buy component parts that go into the final product. That is, should a firm vertically integrate to manufacture its own component parts or should it outsource them by buying from independent suppliers? Make-or-buy decisions in international businesses are made complicated due to volatility of countries political economies, exchange rate movements, changes in relative factor costs etc. Are the trade-offs in strategic alliances?

126. Global Manufacturing and Material Management The advantages of make decisions The decision to make is found in vertical integration. Vertical integration may be associated with lowering costs, facilitating investments in highly specialized assets, protecting proprietary product technology, and facilitating the scheduling of adjacent processes. Lower costs A firm may lower cost and continue to manufacture a product or component in-house if it is more efficient at that production than any other enterprise.

127. Global Manufacturing and Material Management Facilitate specialized investments When a firm invest in specialized assets to supply another, a mutual dependency is created. Outsourcing specialized components of a firm’s product may result in trust problem as neither party completely trusts the other to play fair. For example, the supplier of a specialized equipment that only one firm uses is likely to put that firm in a strong bargaining position to squeeze down prices. The firm may also fear that once it becomes dependent on the supplier of the specialized parts, the supplier may have strong bargaining power to demand higher prices. The firm may thus, decide to manufacture the specialized parts itself when substantial investments in specialized assets are required to manufacture a component of the firm’s product.

128. Global Manufacturing and Material Management Protect proprietary product technology Proprietary product technology is technology unique to a firm. If the technology enables the firm to produce a product more efficiently or give it superior features, proprietary technology can give the firm competitive advantage. If a firm contracts out the manufacture of components containing proprietary technology, it runs the risk that the suppliers will expropriate the technology for their own use or sell it to the firm’s competitors.

129. Global Manufacturing and Material Management Improve scheduling Vertical integration is said to result in cost savings as a result of the ease in planning, coordination, and scheduling of adjacent processes especially in firms with just-in-time inventory system. International businesses that source worldwide can have serious scheduling problems exacerbated by time and distance between firm and its suppliers. Firms can have tight scheduling with globally dispersed suppliers and may not need to be vertically integrated for inputs.

130. Global Manufacturing and Material Management Advantages of buy Buying components from independent suppliers can give the firm greater flexibility, drive down the firm’s cost structure, and help the firm capture orders from international customers. Strategic flexibility When firm buys from independent suppliers, they are able to maintain flexibility, and switch orders between suppliers. - Many firms source for a particular component from suppliers based in different countries, primarily as a hedge against adverse movements in factor costs, exchange rates, trade barriers etc. - Sourcing component parts from independent supplier can be advantageous when the optimal location for manufacturing a product is prone to political risks, and FDI to establish a component manufacturing operation in that country is risky.

131. Global Manufacturing and Material Management The downside of strategic flexibility is that the supplier may not be willing to make specialized investments in plant and equipment that would ultimately benefit the firm if the supplier perceives the firm would change supplier in response to changes in exchange rates, trade barriers etc. Lower costs Vertical integration into the manufacturing of component parts increases an organizational scope. The resulting increase in organizational complexity can raise a firm’s cost structure in three ways:

132. Global Manufacturing and Material Management - Vertical integration increases an organisational departments and top management coordinating and controlling roles. The greater the number of subunits, the harder it is to effectively control all of them. The resulting inefficiency might offset the advantages derived from integration The problem of coordinating and controlling is serious for international business where the problem is exacerbated by distance, and differences in time, language and other cultural factors. Internal suppliers of a firm’s component parts do not have the incentive to reduce costs since there are no competitors and may transfer cost increases into higher prices of firm’s products.

133. Global Manufacturing and Material Management Offset Firm’s that outsource component parts are constantly being urged to purchase parts from countries that purchase large volumes of the firm’s finished products to offset the cost of the large quantities purchased. Tradeoffs Tradeoffs are involved in make-or-buy decisions. Firms may benefit from manufacturing component parts in-house when highly specialized assets are involved. For example, protection of proprietary technology or when the firm is more efficient than external suppliers at producing those parts. Since the risks of strategic inflexibility and organizational control is greater for international business involved in vertical integration, outsourcing of component parts may be a better option for international business.

134. Global Manufacturing and Material Management Strategic alliances with suppliers International businesses who enter into strategic alliance with essential suppliers have reaped some benefits of vertical integration without its associated problems. Strategic alliances build trust between the firm and its suppliers. The commitment by firm to continue purchasing from a supplier will encourage supplier to undertake specialized investments. Firm may demonstrate its commitment by taking a minority shareholding in the supplier’s company to signal its intention to build a long-term relationship that is mutually beneficial to the two firms.

135. Global Manufacturing and Material Management In general, the increased utilization of just-in-time inventory system (JIT), computer-aided manufacturing (CAM), and computer-aided design have increased pressures for firms to establish long-term relationships and strategic alliances with their suppliers. However, a firm that enters into long-term alliances with suppliers may limit its strategic flexibility by the commitments it makes to its alliance partners, and may risk giving away its key technological know-how to a potential competitor.

136. Global Manufacturing and Material Management Coordinating a global manufacturing system Materials management (logistics and distribution) is a major undertaking in a firm with globally dispersed manufacturing system and global market. The ability to link customers orders to match supply drives excess inventory out of its system and significantly reduce firm’s cost structure. The potential for reducing costs of value creation through efficient materials management can increase a firm’s competitive advantage through superior customer service. For a typical manufacturing firm, material costs account for between 50 and 70 percent of revenue. A small reduction in costs can have substantial impact on profitability.

137. Global Manufacturing and Material Management Just-in-time Inventory systems Pioneered by Japanese firms in the 1950s, the philosophy behind just-in-time (JIT) inventory system is to economize on inventory holding costs by having materials arrive at a manufacturing plant just in time to enter production process and not before. The major cost saving comes from speeding up inventory turnover by reducing inventory holding costs such as warehousing and storage costs. It also allows firm to avoid holding unsold inventory that may be written off or priced low in order to sell. JIT also helps firms to improve product quality. Since product parts are not warehoused, defective parts are immediately detected and traced to the supply source and fixed before more defective parts are produced. The problem with JIT is that it leaves a firm without a buffer stock of inventory. Disruption in supplies or a sudden increases in demand can hurt the firm in the short run.

138. Global Manufacturing and Material Management Information technology, the internet and material management Web-based information systems play important role in material management. It can be used to track component parts across the globe to an assembly plant, and allows firm to optimize its production scheduling to correspond to the expected arrival of component parts. Firms increasingly use electronic data interchange to coordinate the flow of materials into manufacturing, through manufacturing and out to customers. EDI system links firm to suppliers and customers. Firm may place orders with suppliers, register parts leaving a supplier, track them as they travel toward manufacturing plant, and to register their arrival. EDI makes communication very easy between a firm and its suppliers, shippers and purchasing firms and increases flexibility and responsiveness of the whole supply system.

139. Global Manufacturing and Material Management EDI systems eliminate all paperwork between firm, suppliers and purchasing firms, decentralize materials management decisions to the plant level, and allow firms to reap economic benefits.

140. GLOBAL HUMAN RESOURCE MANAGEMENT This chapter discusses the pros and cons of different approaches to staffing policy in international business Understand why managers may fail to thrive in foreign postings. Understand strategies that can be adopted to increase an executive’s chance of succeeding in a foreign posting. Appreciate the role that training, management development, and compensation practices can play in managing human resources within an international business.

141. GLOBAL HUMAN RESOURCE MANAGEMENT Human resource management refers to the activities an organisation carries out to use its human resources effectively. Activities of HRM include: Determining the firm’s human resource strategy Staffing Performance evaluation Management development Compensation Labour relations. 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 to customer service.

142. GLOBAL HUMAN RESOURCE MANAGEMENT The strategic role of HRM is complex for international businesses as its activities are complicated by differences between countries in labour market, culture, legal systems, political and economic systems. Compensation practices, labour laws, and equal employment legislations vary from country to country. HRM must also deal with issues relating to the expatriate manager , a citizen of one country who is employed to work abroad in a subsidiary of the firm. The HRM must decide whom to send on expatriate postings, compensate appropriately, and ensure they are adequately debriefed and reoriented once they return home.

143. GLOBAL HUMAN RESOURCE MANAGEMENT The benefit package is designed to ensure that all employees are viewed equally regardless of national origin. The strategic role of international HRM Recall the four strategies pursued by international business, that is, the international, the multidomestic, the global and the transnational. Multi domestic create value by emphasizing local responsiveness; international firms by transferring core competences overseas; global firms, by realizing experience curve and location economies; and transnational firms combine all these strategies simultaneously. HRM policies need to be congruent with the specific strategy of the firm. For example, pursuing a transnational strategy requires a strong corporate culture and an informal management network for transmitting information within the organisation.

144. GLOBAL HUMAN RESOURCE MANAGEMENT The HRM function can help develop such corporate culture through its employee selection, management development programs, performance appraisal and compensation policies. By creating a cadre of international managers with experience in various nations, the liberal use of expatriates can help establish an informal management network. In addition, management development programs can build a corporate culture that supports strategic goals.

145. GLOBAL HUMAN RESOURCE MANAGEMENT Staffing policies involve the selection of employees for particular jobs. At one level, staffing policy can be a tool for developing and promoting corporate culture. Corporate culture refers to the organizational norms and value systems. A strong corporate culture can help a firm pursue its strategy. For example, General Electric hires staff who do not just have the skills required for performing particular jobs, but individuals whose behavioural styles, beliefs, and value systems are consistent with those of GE. The belief is that if employees are predisposed toward the organisation’s norms and value systems by their personalty type, the firm will be able to attain higher performance.

146. GLOBAL HUMAN RESOURCE MANAGEMENT Types of Staffing Policy Three types of staffing policies in international business are: the ethnocentric approach, the polycentric approach, and the geocentric approach. The Ethnocentric Approach It is a staffing policy in which all key management positions are filled by parent-country nationals. Japanese and South Korean firms such as Toyota and Samsung have key positions in international operations held by home-country nationals. Firms pursue ethnocentric staffing policy for three reasons:

147. GLOBAL HUMAN RESOURCE MANAGEMENT The firm may believe the host country may lack qualified individuals to fill senior management positions. Such argument is projected when the host country is less developed. A firm may see an ethnocentric staffing policy as the best way to maintain a unified corporate culture. The belief is that the expatriate home-country manager would have been socialized into the firm’s culture while in employment in the home country. A firm that is pursuing international policy and may want to transfer core competencies to a foreign operation, would often do this through a parent-country nationals who have knowledge of that competency.

148. GLOBAL HUMAN RESOURCE MANAGEMENT - Competencies such as marketing skills may not be easily articulated or written down, and may have tacit dimensions that are often acquired through experience. Ethnocentric staffing policy face many challenges in recent times. The rational for this policy limits advancement opportunities for host-country nationals. This can lead to resentment, low productivity, and increased turnover among the group. Resentment can be greater when expatriate managers are paid significantly more than home-country nationals. Ethnocentric policy can lead to ‘cultural myopia’ as the firm fails to understand host country cultural differences that require different approaches to marketing and management. The expatriate manager may fail to appreciate how product attributes, distribution strategy, communication strategy and pricing strategy are adapted to the host-country conditions and may commit major costly blunders at the initial stages.

149. GLOBAL HUMAN RESOURCE MANAGEMENT The Polycentric Staffing Policy This policy requires host-country nationals to be recruited to manage subsidiaries while parent-country nationals occupy key positions at corporate headquarters. One advantage of adopting a polycentric approach is that the firm is less likely to suffer from cultural myopia. Host country managers are unlikely to make the mistakes arising from cultural misunderstandings to which expatriate managers are vulnerable. Another advantage is that a polycentric approach is less expensive to implement thus, reducing the costs of value creation. The drawback to this approach is that host-country nationals have limited opportunities to gain experience outside their own country and cannot progress beyond senior positions in their subsidiary.

150. GLOBAL HUMAN RESOURCE MANAGEMENT Polycentric approach can create a gap between host-country managers and parent-country managers. Cultural differences such as language barriers, and national loyalties may isolate the corporate headquarters staff form various foreign subsidiaries. The lack of management transfers from home to host countries and vice versa, can exacerbate this isolation and lead to lack of integration between corporate headquarters and foreign subsidiaries. The likely federation of independent national unit formed, may prevent the transfer of core competences and/or make it difficult for the firm to achieve experience curve and location economies.

151. GLOBAL HUMAN RESOURCE MANAGEMENT Polycentric approach may thus, be appropriate for firms pursuing a multi-domestic strategy. The Geocentric approach This policy seeks the best people for key positions throughout the organisation regardless of nationality. Geocentric approach enables the firm to make the best use of its human resource. It enables the firm to build a cadre of international executives who feel at home working in a number of cultures. This helps the firm to build a strong unifying corporate culture and an informal management network needed in the pursuit of global and transnational strategies. Firms pursuing a geocentric staffing policy may be better able to create value from experience curve and location economies and from the multidirectional transfer of core competencies than firms pursuing other policies.

152. GLOBAL HUMAN RESOURCE MANAGEMENT In addition, the multinational composition of the management team that results from geocentric staffing policy tends to reduce cultural myopia and enhance local responsiveness, making this policy the most attractive. The drawback to this policy is that, many firms are hindered by immigration laws to employ the host-country’s nationals if they are available and possess the requisite skills. Cumbersome and expensive procedures, and extensive documentation are required from firms that wish to hire foreign nationals. Geocentric approach is expensive to implement. Increased training and relocation costs are involved in transferring managers from one country to another. The company may also need a compensation structure with a standardized international base pay level higher than national levels in many countries.

153. GLOBAL HUMAN RESOURCE MANAGEMENT Critics of staffing policies have noted that while staffing policies vary significantly from national subsidiary to national subsidiary, staffing policy adopted by a firm is primarily driven by its geographic scope as opposed to its strategic orientation. Firms that have a broad geographic scope, are the most likely to have a geocentric mind-set. In addition, expatriate managers are usually kept in top positions because they are likely to have a better understanding of the home office’s corporate culture. They are also likely to have a better understanding of the way the home company wants the subsidiary to be run.

154. GLOBAL HUMAN RESOURCE MANAGEMENT Expatriate managers may be better able and more willing to communicate problems back to the home office. Expatriate failure rates A major issue in international staffing literature is expatriate failure, that is, the premature return of an expatriate manager to his or her home country. The costs of expatriate failure are high. It is estimated to be between $250,000 and $1 million. Research suggests that expatriate failure rate is also high. Between 16 and 40 percent of all American employees sent abroad to developed nations return from their assignment early while 70 percent of employees sent to developing nations return early.

155. Reasons assigned to expatriate failure are: Inability of spouse to adjust Managers inability to adjust Family problems Inability to cope with larger overseas responsibilities.

156. GLOBAL HUMAN RESOURCE MANAGEMENT Expatriate selection Improvement in selection procedures can screen out inappropriate candidates. For example, a manager who performs well in a domestic setting may not be able to adapt to managing in a different cultural setting. Success in a foreign posting has been found to be dependent on self-orientation (self confidence, self esteem and mental well-being); others orientation (ability to interact effectively with host-country nationals; perceptual ability (ability to empathize and accept other people’s values); and cultural toughness (unfamiliar cultures make some postings tougher than others).

157. Training and development Matching a manager with a job requires not only appropriate selection procedure, but training and management development The thinking behind job transfers is that broad international experience will enhance the management and leadership skills of executives. Management development programs are strategic. It is seen as a tool to help the firm achieve its strategic goals. Management development programs help build a unifying corporate culture by socializing new managers into the norms and value systems of the firm. Firm builds informal management network by bringing managers together in one location for extended periods and rotating them through different jobs in several countries.

158. Performance appraisal Unintentional bias makes it difficult to evaluate the performance of expatriate managers objectively. The home-country managers may be biased by their own cultural frame of reference and expectations. Guidelines for performance appraisal More weight should be given to an on-site manager’s appraisal because due to proximity, an on-site manager is more likely to evaluate the soft variables that are important aspects of an expatriate performance. When on-site manager is of the same nationality as the expatriate, cultural bias could be alleviated. When the policy is for foreign on-site manager

159. TERIMAKASIH