GURU GOBIND SINGH INDRAPRASTHA UNIVERSITY, DELHI MASTER OF BUSINESS ADMINISTRATION (MBA) MANAGEMENT OF INTERNATIONAL BUSINESS Objectives: The

objective of this course is to enable the students to manage business when the Organizations are exposed to international business environment. Course Contents: 1. Nature and Scope of International Management : Introduction to

International Business; Concept and Definition of International Management; Reasons for Going International, International Entry Modes, Their Advantages and Disadvantages, Hours) 2. Environment Facing Business: Cultural Environment facing Business, Strategy in the Internationalization of Business, Global Challenges; Entry Barriers, Indias Attractiveness for International Business. (14

Managing Diversity within and Across Culture, Hofstede Study, Edward T Hall Study, Cultural Adaptation through Sensitivity Training, Political, Legal, Economic, Ecological and Technological Facing Business and their Management. (14 Hours) 3. Formulating Concept, Strategy for International Global Strategy, Management: Strategy as a Emerging Models of Strategic

Implementing

Management in International Context, Achieving and Sustaining International Competitive Advantage; International Strategic Alliances, Global Mergers and Acquisition. (14 Hours) 4. Organizing and Controlling for International Competitiveness :

International Human Resource Management-concept and Dimensions, Human Resource Issues in Developing and Maintaining an Effective Work Force, Leadership Issues; Motivation; Basic Models for Organization Design in Context of Global Dimensions; Future of International Management in the East, Global Operations Management. (14 Hours)

PART I NATURE AND SCOPE OF INTERNATIONAL MANAGEMENT I. INTRODUCTION TO INTERNATIONAL BUSINESS

MEANING AND CONCEPT International business includes all business transactions involving two or more countries. These business relationships may be between private individuals, companies, groups of companies, non-profit organizations or government agencies. In some ways, international business is an extension of domestic business, but it is different for two reasons. The first reason is that international business objectives are likely to be different from domestic business objectives; the second and more significant is that the environmental conditions in which international business is conducted are usually of greater complexity than is the case with domestic business. These complexities arise from, amongst other things, differences in culture, currencies, legal systems and the endowment of national resources. Developments in communication and transportation technology facilitate trade worldwide, leading to the clich that 'all business is now international business'; thus people working in maritime industries are inevitably involved in international business. International business can be defined as set of those business activities that involves the crossing of national boundaries. The set of activities includes: Import and export of commodities and manufactured goods Investment of capital in manufacturing, extractive, agricultural, transportation and communication assets -2-

Supervision of employees in different countries Investment in international services like banking, advertising, tourism, retailing and construction Transactions involving copyrights, patents, trademarks and process technology.

International business covers all business transactions involving two or more countries. Vernon (1964) defined the field of international business in terms of dealing with: (1) "operating within foreign economies"; (2) "the problems of the movements of goods and capital across boundaries," and (3) "the problems of surveying and integrating from headquarters the operations of entities existing in more than one country."

EVOLUTION OF INTERNATIONAL BUSINESS The business across the borders of the countries had been carried on since times immemorial. But, the business had been limited to the international trade until the recent past. The post World War II period witnessed an unexpected expansion of national companies into international or multinational companies. The post 1990s period has given greater fillip to international business. In fact, the term international business was not in existence before two decades. The term international business has emerged from the term international marketing, which in turn, emerged from the term export marketing. International Trade to International Marketing: Originally, the producers used to export their products to the nearby countries and gradually extended the exports to far-off countries. Gradually, the companies extended the operations beyond trade. For example, India used to export raw cotton, raw jute and iron ore during the early 1900s. The massive industrialization in the country enabled us to export jute products, cotton garments and steel during 1960s. India, during 1980s could create markets for its products, in addition to mere exporting. The export marketing efforts include -3-

creation of demand for Indian products like textiles, electronics, leather products, tea, coffee etc., arranging for appropriate distribution channels, attractive package, product development, pricing etc. This process is true not only with India, but also with almost all developed and developing economies. International Marketing to International Business: The multinational companies which were producing the products in their home countries and Marketing them in various foreign countries before 1980s, started locating their plants and other manufacturing facilities in foreign/host countries. Later, they started producing in one foreign country and marketing in other foreign countries. For example, Unilever established its subsidiary company in India, i.e., Hindustan Lever Limited (HLL). HLL produces its products in India and markets them in Bangladesh, Sri Lanka, Nepal etc. Thus, the scope of the international trade is expanded into international marketing and international marketing is expanded into international business.

NATURE OF INTERNATIONAL BUSINESS International business houses need accurate information to make an appropriate decision. Europe was the most opportunistic market for leather goods and particularly for shoes. Bata based on the accurate data could make appropriate decision to enter various European countries. International business houses need not only accurate but timely information. CocaCola could enter the European market based on the timely information, whereas Pepsi entered later. Another example is the timely entrance of Indian software companies into the US market compared to those of other countries. Indian software companies also made timely decision in the case of Europe. The size of the international business should be large in order to have impact on the foreign Economies. Most of the multinational companies are significantly large in size. In fact, the Capital of some of the MNCs is more than our annual budget and GDPs of the some of the African Countries.

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Most of the international business houses segment their markets based on the geographic market segmentation. Daewoo segmented its market as North America, Europe, Africa, Indian subcontinent and Pacific markets.

International markets present more potentials than the domestic markets. This is due to the fact that international markets wide in scope, varied in consumer tastes, preferences and Purchasing abilities, size of the population etc. For example, the IBMs sales are more in foreign countries than in USA. Similarly, Coca-Colas sales, Procter and Gambles sales and Satyam Computers sales are more in foreign countries than in their respective home countries. The population for the year 2000 indicates that: USAs population would be 300 million, Mexicos 126 million, Brazils 205 million, Indonesias 223 million, Pakistans 138 million, Nigerias 154 million and Bangladeshs 146 million. The size of the population, sometimes, may not determine the size of the market. This is due to the backwardness of the economy and low purchasing power of the people, In fact, the size of Eritrea an African country is roughly equal to that of the United Kingdom in terms of land area and size of the population. But, in terms of per capita income it is one of the poorest countries in the world with estimated per capita income of US $ 150 per annum. Therefore, the international business houses should consider the consumers willingness to buy and also ability to buy the products In fact, most of the multinational companies, which entered Indian market after 1991, failed in this respect. They viewed that almost the entire Indian population would be the customers. Therefore, they estimated that the demand for consumer durable goods would be increasing in India after globalisation. And they entered the Indian market. The heavy inflow of these goods and decline in the size of Indian middle class resulted in a slump in the demand for consumer durable goods.

Wider Scope: Foreign trade refers to the flow of goods across national political borders. Therefore, it refers to exporting and importing by international marketing companies plus creation of demand, promotion, pricing etc. As stated earlier, international business is much broader in scope. It involves international marketing, international investments, management of foreign exchange, procuring

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international finance from IMF, IBRD, IFC, IDA etc., management of international human resources, management of cultural diversity, international marketing, management of international production and logistics, international strategic management and the like. Thus, international business is broader in scope and covers all aspects of the system. Inter-country Comparative Study: International business studies the business opportunities, threats, consumers preferences, behavior, cultures of the societies, employees, business environmental factors, manufacturing locations, management styles, inputs and human resource management practices in various countries. International business seeks to identify, classify and interpret the similarities and dissimilarities among the systems used to anticipate demand and market products. The system presents inter-country comparison and intercontinental comparison/comparative analysis helps the management to evaluate the markets, finances, human resources, consumers etc. of various countries. The comparative study also helps the management to evaluate the market potentials of various countries. The study also indicates the degree of consumer acceptance of the product, product changes and developments in different countries. Managements of international business houses can group the countries with similar features and design the same products, fix similar price and formulate the same marketing strategies. For example, Prentice Hall grouped India, Nepal, Pakistan Bangladesh, Sri Lanka etc. into one category based on the customers ability to pay and designed the same quality product and sell them at the same price in all these countries. Similarly, Dr. Reddys Lab does the same for its products to sell in the African countries. STAGES OF INTERNATIONALIZATION The internationalization process generally includes five stages, viz., domestic company, international Company, multinational company, global company and transnational company. Now, we will study stage of internationalization in detail. Stage 1: Domestic Company Domestic company limits its operations, mission and vision to the national political -6-

boundaries. These companies focus its view on the domestic market opportunities, domestic suppliers, domestic financial companies, domestic customers etc. These companies analyze the national environment of the country, formulate the strategies to exploit the opportunities offered by the environment. The domestic Companies unconscious motto is that, if its not happening in the home country, it is not happening. The domestic company never thinks of growing globally. If it grows, beyond its present capacity, the company selects the diversification strategy of entering into new domestic markets, new products, technology etc. The domestic company does not select the strategy of expansion/penetrating into the international markets. Stage 2: International Company Some of the domestic companies, which grow beyond their production and/or domestic marketing capacities, think of internationalizing their operations. Those companies who decide to exploit the opportunities outside the domestic country are the stage two companies. These companies remain ethnocentric or domestic country oriented. These companies believe that the practices adopted in domestic business, the people and products of domestic business are superior to those of other countries. The focus of these companies is domestic but extends the wings to the foreign countries. Markets and extend the same domestic operations into foreign markets. In other words, these companies extend the domestic product, domestic price, promotion and other business practices to the foreign markets. Normally internationalization process of most of the global companies starts with this stage. Most of the companies follow this strategy due to limited resources and also to learn from the foreign markets gradually before becoming a global company without much risk. The international company holds the marketing mix constant and extends the operations to new countries. Thus the international company extends the domestic country marketing mix and business model and practices to foreign countries. Stage: 3 Multinational Company Sooner or later, the international companies learn that the extension strategy (i.e., extending the domestic product, price and promotion to foreign markets) will not work. -7-

This statue of multinational company is also referred to as multi-domestic. Multidomestic company formulates different strategies for different markets; thus, the orientation shifts from ethnocentric to polycentric. Under polycentric orientation the offices /branches/subsidiaries of a multinational company work like domestic company in each country where they operate with distinct policies and strategies suitable to that country concerned. Thus they operate like a domestic company of the country concerned in each of their markets. Philips of Netherlands was a multi-domestic company of this stage during 1960s. It used to have autonomous national organizations and formulate the strategies separately for each country. Its strategy did work effectively until the Japanese companies and Matsushita started competing with this company based oil global strategy. Global strategy was based on focusing the company resources to serve tile world market. Philips strategy was to work like a domestic company, and produce a number of models of the product consequently it increased the cost of production and price of the product. But the Matsushitas strategy was to give the value, quality, design and low price to the customer. Philips lost its market share as Matsushita offered more value to the customer Consequently Philips changed its strategy and created industry main groups in Netherlands which are responsible for formulating a global strategy for producing, marketing and R & D. Stage 4: Global Company A global company is the one, which has either global marketing strategy or a global strategy. Global company either produces in home country or in a single country and focuses on marketing these products globally, or produces the products globally and focuses on marketing these products domestically. Harley designs and produces super heavy weight motorcycles in USA and markets in the global market. Similarly, Dr. Reddys Lab designs and produces drugs in India and markets globally. Thus Harley and Dr. Reddys Lab are examples of global marketing focus. Gap procures products in the global countries and markets the products in its retail organization in USA. Thus gap is an example for global sourcing company. Harley Davidson designs and produces in USA and gains competitive advantage as Mercedes in Germany. The Gap understands the US consumer and got -8-

competitive advantage. Stage 5:Transnational Company Transnational company produces, markets, invests and operates across the world. It is an integrated global enterprise, which links global resources with global markets at profit. There is no pure transnational corporation. However, most of the transnational companies satisfy many of the characteristics of a global corporation. Characteristics of a Transnational Company (i)Geocentric Orientation: A transnational company is geocentric in its orientation. This company thinks globally and acts locally. This company adopts global strategy but allows value addition to the customer of a domestic country. This company allows adaptation to add value to its global offer. The assets of a transnational company are distributed throughout the world, independent and specialized. The R & D facilities of a transnational company are spread in many countries, but specialized in each Country based on the local needs and integrated in world R & D project. Similarly, the production facilities are spread but specialized and integrated. Units of the transnational corporation in different countries create and develop the knowledge in all functions and share among them. Thus knowledge and experience is shared jointly. It gains power and competitive advantage by developing and sharing knowledge and experience. (ii) Scanning or information Acquisition: Transnational companies collect the data and information worldwide. These companies scan the environmental information regarding economic environment, political environment, social and cultural environment and technological environment. These companies collect and scan the information regardless geographical and national boundaries. (iii) Vision and Aspirations: The vision and aspiration of transnational companies are global, global markets, global customers and grow ahead of other global/transnational companies. (iv)Geographic Scope: The transnational companies scan the global data and information. By doing so, they analyze the global opportunities regarding the availability of resources, customers, markets, technology, research and development -9-

etc. Similarly, they also analyze the global challenge and threats like competition from the other global companies, local companies of host countries, political uncertainties and the like. They formulate global strategy. Thus the geographic scope of a transnational company is not limited to certain countries in analyzing opportunities, threats and formulating strategies. (v) Operating Style: Key operations of a transnational are globalize. The transnational companies globalize the functions like R & D, product development, placing key human resources, Procurement of high valued material etc. For example, the R &D activity of Proctor & Gamble, and key human resource activity of Colgate are the joint and shared activity of the units of these companies in various countries. (vi) Adaptation: Global and transnational companies adapt their products, marketing strategic and other functional strategies to the environmental factors of the market concerned, For example, Mercedes Benz is a super luxury car in North America, luxury automobile in Germany, standard taxi in Europe. (vii) Extensions: Some products do not require any change when they are marketed in other countries. Their market is just extension. For example, Casio calculators of Japan. (viii) Creation through Extension: Transnational companies create the global brand through extending the product to the new market. Rothmans Cigarette extended its product to many European countries and African countries and created it as global and national basis. (ix) Human Resource Management Policy: The transnational companys human resource policy is not restricted by national political or legal constraints. It selects the best human resources and develops them regardless of nationality, ethnic group etc. But the international company reserves the top and key positions for nationals. (x) Purchasing: Transnational Company procures world-class material from the best source across the globe.

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INTERNATIOANL BUSINESS APPROACHES Douglas Wind and Pelmutter advocated four approaches of international business. They are: 1. Ethnocentric Approach The domestic companies normally formulate their strategies, their product design and their operations towards the national markets, customers and competitors. But, the excessive production more than the demand for the product, either due to competition or due to changes in customer preferences push the company to export the excessive production to foreign countries. The domestic company continues the exports to the foreign countries and views the foreign markets as an extension to the domestic markets just like a new region. The executives at the head office of the company make the decisions relating to exports and, the marketing personnel of the domestic company monitor the export operations with the help of an export department. The company exports the same product designed for domestic markets to foreign countries under this approach. Thus, maintenance of domestic approach towards international business is called ethnocentric approach.
Managing Director

Manager R& D

Manager Finance

Manager Production

Manager Human Resources

Manager Marketing

Assistant Manager North India

Assistant Manager South India

Assistant Manager Exports

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This approach is suitable to the companies during the early days of internationalization and also to the smaller companies. 2. Polycentric Approach The domestic companies, which are exporting to foreign countries using the ethnocentric approach, find at the latter stage that the foreign markets need an altogether different approach. Then, the company establishes a foreign subsidiary company and decentralists all the operations and delegates decision making and policy-making authority to its executives. In fact, the company appoints executives and personnel including a chief executive who reports directly to the Managing Director of the company. Company appoints the key personnel from the home country and the people of the host country fill all other vacancies.

3. Regiocentric Approach The company after operating successfully in a foreign country, thinks of exporting to the neighboring countries of the host country. At this stage, the foreign subsidiary considers the regions environment (for example, Asian environment like laws, culture, policies etc.) for formulating policies and strategies. However,

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it markets more or less the same product designed under polycentric approach in other countries of the region, but with different market strategies.

4. Geocentric approach Under this approach, the entire world is just like a single country for the company. They select the employees from the entire globe and operate with a number of subsidiaries. The head quarter coordinates the activities of the subsidiaries. Each subsidiary functions like an independent and autonomous company in formulating policies, strategies, product design, human resource policies, operations etc.

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II.

CONCEPT AND DEFINITION OF INTERNATIONAL MANAGEMENT

The study of international management is gaining importance as firms expand their operations to various countries. International management deals with the processes of planning, organizing, staffing, leading and controlling organizations engaged in international business. Companies go international for various reasons: gain access to new markets, to increase profits, or to acquire products for the home market. These are called aggressive reasons for going international. International Management and International Business are two separate concepts. While IB is transactions devised and carried out across international borders to satisfy corporations and individuals, IM deals with managing such transactions within a boundary set by corporate strategy.

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The maintenance and development of an organization's production or market interests across national borders with either local or expatriate staff

The process of running a multinational business made up of formerly independent organizations

The body of skills, knowledge, and understanding required to manage crosscultural operations

Took and Beeman define international management as the determination and completion of actions and transactions conducted in and/or with foreign countries in support of organization policy. Czinkotra and Grosse and Kojawa define international business as transactions devised and carried out across international borders to satisfy corporations and individuals. International management by these definitions is viewed as a subset of international business. The focus of international business is on international transactions, whereas international management deals with managing such transactions with in the boundary set by corporate strategy. Thus, when a company decides to enter a foreign market, that decision incorporates planning to establish the ways by which business functionsmarketing, accounting, human resource management, and so on-are to be managed in that distinct location. Managing the various functions and coordinating them with the parents companys overall strategy is the task of international management.

III. REASONS FOR GOING INTERNATIONAL

The primary reason for going international is there is money to be made by going abroad. U.S. giants like Mc Donalds have made massive penetration into foreign markets. In 1994, Mc Donalds experienced a 6% gains in its domestic sales, but its foreign sales accounted for half of its overall volume. With the recent advent of - 15 -

technological innovation and the emergence of the newly industrialized countries (NICs), a convergence has occurred among nation in terms of rates and preferences, financial systems, and organization design. These convergences along with complimentary developments are forcing organizations to borderless terms. Their thinking revolves around the following issues: 1. Where the value-adding activities should be performed? 2. Where are the most cost-effective markets for new capital and labor? 3. Can products be designed in one market and then be sold in other countries without adding further costs?

Reasons for Going International

Convergence in: >Tastes and Preferences >Organization Design >Financial System

Complementary Development >NIC Purchasing Power >Developing Countries Ability to Purchase Good Quality Products

Removal of Trade Barriers Resulting in

Meeting Global Consumer Demands Lower Price Better Value

Sustainable Competitive Advantage - 16 -

I. To Achieve Higher Rate of Profits : As we have discussed in various courses/subjects like Principles and Practice of Management, Managerial Economics and Financial Management that the basic objective of the business firms is to earn profits. When the domestic markets do not promise a higher rate of profits, business firms search for foreign markets, which promise for higher rate of profits. For example, Hewlett Packard earned 85.4% of its profits from the foreign markets compared to that of domestic markets in 1994. Apple earned US $ 390 million as net profit from the foreign markets and only US $ 310 millions as net profit from its domestic market in 1994. Further in certain cases, international business can help increase the profitability of the domestic business. II. Expanding the Production Capacities beyond the Demand of the Domestic Country: Some of the domestic companies expanded their production capacities more than the demand for the product in the domestic countries. These companies, in such cases, are forced to sell their excess production in foreign developed countries. III. Growth Opportunities: An important reason for going international is to take advantage of the opportunities in other countries. MNCs are getting increasingly interested in a number of developing countries as the income and population are rapidly rising in these countries. Foreign markets both developed and developing countries provide enormous growth opportunities for the developing country firms too. IV. Government Policies and Regulations: Government policies and regulations may also motivate internationalization. There are both positive and negative factors, which could cause internationalization. Many governments give a number of incentives and other positive support to domestic companies to export and invest in foreign countries. Similarly, several countries give a lot of importance to import development and foreign investment. Sometimes, (as was the case in India) companies may be obliged to earn foreign exchange to finance their

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imports and to meet certain other foreign exchange requirements like payment of royalty dividend etc. V. Monopoly Power: in some cases, international business is a corollary of the monopoly power, which a firm enjoys internationally. Monopoly power may arise from such factors as monopolization of certain resources, patent rights, technological advantage, product differentiation etc. Such monopoly power need not necessarily be an absolute one but even a dominant position may facilitate internationalization. Similarly, exclusive market information (which includes knowledge about foreign customers, market places, or market situations not widely shared by other firms) is another proactive stimulus. VI. Severe Competition in the Home Country: The countries oriented towards market economies since 1960s had severe competition from other business firms in the home countries. The weak companies, which could not meet the competition of the strong companies in the domestic country, started entering the markets of the developing countries. Moreover a protected market does not normally motivate companies to seek business outside the home market. For example Indian economy was a highly protected market before liberalization in 1991. Not only the domestic producers were protected from foreign competition but also domestic competition was restricted by several policy induced entry barriers, operated by such measures as industrial licensing etc. After liberalization, competition increased from foreign as well as domestic firms. Many Indian companies are now systematically planning to go international in a big way. VII. Limited Home Market: When the size of the home market is limited either due to the smaller size of the population or due to lower purchasing power of the people or both, the companies internationalize their operations. For example, most of the Japanese automobile and electronic firms entered US, Europe and even African markets due to the smaller size of the home market. ITC entered the European market due to the lower purchasing power of the Indians with regard to high quality cigarettes. Similarly, the mere six million population of Switzerland is the reason for Ciba Geigy to internationalize its operations. In fact, this

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company was forced to concentrate on global market and establish manufacturing facilities in foreign countries. VIII. Political Stability vs. Political Instability : Political stability does not simply mean that continuation of the same party in power, but it does mean the continuation of the same policies of the Government for a quite longer period. It is viewed that USA is a politically stable country. Similarly, UK, France, Germany, Italy and Japan are also politically stable countries. Most of the African countries and some of the Asian countries like Malaysia, Indonesia, Pakistan and India are politically instable countries. Business firms prefer to enter the politically stable countries and are restrained from locating their business operations in politically instable countries. In fact, business firms shift their operations from politically instable countries into politically stable countries. IX. Availability of Technology and Managerial Competence: Availability of advanced technology and managerial competence in some countries act as pulling factors for business firms from the home country. The developed countries due to these reasons attract companies from the developing world. In fact, American companies, in recent years, depend on Japanese companies for technology and management expertise. X. High Cost of Transportation: Initially companies enter foreign countries through their marketing operations. At this stage, the companies realize the challenge from the domestic companies. Added to this, the home companies enjoy higher profit margins whereas the foreign firms suffer from lower profit margins. The major factor for this situation is the cost of transportation of the products. Under such conditions, the foreign companies are inclined to increase their profit margin by locating -their manufacturing facilities in foreign countries where there is enough demand either in one country or in a group of neighboring countries. XI. Nearness to Raw Materials: The source of highly qualitative raw materials and bulk raw materials is a major factor for attracting the companies from various foreign countries. Most of the US based and European based companies located their manufacturing facilities in Saudi Arabia, Bahrain, Qatar, Oman, Iran and

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other Middle East countries due to the availability of petroleum. These companies, thus, reduced the cost of transportation. XII. Availability of Quality Human Resources at Less Cost : This is a major factor, in recent times, for software, high technology and telecommunication companies to locate their operations in India. India is a major source for high quality and low cost human resources unlike USA, developed European countries and Japan. Importing human resources from India by these firms is costly rather than locating their operations in India. Hence these companies started their operations in India and other similar countries. XIII. To Avoid Tariffs and Import Quotas: It was quite common before globalization that governments imposed tariffs or duty on imports to protect the domestic company. Sometimes Government also fixes import quotas in order to reduce the competition to the domestic companies from the competent foreign companies. These practices are prevalent not only in developing countries but also in advanced countries. For example, Japanese companies are competent competitors to the US companies. USA imposed tariffs and quotas regarding import of automobiles and electronics from Japan. Harley Davidson of USA sought and got five years of tariffs protection from Japanese imports. Similarly, Japan places high tariffs on imports of rice and other agricultural goods from USA. To avoid high tariffs and quotas, companies prefer direct investment to go globally. For example, companies like Sony, Honda and Toyota preferred direct investment in various countries by establishing subsidiaries or through joint ventures in various foreign countries including USA and India. Xerox, Canon, Phillips, Unilever, Lucky Gold Star, South Korean Electronics Company, Pepsi, Coca Cola, Shell, Mobil etc. established manufacturing facilities in various foreign countries in order to avoid tariffs, import duties and quotas.

REASONS PART II

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IV.

ENTRY BARRIERS
Tariff Barriers Customs duties enforced on imported products (final products or intermediate products) Different tariff rates for different countries and different products May be adjusted by political influence from trade associations

Non-Tariff Barriers Non-tariff barriers to trade are trade barriers that restrict imports but are not in the usual form of a tariff. These include all other entry barriers, e.g., transportation costs, slow customs procedures, etc. They are criticized as a means to evade free trade rules such as those of the World
Trade Organization Agreement

(WTO), the European Union (EU), or North American Free Trade

(NAFTA) that restrict tariffs. Some of the common examples are anti-

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dumping

measures and countervailing duties, which, although they are called "non-

tariff" barriers, have the effect of tariffs but are only imposed under certain conditions. Their use has risen sharply after the WTO rules led to a very significant reduction in tariff use. Non-tariff barriers may also be in the form of manufacturing or production requirements of goods, such as how an animal is caught or a plant is grown, with an import ban imposed on products that don't meet the requirements. Examples are the European Union restrictions on genetically-modified organisms or beef treated with
growth hormones.

Some non-tariff trade barriers are expressly permitted in very limited circumstances, when they are deemed necessary to protect health, safety, or sanitation, or to protect diminishing natural resources. Non-tariff barriers to trade can be: State subsidies, procurement, trading, state ownership National regulations on health, safety, employment
Product classification Quota shares Foreign exchange

controls and multiplicity

Over-elaborate or inadequate infrastructure "Buy national" policy.

Intellectual property Bribery

laws (patents, copyrights)

and corruption

Unfair customs procedures Restrictive licenses Import bans Seasonal import regimes

Natural Entry Barriers Intense competition among several differentiated brands

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Strong brand names charging a premium price over generic competitors Pro-domestic sentiment favoring local brands

Artificial Entry Barriers Limited distribution access Bureaucratic inertia Government regulations Limited access to technology Local monopolies Tariffs

Barriers to entry are designed to block potential entrants from entering a market profitably. They seek to protect the monopoly power of existing (incumbent) firms in an industry and therefore maintain supernormal (monopoly) profits in the long run. Barriers to entry have the effect of making a market less contestable The economist Joseph Stigler defined an entry barrier as " A cost of producing (at some or every rate of output) which must be borne by a firm which seeks to enter an industry but is not borne by firms already in the industry ". This emphasizes the asymmetry in costs between the incumbent firm (already inside the market) and the potential entrant. If the existing businesses have managed to exploit some of the economies of scale that are available to firms in a particular industry, they have developed a cost advantage over potential entrants. They might use this advantage to cut prices if and when new suppliers enter the market, moving away from short run profit maximization objectives - but designed to inflict losses on new firms and protect their market position in the long run. Examples of barriers to entry Patents: Giving the firm the legal protection to produce a patented product for a number of years.

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Limit Pricing: Firms may adopt predatory pricing policies by lowering prices to a level that would force any new entrants to operate at a loss. Cost advantages: Lower costs, perhaps through experience of being in the market for some time, allows the existing monopolist to cut prices and win price wars Advertising and marketing: Developing consumer loyalty by establishing branded products can make successful entry into the market by new firms much more expensive. This is particularly important in markets such as cosmetics, confectionery and the car industry. Research and Development expenditure: Heavy spending on research and development can act as a strong deterrent to potential entrants to an industry. Clearly much R&D spending goes on developing new products but there are also important spill-over effects which allow firms to improve their production processes and reduce unit costs. This makes the existing firms more competitive in the market and gives them a structural advantage over potential rival firms. Presence of sunk costs: Some industries have very high start-up costs or a high ratio of fixed to variable costs. Some of these costs might be unrecoverable if an entrant opts to leave the market. This acts as a disincentive to enter the industry. International trade restrictions: Trade restrictions such as tariffs and quotas should also be considered as a barrier to the entry of international competition in protected domestic markets. Sunk Costs: Sunk Costs are costs that cannot be recovered if a businesses decides to leave an industry Examples include: " Capital inputs that are specific to a particular industry and which have little or no resale value " Money spent on advertising / marketing / research which cannot be carried forward into another market or industry When sunk costs are high, a market becomes less contestable. High sunk costs (including exit costs) act as a barrier to entry of new firms (they risk making huge losses if they decide to leave a market). A good example of substantial sunk costs occurred in 2001 when British Telecom announced it was scrapping its loss-making joint venture with US telecoms firm AT&T. The closure was estimated to lead to the loss of 2,300 jobs - almost 40% of

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Concert's workforce. And, it will cost BT $2bn (1.4bn) in impairment charges and restructuring costs, and AT&T $5.3bn.

V.

INTERNATIONAL ENTRY MODES

Companies deciding to enter the foreign markets, face the dilemma while deciding the method of entry into a given overseas location. Analyzing the following decision factors can reduce this dilemma: 1. Ownership Advantages: Ownership advantages are those designed by a company by owning resources. These benefits provide competitive advantage to the company over its competitors. Torontobased Inco. Ltd., of rich, nickel-bearing ores allowed the company , to dominate the production of both primary nickel and nickel-based metal alloys.' Similarly,, Tata Iron and Steel Company (TISCO) Ltd., owned its iron ore mines and coal mines. This ownership grants the advantage of low cost producer to the company. 2. Location Advantages - 25 -

Certain location factors grant benefit to the company when the manufacturing facilities are located in the host country rather than in the home country. These location factors include: Customer Needs, Preferences and Tastes Logistic Requirements Cheap Land Acquisition Cost Cheap Labor Political Stability Low Cost Raw Materials Climatic Conditions. If the company has location advantages, it enters foreign markets through direct investment. If the location of manufacturing facilities in home country is advantageous in the host country, the company enters foreign markets through exporting. 3. Internationalization Advantages Internationalization advantages are those benefits that a company gets by manufacturing goods or rendering services in the host country by itself rather than through contract arrangements with the companies in the host country. Sometimes the cost of negotiating, monitoring and enforcing an agreement with the host country's company would be difficult and costly. In such cases the company enters the international markets through direct investment. Otherwise, if the company thinks that the transaction costs are low, and the local companies in the host country can produce efficiently without jeopardising the interest, the company can enter the foreign markets through contract manufacturing, franchising or licensing. Toyota enters foreign markets through direct investment and jointventures us the local companies in foreign countries cannot produce as efficiently as Toyota.

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Companies with low cash reserves normally prefer licensing mode rather than foreign direct investment (FDI) Merck entered Israel by issuing license to Teva Pharmaceutical an Israel company in order to save the expenses of establishing in Israel. /n contrast, cash rich firms may prefer FDI. Firms also enter through FDI in order to take the advantage of economies of scale, and synergies between their domestic and international operations. However, the software companies prefer licensing and franchising mode as they have to respond quickly to the market needs. For example Microsoft and Compaq. Thus, different firms select different modes based on the nature of the industry.

The entry mode employed should be consistent with the firm's objectives and the choice will often involve a trade-off among objectives. The factors which influence the choice of entry mode are:
o o o o o o

Legal considerations The nature of the competition Political factors Economic risk The nature of the assets to be employed The firm's experience.

Firms may use different entry modes in different countries and for different products. As diversity increases, the task of coordinating the foreign operations becomes more complex.

Firms usually want complete ownership of foreign operations to guarantee control and prevent loss of profit. However, host countries usually want a share of the action and the resources that the MNE will bring into the host country.

Joint ventures are often motivated by the complementary resources firms have at their disposal, and just as often by governmental preferences.

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Turnkey projects usually require high level negotiation skills to deal with host country government officials. Management contracts are a means of securing income with little capital outlay. They are usually used for expropriated properties in LDCs, for new operations, and for facilities with operating problems. Management contracts involve the sale of technical or managerial expertise, and one of the responsibilities of the hired manager is to train local nationals so they will be able to run the business when the contact expires.

Contracting foreign business does not negate management's responsibility to ensure that company resources are being optimally employed. This involves constantly assessing the work of the outsiders such as contract managers and evaluating new options for their employment.

MODES OF ENTRY
I. EXPORTING Exporting is the simplest and widely used mode of entering foreign markets. It is the marketing and selling of domestically produced goods in another country. It is a traditional and well established method of reaching foreign markets. Since it does not require that the goods be produced in the target country, no investment in foreign facilities is required. Most of the costs associated with exporting take form of marketing expenses. The advantages of exporting include: a. Need for Limited Finance : If the company selects a company in the host country to distribute, the company can enter international market with no or less financial resources. Alternatively, if the company chooses to distribute on its own, it needs to invest financial resources, but this amount would be quite less compared to that would be necessary under other modes. b. Less Risk: Exporting involves less risk as the company understands the culture, customer and the market of the host country gradually. The company can enter the host country on a lull scale, if the product is

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accepted by the host country's market. British company selected this mode to export jams to Japan. c. Motivation for Exporting: Motivations for exporting are proactive and reactive. Proactive motivations are opportunities available in the host country. San Antonio's Pace, Inc., producing Tex-Mex food products exported its products to Mexico as Mexicans relished the taste of its products. Reactive motivations are those efforts taken by the company to export the product to a foreign country due to the decline in demand for its product in the home country. Toto Ltd., of Japan started exporting its products, i.e., Porcelain bathroom fixtures to China when the Japanese economy started slowing down in 1990s.

FORMS OF EXPORTING Forms of exporting include: 1. Indirect Exporting: Indirect exporting is exporting the products either in their original form or in the modified form to a foreign country through another domestic company. Various publishers ill India including Himalaya Publishing House, sell their products, i.e., books to UBS publishers of India, which in turn exports these books to various foreign countries. 2. Direct Exporting: Direct exporting is selling the products in a foreign country directly through its distribution arrangements or through a host country's company. Baskin Robbins initially exported its ice-cream to Russia in 1990 and later opened 74 outlets with Russian partners. Finally in 1995 it established its ice cream plant in Moscow." 3. Intracorporate Transfers: Intracorporate transfers are selling of products by a company to its affiliated company in host country (another country). Selling of products by Hindustan Lever in India to Unilever in USA. This transaction is treated as exports in India and imports in USA.

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FACTORS TO BE CONSIDERED: The company, while exporting, should consider the following factors: Government policies like export policies, import policies, export financing, foreign exchange etc. Marketing factors like image, distribution networks, responsiveness to the customer, customer awareness and customer preferences. Logistical consideration: These factors include physical distribution costs, warehousing costs, packaging, transporting, inventory carrying costs. Distribution Issues: These include own distribution networks, networks of host county's companies. Japanese companies like Sony, Minolta and Hitachi rely On the distribution networks Of' their subsidiaries in the host country. Export Intermediaries: Export intermediaries perform a variety of functions and enable tile small companies to export their goods to foreign countries. Their functions include: handling transportation, documentation, taking ownership of foreign-bound goods, assuming total responsibility for exporting and financing. Types of export intermediaries include: Export management companies act as export department of the exporting firm (its client). These companies act as commission agents for exports or they take tittle to the goods. Cooperative Society: The domestic companies desire to export the goods form a cooperative society, which undertakes the exporting operations of its members. International Trading Company: This company is engaged in directly exporting and importing. It buys the goods from the domestic companies and exports. Therefore, the companies can export their goods by selling them to the international trading company. Manufacturers' Agents: They work on a commission basis. They solicit domestic orders for foreign manufacturers.

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 Manufacturers' Export Agents: These agents also work on a commission basis. They sell the domestic manufacturers' products in the foreign markets and act as their foreign sales department. Export and Import Brokers: The brokers bridge the gap between exporters and importers and bring these two parties together. Freight Forwarders: Freight forwarders help the domestic manufacturers in exporting their goods by performing various functions like physical transportation of goods, arranging customs documents and arranging transportation services. II. LICENSING In this mode of entry, the domestic manufacturer leases the right to use its intellectual property, i.e., technology, work methods, patents, copy rights, brand names, trademarks etc. to a manufacturer in a foreign country for a fee." Here the manufacturer in the domestic country is called 'licensor' and the manufacturer in the foreign country is called `licensee.' Licensing is a popular method of entering foreign markets. The cost of entering foreign markets through this mode is less costly. The domestic company need not invest any capital as it has already developed intellectual property. As such, the domestic company earns revenue without additional investment. Hence, most of the companies prefer this mode of foreign entry. The domestic company can choose any international location and enjoy the advantages without -incurring any obligations and responsibilities of ownership, managerial, investment etc. Kirin Brewery - Japan's largest beer producer entered Canada by granting license to Molson and British market by granting license to Charles Wells Brewery.

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BASIC ISSUES IN INTERNATIONAL LICENSING: Companies should consider various factors in deciding negotiations. Each international licensing is unique and has to be decided separately. However, there are certain common factors which affect most of the international licenses. They are: o Boundaries of the Agreements: The companies should clearly define the boundaries of agreements. They determine which rights and privileges are being conveyed in the agreement. Pepsi-Cola granted license to Heineken of Netherlands with exclusive rights of producing and selling Pepsi-Cola in Netherlands. Under this agreement the boundaries are (i) Heineken should not export Pepsi-Cola to any other country, (ii) Pepsi supplies concentrated cola syrupand Heineken adds carbonated water to produce beverage and (iii) Pepsi can grnatclicence, to other companies in Netherlands to produce other products of' Pepsi like Potatochips. o Determination of Royalty: The most important factor in deciding the license is the amount of royalty. It is needless to mention that the licensor expects high rate of royalty while licensee would be unwilling to par much royalty. However, both the parties negotiate for a fair royalty for both the sides in order to implement the contract more o Determining; Rights, Privileges and Constraints : Another important factor, in granting license is determining clearly and specifically the rights, privileges and constraints. For example, if the Indian licensee of Aiwa TV uses interior input in order to reduce price, boost up sales and profit, the image of the Japanese licensor would be damaged. o Dispute Settlement Mechanism: The licensee and licensor should clearly mention the mechanism to settle the disputes as disputes are hound to crop up. This is because, settlement of disputes in courts is costly, time consuming and hinders business interests. o Agreement Duration: The two parties of the agreement specify the duration of the agreement. Licensing cannot he a short-term strategy. Hence, the

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duration of the licensing should not be of the short-term. It would always be appropriate to have long duration of the licensing. Tokyo Disneyland demanded on a 100-year licensing agreement With The Walt Disney Company. ADVANTAGES AND DISADVANTAGES OF LICENSING Advantages Licensing mode carries relatively low investment on the part of licensor Licensing mode carries low financial risk to the licensor. Licensor can investigate the foreign market without much efforts on his part. Licensee gets the benefits with less investment on research and development. Licensee escapes himself from the risk of product failure. For example, Nintendo game designers have the relatively safety of knowing millions of game system units. Disadvantages Licensing agreements reduce the market opportunities for both the licensor and licensee. Pepsi-cola cannot enter Netherlands and Heineken cannot sell Coca-cola. Both the parties have the responsibilities to maintain the product quality and promoting the product. Therefore, one party can affect the other through their improper acts. Costly and tedious litigation may crop up and hurt both the parties and the market. There is scope for misunderstanding between the parties despite the effectiveness of the agreement. The best example is Oleg Cassini and Jovan. There is a problem of leakage of the trade secrets of the licensor. The licensee may develop his reputation. The licensee may sell the product outside the agreed territory and after the expiry of the contract.

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III.

FRANCHISING Franchising is a form of licensing. The franchisor can exercise more control over the franchised compared to that in licensing. International franchising is growing at a fast rate. Under franchising, an independent organization called the franchisee operates the business under the name of another company called the franchisor. Under this agreement the franchisee pays fee to t e franchisor. The franchisor provides the following services to the franchisee: Trade marks Operating systems Product reputations Continuous support systems like advertising, employee training, reservation services, and quality assurance programmes etc. BASIC ISSUES IN FRANCHISING The franchisor has been successful in his home country. McDonnell was successful in USA due to the popular menu and fast and efficient services. The factors for the success of the McDonald are later transferred to other countries. The franchiser may have the experience in franchising in the home country before going for international franchising. Foreign investors should come forward for introducing the product on franchising basis. FRANCHISING AGREEMENTS: The franchising agreement should contain important items as follows: Franchisee has to pay a fixed amount and royalty based on the sales to the franchisor. Franchisee should agree to adhere to follow the franchisor's requirements like appearance, financial reporting, operating procedures, customer service etc."

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 Franchisor helps the franchisee in establishing the manufacturing facilities, services facilities. provides expertise, advertising, corporate image etc. Franchisor allows the franchisee some degree of flexibility in order to meet the local taste-, and preferences. McDonald restaurants in Germany sell beer also and McDonald restaurants in France sell wine also. ADVANTAGES AND DISADVANTAGES OF FRANCHISING ADVANTAGES For franchisors 1. Expansion: Franchising is one of the only means available to access investment capital without the need to give up control in the process. After their brand and formula are carefully designed and properly executed, franchisors are able to expand rapidly across countries and continents using the capital and resources of their franchisees, and can earn profits commensurate with their contribution to those societies. Additionally, the franchisor may choose to leverage the franchisee to build a distribution network. 2. Legal considerations: The franchisor is relieved of many of the mundane duties necessary to start a new outlet, such as obtaining the necessary licenses and permits. In some jurisdictions, certain permits (especially liquor licenses) are more easily obtained by locally based, owner-operator type applicants while companies based outside the jurisdiction (and especially if they originate in another country) find it difficult if not impossible to get such licenses issued to them directly. For this reason, hotel and restaurant chains that sell liquor often have no viable option but to franchise if they wish to expand to another state or province. 3. Operational considerations: Franchisees are said to have a greater incentive than direct employees to operate their businesses successfully because they have a direct stake in the operation. The need of franchisors to closely scrutinize the day to day operations of franchisees (compared to directly-owned outlets) is greatly reduced. For franchisees

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1. Quick start: As practiced in retailing, franchising offers franchisees the advantage of starting up a new business quickly based on a proven trademark and formula of doing business, as opposed to having to build a new business and brand from scratch (often in the face of aggressive competition from franchise operators). A well run franchise would offer a turnkey business: from site selection to lease negotiation, training, mentoring and ongoing support as well as statutory requirements and troubleshooting. 2. Expansion: With the help of the expertise provided by the franchisers the franchisees are able to take their franchise business to that level which they wouldn't have had been able to without the expert guidance of their franchisors. 3. Training: Franchisors often offer franchisees significant training, which is not available for free to individuals starting their own business. Although training is not free for franchisees, it is both supported through the traditional franchise fee that the franchisor collects and tailored to the business that is being started. DISADVANTAGES for Franchisors 1. Limited pool of viable franchisees: In any city or region there will be only a limited pool of people who have both the resources and the desire to set up a franchise in a certain industry, compared to the pool of individuals who would be able to competently manage a directly-owned outlet. 2. Control: Successful franchising necessitates a much more careful vetting process when evaluating the limited number of potential franchisees than would be required to hire a direct employee. An incompetent manager of a directly-owned outlet can easily be replaced, while regardless of the local laws and agreements in place removing an incompetent franchisee is much more difficult. Incompetent franchisees can easily damage the public's goodwill towards the franchisor's brand by providing inferior goods and services. If a franchisee is cited for legal violations, she will probably face the legal consequences alone but the franchisor's reputation could still be damaged. For franchisees

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1. Control: For franchisees, the main disadvantage of franchising is a loss of control. While they gain the use of a system, trademarks, assistance, training, marketing, the franchisee is required to follow the system and get approval for changes from the franchisor. For these reasons, franchisees and entrepreneurs are very different. The United States Office of Advocacy of the SBA indicates that a franchisee "is merely a temporary business investment where he may be one of several investors during the lifetime of the franchise. In other words, he is "renting or leasing" the opportunity, not "buying a business for the purpose of true ownership." Additionally, a franchise purchase consists of both intrinsic value and time value. A franchise is a wasting asset due to the finite term, unless the franchisor chooses to contractually obligate itself it is under no obligation to renew the franchise. 2. Price: Starting and operating a franchise business carries expenses. In choosing to adopt the standards set by the franchisor, the franchisee often has no further choice as to signage, shop fitting, uniforms etc. The franchisee may not be allowed to source less expensive alternatives. Added to that is the franchise fee and ongoing royalties and advertising contributions. The contract may also bind the franchisee to such alterations as demanded by the franchisor from time to time. (As required to be disclosed in the state disclosure document and the franchise agreement under the FTC Franchise Rule) 3. Conflicts: The franchisor/franchisee relationship can easily cause conflict if either side is incompetent (or acting in bad faith). An incompetent franchisor can destroy its franchisees by failing to promote the brand properly or by squeezing them too aggressively for profits. Franchise agreements are unilateral contracts or contracts of adhesion wherein the contract terms generally are advantageous to the franchisor when there is conflict in the relationship. OTHER ADVANTAGES Franchisor can enter global markets with low investment and low risks. Franchisor can get the information regarding the markets, culture, customs and environment of the host country.

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 Franchisor learns more lessons from the experiences of the franchisees. McDonald benefited from the world wide learning phenomenon. McDonald is convinced to open a restaurant in inner-city office building in Japan. This location has become a more successful one. Based on this lesson, McDonald opened its restaurants in downtown locations in various countries. Franchisee can early start a business with low risk as he selects an established and proven product and operating system, Franchise gets the benefits of R & D with low cost. Franchisee escapes form the risk of product failure. OTHER DISADVANTAGES International franchising may be more complicated than domestic franchising. McDonald taught the Russian farmers the methods of growing potatoes to meet its standards. It is difficult to control the international franchisee. As one of the French investor did not maintain the stores as per the standards, McDonald did revoke the franchise. Franchising agents reduce the market opportunities for both the franchisor and franchisee. Both the parties have the responsibilities to maintain product quality and product promotion. There is scope for misunderstanding between the parties. There is a problem of leakage of trade secrets. IV. SPECIAL MODES Some companies cannot make long-term investments or long-term contracts to enter markets. Therefore, they may use specialized strategies. These specialized strategies include: a. Contract Manufacturing

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Some companies outsource their part of or entire production and concentrate on marketing operations. This practice is called the contract manufacturing or outsourcing. Nike has contracted with a number of factories in south-east Asia to produce its athletic footware and it concentrates on marketing. Bata also contracted with a number of cobblers in India to produce its footware and concentrate on marketing. Mega Toys - a Los Angeles based company contracts with Chinese plants to produce Toys and Mega Toys concentrates on marketing. Advantages International business can focus on the part of the value chain where it has distinctive -competence. It 'reduces the cost of production as the host country's companies with their relative cost advantage produce at low cost. Small and medium industrial units in the host country can also develop as most of the production activities take in these units. The international company gets the location advantages, generated by the host country's production. Disadvantages Host country's companies may take up the marketing activities also, hindering the interest of the international company. Host county's companies may not strictly adhere to the production design, quality standards etc. These factors result in quality problems, design problem and other surprises. The poor working countries in the host country's companies affect the company's, image. For example, Nike has suffered a string of blows to its public image, because of reports of unsafe and harsh working conditions in Vietnamese factories churning our Nike footware. b. Management Contracts

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The companies with low level technology and managerial expertise may seek tile assistance of a foreign company. Then the foreign company may agree to provide technical assistance and managerial expertise. This agreement between these two companies is called the management contract. A management contract is an agreement between two companies whereby one company provides managerial assistance, technical expertise and specialized services to the second company of the argument for a certain agreed period in return for monetary compensation. Monetary Compensation may be in the form of a flat fee or Percentage over sales or Performance bonus based on profitability, sales growth, production or quality measures. Management contracts are mostly due to governmental inventions. The Government of the Kingdom of Saudi Arabia nationalized Armco and requested the former owners to manage the company. Exxon and other former owners of Armco accepted the offer. Delta, Air France and KLM often provide technical and managerial assistance to the small airlines companies owned by the Governments.

Advantages Foreign company earns additional income without any additional investment, risks and obligations. Hilton Hotels provided these seivices to other hotels without additional investment and earned additional income.. This arrangement and additional income allows the company to enhance its image in the investors and mobilise the funds for expansion. Management contract helps the companies to enter other business areas in the host country.

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 The companies can act as dealer for the business of, the host countrys business in the home country. Disadvantages Sometimes the companies allow the companies in the host country even to use their trademarks and brand name. The host country's companies spoil the brand name, if they do not keep up the quality of the product service. The host countrys companies may leak the secrets of technology

c. Turnkey Project A turnkey project is a contract under which a firm agrees to fully design, construct and equip a manufacturing/business/service facility and turn the project over to the purchaser when it is ready for operation for remuneration. The forms of remuneration include: A fixed price (firm plans to implement the project below this price) Payment on cost plus basis (i.e., total cost incurred plus profit) International turnkey projects include nuclear power plants, air ports, oil refinery, national highways, railway lines etc. Hence, they are large and multiyear projects. International companies involved in such projects include: Bechtel, Brown and Root, Hyundai Group, Friedrich Krupp, etc. The companies normally approach the host country's Governments or International Finance, Corporation, Export-Import Bank of USA and the like for financial assistance as the turnkey projects require huge finances. The recent approach of turnkey projects is Build, Operate and Transfer (B-O-T). The company builds the manufacturing/services facility, operates it for some time and then transfers it to the host country's Government. In this approach, the contractor will not be paid the remuneration. V. FOREIGN DIRECT INVESTMENT WITHOUT ALLIANCES (Greenfields strategy)

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Some companies, enter the foreign markets through exporting, licensing, franchising etc., get the knowledge and awareness of the foreign markets, culture of the country, customers' preferences, political situation of the country etc., and then establish manufacturing facilities by ownership in the foreign countries. Baskin-Robbins in Russia followed this strategy. In contrast, some other companies enter the foreign market through ownership and control of assets in host countries. Companies which enter the international markets through foreign direct investment (FDI) invest their money, establish manufacturing and marketing , facilities through ownership and control. Foreign firm needs to control the operations when

It has foreign firm's need to control the operations when it has subsidiaries to achieve strategic synergies. The technology, manufacturing expertise, intellectual property rights have potentialities and their full utilization needs planned exploitation.

ADVANTAGES

Mostly, the customers of the host country prefer to the products produced in their country like -'Be American, Buy American, 'Be Indian. Buy Indian.'. In such cases FDI helps the company to gain market through this mode rather than other modes. Purchase managers of most of the companies prefer to buy local production in order to ensure certainty of supply, faster services, quality dependability and better communication with the supplier. The company can produce based on the local environment and changing preferences of the cutomers.

Disadvantages o FDI exposes the company (to a fullest extent) tothe host country's politicaL and economic risks. - 42 -

o FDI also exposes the company to the exchange rate fluctuations. o Some countries discourage the entry of foreign companies through FDI in order to protect the domestic industry. o Changing Government policies of the host country may create uncertainties to the company. o Host country Governments, sometimes, ban the acquisition of local companies by foreign companies, impose restrictions on repatriation of dividends and capital. India has allowed IOO% convertibility. THE GREENFIELD STRATEGY The term Greenfield refers to starting with a virgin green site and then building is, Greenfield strategy is starting of the operations of a company from scratch in a foreign market. The company conducts the market survey, selects the location, buys or leases land, creates facilities, erects the machinery, remits or transfers the human resources and starts the operations and marketing activities. This strategy is followed by Fuji in locating its manufacturing, facilities in South Carolina, by Mercedes-Benz in locating automobile assembly plant in Alabama and by Nissan in locating its factory in Sunderland, England." Disney management faced the problems in building Disneyland in Paris. These problems include: Problems in dealing with French construction contractors. Communication difficulties with painters. Local contractors demanded $150 million extra at the time of opening , and threatened the opening. Local employees resisted the firm's attempt to impose its US work values. ADVANTAGES The company selects the best location from all viewpoints. The company can avail the incentives, rebates and concessions offered by the host governments including local governments.

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 The company can have latest models of the buildings, machinery and equipment technology. The company can, also have its own policies and styles of human resources management. The company can have its gestation period to understand and adjust to the new culture of the host country. Thus it can avoid the cultural shock. DISADVANTAGES This strategy results in a longer gestation period as the successful implementation takes time and patience. Some companies may not get the land in the location of its choice. The company has to follow the rules and regulations imposed by the host country's Government in case of construction of the factory buildings. Host country's Government may impose conditions that the company should recruit local people and train them, if necessary, to meet the companys requirement. VI. FOREIGN DIRECT INVESTMENT WITH STRATEGIC ALLIANCES Innovations, creations, productivity, growth, expansions and diversifications, in the recent years, are mostly accomplished by the strategic alliances adopted by various companies like mergers, acquisitions and joint-ventures. Strategic alliance is a co-operative and collaborative approach to achieve the larger goals. Strategic alliance takes different forms like licensing, franchising, contract manufacturing, joint ventures etc. Alliance is a strategy to explore a new market which the companies individually cannot do. For example, Xerox of USA and Fuji of Japan collaborated to explore new markets in Europe and Pacific Rim. Two companies join hands in order to align their distinctive and different strengths. Dunlop and Pirelli - the two tyre making corporations -joined together in order to synergize the strength of marketing capabilities of Dunlop and R&D capabilities of Pirelli.

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Why Consider Strategic Alliances? Multiply market entry alternatives and available resources for expansion into choice international markets. Consider possibility of replicating IJV's in different market areas. Access dominant or leading foreign technology through local manufacture in the target market. Domestic markets may also be served trough reverse licensing from the IJV. Access lucrative but otherwise closed or resistant markets through the efforts of a foreign partner to maximize value of established relationships. Develop customer service channels what would be unfeasible otherwise. Gain cost advantages through scale and locational economies (factor costs). Employ key managers experienced in cultural norms and business practices of overseas target markets. Realize political or legal advantages via relationship with a partner enjoying regional or national recognition. Exploit multiple synergies in production, marketing, and finance. Limit exposure of own corporate assets to those actually contributed to the joint venture. MODES OF FOREIGN ENTRY THROUGH ALLIANCES: a. Mergers and Acquisitions Domestic companies enter international business though mergers and acquisitions. A domestic company selects a foreign company and merges itself with the foreign company in order to enter international business. Alternatively, the domestic company may purchase the foreign company

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and acquires its ownership and control. Domestic business selects this mode of entering international business as it provides immediate access to international manufacturing facilities and marketing, network. Otherwise, the domestic company faces serious problems in gaining access to international markets. Fo r example. ('()C Cola entered Indian market instantly 11V acquiring the Pane and its bottling units. In addition, the domestic company through this strategy of mergers and acquisition may also get access to new technology or a patent right. 1 Though mergers and acquisitions provide easy and instant entry to global business, it would be very difficult to appraise the cases of acquisitions and mergers. Some times it Would he cheaper to a domestic company to have a green field strategy than by acquisitions. Sometimes merg ers and acquisitions also result in purchasing the problems of a fore Advantages and Disadvantages of Aquisition strategy Advantages

The company immediately gets the ownership and control over the acquired firm's factories, employees, technology, brand names and distribution networks. The company can formulate international strategy and generate more revenues. If the industry already reached the stage of optimum capacity level or overcapacity level in the host country. This strategy helps the economy of the host country.

Disadvantages

Acquiring a firm in a foreign country is a complex task involving bankers, lawyers, regulations, mergers and acquisition specialists from the two distribution networks. - 46 -

This strategy adds no capacity to the industry. Sometimes host countries imposed restrictions on acquisition of local companies by the foreign companies. Labour problems of the host country's company are also transferred to the acquired company.

Companies adopt this strategy just as a means of entering foreign markets. Procter and Gamble entered Mexican tissue products in 1997 by purchasing Loreto Y. Pena Pobre's manufacturing and marketing systems. b. Joint Ventures Two or more firms join together to create a new business entity that is legally separate and distinct from its parents. Joint ventures are established as corporations and owned by the funding partners in the predetermined proportions. American Motor Corporation entered into ajoint venture with Beijing Automotive Works called Beijing Jeep to enter Chinese market by producing jeeps and other vehicles. Joint ventures involve shared ownership. Joint Ventures are common in international business. Various environmental factors like social, technological, economic and political encourage the formation of Joint ventures. Joint ventures provide required strengths in terms of required capital, latest technology required human talent etc. and enable the companies to share the risks in the foreign markets. Joint ventures involve the local companies. This act improves the local image in the host country and also satisfies the governmental requirements regarding joint ventures. In fact, support of the host country's Government is essential for the success of the joint venture. Massey-Ferguson entered into a 51% joint venture in Turkey to produce Tractors. It planned to produce 50,000 engines per year and called the Government to provide facilities for an additional production of 30,000 tractors a year. Massey-Ferguson failed to understand economic, political

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and Governmental factors in the country. The company needed Government support for its successful operation. The venture is terminated as the Government of Turkey did not provide he support to the company.

ADVANTAGES

Joint ventures provide large capital funds. Joint ventures are suitable for major projects. Joint venture spread the risk between or among, partners. Different parties to the joint venture bring different kinds of skills like technical skills, technology, human skills, expertise, marketing skills or marketing networks.

Joint ventures make large projects and turn key projects feasible and possible. Joint ventures provide synergy due to combined efforts of varied parties. DISADVANTAGES

Joint ventures are also potential for conflicts. They result in disputes between or among parties due to varied interests. For example, the interest of a host country's company in developing countries would be to get the technology from its partner while the interest of a partner of an advanced county would be to get the marketing expertise from the host country's company. The partners delay tile decision-making once the dispute arises. Then the operations become unresponsive and inefficient.

Decision-making is normally slowed down in joint ventures due to the involvement of a number of parties. Scope for collapse of a joint venture is more due to entry of competitors, changes in the business environment in the two countries, changes in the partners' strengths etc. Life cycle of a joint venture is hindered by many causes of collapse.

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LIFE CYCLE OF A JOINT VENTURE The first stage of the life cycle of a joint venture begins with exploratory stage. During this stage the prospective partners start making: Alliances Project Collaborations Feasibility Studies After making alliances, the growth phase of the joint venture takes place. If the interests of the parties vary at this stage, they will lead to collapse of the joint venture in this phase itself. If the partners work together, this phase leads to stability of the joint ventures. Even in the stability stage, the joint venture may collapse. If not, the changed interests of the parties force them to renegotiate regarding their interests and shares. If the renegotiation is not successful, the joint venture may collapse. The reasons for collapse include: Entry of new competitors Changes in Business Environment Changes in partners' strengths Today's partners may become tomorrow's competitors, Changes in partners' interests.

PART III FORMULATING STRATEGY FOR INTERNATIONAL MANAGEMENT

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STRATEGY AS A CONCEPT & IMPLEMENTING GLOBAL STRATEGY

Strategy of a firm defines its long-term goals and objectives and the resources required to and the courses of action applied to attain those goals. It is a unified, integrated and comprehensive plan of an organization that relates to the strategic advantages of the firm to the challenges of the environment. It is designed to ensure that the basic objectives of the enterprise are achieved through proper execution by the organization. Strategy of a firm describes its integrative pattern of decisions revealing the firms action plans, resource allocation priorities and long-term goals. J. Lorsch defines strategy as, the stream of decisions taken over time by top managers which, when understood as a whole, reveal the goals they are seeking and the means used to reach those goals. A.Hax and N. Majluf define the concept of strategy as follows: I. Strategy is an integrative pattern of decisions revealing the firms resource allocation priorities, action programs and long-term goals. II. Strategy is a conscious selection of the business that the firm wishes to be in or is already in, based on its strengths and weaknesses and the opportunities and threats in the environment. III. Strategy is a conscious management effort at the corporate, business, and functional level to sustain the firms competitive advantage.

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IV. Strategy is an attempt to maximize both financial and non-financial returns to its stakeholders. Mintzberg divides strategy into: 1. Deliberate Strategy that emanates from the corporate planning effort 2. Emergent Strategy that evolves from the environment. Strategic Management is a continuous, iterative, cross-functional process aimed at keeping an organization as a whole appropriately matched to its environment. It is concerned with deciding on strategy and planning how that strategy is put into effect. NATURE OF GLOBAL (OR INTERNATIONAL) STRATEGIC

MANAGEMENT: 1. International strategic management is concerned with the flow of goods and services across the countries. It thus deals with global opportunities, threats, challenges and risks. 2. GSM takes into account analysis of the global business environment and strategies are formulated for particular clusters or markets. 3. GSM process is an integral part of the overall corporate policy of the firm. 4. GSM is concerned with the impact of the present decision on future. Thus, it is future oriented. 5. GSM is action oriented as it deals with the execution of the firms strategy. 6. GSM involves continuous and dynamic management of the firms business. The strategy of the firm incorporates the changes taking place in the firms environment. - 51 -

7. GSM involves planning for the long term. 8. GSM involves analysis of the firms global competitors. 9. GSM integrates the firms global and domestic operations 10. GSM is a critical exercise of business as it has long-term impact on the business and its operation. Its effective management is necessary for the firms survival and growth. GLOBAL STRATEGIC MANAGEMENT PROCESS 1. Analysis of existing missions and goals The firms global strategy stems out of its corporate strategy as firms initially start as domestic firms and later transform into international firms. When formulating the global strategy of the firm it is thus important to analyze its current mission and reformulate it if it appears redundant. 2. Organizational analysis of the Global Business firm The firms internal environment forms it source of strengths and weaknesses. Organizational analysis is concerned with the analysis of the internal environment of the firm that is composed of the Organizations vision, its functionsHR, Marketing, Finance, Operations, IT and R & D, its top managements philosophy, its culture and climate, its structure, etc. before formulating the global strategy, it is important for the firm to know its resource allocation framework and deficits if any. 3. Analysis of the Global Environment This is required to assess the global opportunities and threats. The Global Business environment consists of its Political-legal Factors, Economic Factors, Technological Factors and Social-Cultural Factors.

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4. Global SWOT analysis SWOT stands for Strengths, Weaknesses, Opportunities and Threats. Based on the companys organizational and environmental analysis a SWOT profile can be created. S & W are given rise to by the firms internal environment and O & T are provided by its external environment. The aim of strategists is however to utilize the firms strengths and minimize its weaknesses to capitalize on its opportunities and combat its threats. To evaluate the firms strengths and weaknesses, the following questions need to be answered: Do we have a strong market position in the respective countries in which we operate? Do we have better quality products than those of the competitors to serve the market? Do we have technological advantage in the world regions where we will operate our major businesses? Do we have strong brand reputation in the countries in which we sell our products or services? Does our financial profile compare favorably with that of the industry? Do we have the right people performing the right jobs and possessing the right competencies? Are we consistently profitable?, etc.

To evaluate the firms Opportunities & Threats, the following questions need to be answered: -

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What threats and opportunities do political and legal factors present? What threats and opportunities do technological factors present? What threats and opportunities do social and cultural factors present? What threats and opportunities do economic factors present? What is the size of the industry? What is the growth rate of the industry? How intense is the competition in the industry? What is the rate of innovation in the industry?, etc.

5. Formulation of Alternate Corporate Level and Business Level Strategies: Corporate Level Strategies These strategies are fundamentally concerned with the selection of the businesses in which the company should compete and with the development and coordination of that portfolio of the businesses. The various options of corporate level strategies include: 1. Stability strategies, 2. Growth/Expansion strategies 3. Retrenchment strategies 4. Combination Strategies However, for a Global business firm corporate level strategies are different and before deciding on a particular corporate level strategy to be undertaken, the companies must decide on which global markets to enter keeping into mind the market entry and control costs, product and communication costs, country characteristics, industry and competitors characteristics, etc. The various corporate level strategies of global business are: -

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1. Exporting- Indirect and Direct 2. Licensing and Franchising 3. Joint Ventures 4. Direct Investment 5. Mergers and Acquisitions 6. Production Sharing 7. Management Contracts 8. Turnkey operations Strategic Business Unit Level Strategies A strategic Business Unit (SBU) may be a division, product line, or other profit center hat can be planned independently from the other businesses of the firm. At the SBU level, the strategic issues are less about the coordination of operating units and more about developing and sustaining a competitive advantage for the goods and services that are produced. At the SBU level, the strategy formulation phase deals with positioning the business against rivals, anticipating changes in demand and technologies and adjusting the strategy to accommodate them and influencing the nature of competition through strategic actions such as vertical integration and through political actions. The various SBU level strategies are: I. Porters Generic Strategies: 1. Cost Leadership Strategy This generic strategy calls for being the low cost producer in an industry for a given level of quality. The firm sells its products either at average industry prices to earn a profit higher that that of rivals, or below the average industry prices to gain market share. Some of the ways that firms acquire - 55 -

cost advantages are by improving process efficiencies, gaining unique access to a large source of lower cost materials, making optimal outsourcing and vertical integration decisions, or avoiding some costs altogether. If competing firms are unable to lower their costs by a similar amount, the firm may be able to sustain a competitive advantage based on cost leadership. 2. Differentiation Strategy It calls for the development of a product or a service that offers unique attributes that are valued by customers and that customers perceive to be better that and different from those offered by the competitors. The value added by the unique attributed of the product may also allow the firm to charge premium price for it. Firms succeed in this strategy when they have access to leading scientific research, have highly skilled and creative product development team and/or effective sales team, have established corporate reputation for quality and innovation, etc. 3. Focus (or Niche) Strategy Under this strategy, the firm concentrates on a narrow segment and within that segment attempts to achieve either cost leadership or differentiation. The premise is that the needs of a group can be better serviced by focusing entirely on it. A firm using a focus strategy often enjoys a high degree of customer loyalty, and this entrenched loyalty discourages other firms from competing directly.

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II. Offensive Strategies: These involve: Attacking competitors strengths Attacking competitors weaknesses End-run offensives Pre-emptive strategies, etc.

III. Defensive Strategies: These include firms effort of protecting its competitive position and/or taking the first movers advantage. 6. Selection of the best strategy from amongst the

alternatives After formulation of the alternative strategies, the firm opts for the best alternative. The aim here is to select a strategy that best supports the creation of competitive advantage for the firm. Two major factors according to Thompson and Strikland in the determination of the choices are: (1) Competitive Position (CP), which indicates whether the firm is strong or weak; and (2) Market

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Growth Rate (MGR), which indicates whether the market for the product is growing rapidly, slowly, or not at all. The following strategic choices may be made on basis of these two factors: 1. When CP is strong and MGR is rapid, the strategies, in terms of attractiveness, are: (1) concentration on the existing business with the possibility of expanding overseas; (2) vertical integration; and (3) related diversification. 2. When CP is strong but MGR is slow, the strategies, in order of attractiveness, are: (1) international expansion; (2) related and unrelated diversification; (3) joint ventures; and (4) vertical integration. 3. When CP is weak but MGR is rapid, the strategies are: (1) reformulation of strategy; (2) related acquisition; (3) vertical integration; and (4) abandonment, as a last resort. 4. When CP is weak and MGR is slow, the strategies are: (1) reformulation of concentric strategy; (2) merger with a rival firm; (3) vertical integration; (4) diversification; and (5) harvest or divest (sell-off divisions or other saleable assets). These strategic choices however are impacted by the stage of development of the organization itself. For example, Hofer and Schendel suggest that a new organization may have an entrepreneurial strategic mode, whereas a medium-sized firm in a stable environment may have an adaptive mode. It is likely that a large firm will have a planning mode with emphasis on detailed planning as a precursor to strategic management. On the other hand, all of these modes might be found in the same organization, depending on where its divisions are in terms of product life cycles. In addition to considering the stages of development of an organization, it is important to note that the strategy formulation - 58 -

process will also be impacted by management style, the size of the firm, and the existing organization structure. The various tools for strategic analysis include: 1. BCG Matrix In the early 1970s Boston Consultancy Group developed a model for managing a portfolio of different business units, the BCG growth-share matrix displays the various business units on a graph of the market growth rate (or growth potential) vs. present market share relative to the competitors. Resources are allocated to business units according to where they are situated on the grid.

2. GE Nine Cell Matrix Mckinsey and Company developed this matrix in 1970s. measures the SBUs portfolio in terms of It Market

Attractiveness and Business Strength. Market Attractiveness is a function of annual market growth rate, overall market size, historical profit margin, current size of the market, market structure, market rivalry, demand variability, global opportunities, etc. and business strength depends on current market share, brand image, brand equity, production capacity, corporate image, relative profit margin, R & D performance, personnel, etc. 3. Directional Policy Matrix This matrix measures the health of the market (industrys attractiveness/business sector prospects) and the firms - 59 -

strength (business strength/competitive abilities) to pursue it. Directional Policy Matrix is another refinement upon the Boston Matrix. As with the GE Business Screen, the location of a Strategic Business Unit (SBU) in any cell of the matrix implies different strategic decisions. Each of the zones is described as follows: Leader - major resources are focused upon the SBU. Try harder - could be vulnerable over a longer period of time, but fine for now. Double or quit - gamble on potential major SBU's for the future. Growth - grow the market by focusing just enough resources here. Custodial - just like a cash cow, milk it and do not commit any more resources. Cash Generator - Even more like a cash cow, milk here for expansion elsewhere. Phased withdrawal - move cash to SBU's with greater potential. Divest - liquidate or move these assets on a fast as you can. 7. Strategy Implementation At this stage, the global company implements the selected strategy. The factors of strategy implementation include: 1. Partner Selection Selection of a sound and competent partner is must for successful implementation of the global business strategy. Before selecting a partner the organization needs to analyze it in terms if its performance, market standing, competencies and goodwill. Moreover, a strategic fit between the

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organization and its partner is imperative to attain. The strategist must study before hand the contribution both or all partners can make to others. 2. Organizational Structure This deals with the selection of an appropriate organizational structure for the international division. In case of exporting, the firm can opt either for opening an Export Department or an Export Division which can be headed by an Export Manager reporting to the domestic marketing executive (who in turn would be reporting to the corporate marketing manager) or by Division Manager respectively. In case of licensing and/or franchising, the firm may choose to open up an International Division or International Quarters (Subsidiaries) headed by Director of international operations or President, (who is vice president in parent company) respectively. In cases where substantial investments have been made by the global firms and they are performing diverse business activities, globalfunctional structure for specific geographies, product lines, functions or their combination may be adopted. 3. Behavioral Implementation It is one of the major parts in the global strategy implementation process. It relates with training the existing employees in the culture of the foreign company. It also involves training the expatriates in the culture of the parent company. 4. Marketing Implementation The strategists at this stage alter their market mix according to the host countrys needs. Thus, this involves implementing the various marketing strategies like product design, pricing, - 61 -

distribution, promotion, etc. in order to attain the corporate goals. 5. Financial Implementation It involves taking decisions pertaining to acquisition and allocation of finance taking into account the cost of funds and financial needs of the enterprise. All long-term and short-term decisions like capital budgeting, capital structure and working capital management decisions are taken at this stage. 6. Production Implementation Decisions regarding the plant location and layout and other production processes are taken and implemented at this stage. 7. Human Resource Implementation This involves recruitment and training and development of employees by the global company. The HR strategy is based on the corporate strategy and thus, the firms corporate and SBU level strategies affect the HR decisions and policies. 8. Strategy Evaluation and Control The activities in this regard include: 1. Establishment of the standards of the GSM process. 2. Measurement of the performance at every stage of the process. 3. Comparison of the actual and the standard performance. 4. Observation and analysis of the deviations 5. Corrective steps. The various measures for strategic evaluation and control include: -

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1. Financial Measures- ROI analysis, Budget Analysis, Historical Comparisons, etc. 2. MNC-Host Country Relations- Comparison of the benefits and limitations as posed to the host country by the MNC. The relations can be: a. Contributory Relations When the foreign company contributes directly to the attainment of the goals without any simultaneous negative effect. b. Reinforcing Relations When the foreign companys actions reinforce the attainment of the host nations goals but tend to have some negative effects. c. Frustrating Relations When actions of a foreign company challenge the goals of the nation or impede its immediate functioning in ways to which the nation cannot respond effectively so that its government is frustrated. d. Undermining Relations When the foreign company has adverse effect on the host countrys norms, values and philosophy.

EMERGING

MODELS

OF

STRATEGIC

MANAGEMENT IN INTERNATIONAL CONTEXT

Effective strategic management is absolutely necessary for the firm that is to survive in the competitive arena of international business. The process of strategic management begins with an on-going practice of the external and the internal environmental scanning. It is necessary to scan the internal environment in order to understand the firm's unique strengths and weaknesses. It is

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also necessary to scan the external environment in order to identify opportunities and threats to the firm. The environmental scanning process must be a continuing effort because of the dynamics of change. Most managers agree that the events of the world are changing so fast that new opportunities and threats appear almost daily, and the opportunities may not be available for long. It is more difficult to convince some managers that the conditions within the firm also change and, what may have been a strength last month may now be a weakness. The point is that the forces of change are as prevalent within the organization as they are outside. Matching strengths, weaknesses, opportunities, and threats is the process by which the firm can identify alternative strategic actions. This process also further defines organizational goals. What the goals mean, how they will be accomplished, and how they are viewed is the function of linearity. The linear line is drawn for the firm and then projected outside by the members of its dominant coalitions. These coalition members are the key decision-makers in the company who identify the "relevant" environmental conditions, provide meaning to them, allocate resources, and articulate their rationalizations for the stakeholders.

This process is the Traditional Strategic Management Model, the logic of which has been generally accepted for the past three decades. The model proposes that strategic management is an ends-ways-means sequence, by which the organization's strategic management process takes place in the following three stages: 1. Determine objectives, or the ends to be achieved; 2. Determine the strategies, or ways the objectives are to be achieved; and 3. Determine and allocate the resources, or the means for the achievement of the objectives.

1. ENDS
(Objectives)

2. WAYS
(Strategies)

3. MEANS
(Resources)

Problems of the Traditional Strategic Model

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1. Only recently have some management thinkers begun to question the efficacy of this traditional model. Citing the experiences of several companies, Hayes observed that the traditional strategic management process invites managers to answer the question, "What do we think is going to happen?" when they should be answering the question, "What do we want to happen?" By addressing the former, traditional question, managers fail to see the possibility that the firm has the opportunity to take command of its future. 2. Furthermore, the answers that are normally given by managers to the question of "what's going to happen," tend to lead the organization to search for structural changes as a way of achieving goals, when the behavioral aspects-that is, the things that the firm currently does-may be the real impediments to realizing those goals. In many firms, goals are set first, and then the coalition members busy themselves acquiring resources to meet those goals. In these cases, it is often the financial managers of the firm that are setting strategic boundaries, which tend to tell their managerial colleagues what they can and cannot do. In this manner, strategic management becomes an exercise in "living within the budget."

EMERGING SM MODEL
Because of the many problems with the traditional model for strategic management, it might be worthwhile to conceptualize the model by placing qualitative and quantitative resources as the starting point of strategy making. The Emerging Strategic Management Model reflects another three-stage process: -

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1. Determine the resources, or the means that are reasonably available to the organization; 2. Determine the strategies or ways that these resources might be maximized; and 3. Determining the goals, or end results of the strategies. The emerging model for strategic management offers the following advantages: 1. The model helps to de-personalize the issues by focusing the resources 2. It assists in emphasizing both the strategic content and the process 3. It does not require the manager to scurry around trying to find needed resources after the goals are established and publicized. 4. It does not keep the company with its means but allows the stretching of those resources.

ACHIEVING AND SUSTAINING INTERNATIONAL COMPETITIVE ADVANTAGE

MEANING OF COMPETITIVE ADVANTAGE When a firm sustains profits that exceed the average for its industry, the firm is said to possess a competitive advantage over its rivals. A competitive advantage is an advantage over competitors gained by offering consumers greater value, either by means of lower prices or - 66 -

by providing greater benefits and service that justifies higher prices. Competitive advantages are capabilities that are difficult to replicate or imitate and are non-tradable. Pitts and Snow define a competitive advantage as "any feature of a business firm that enables it to earn a high return on investment despite counter pressure from competitors." ATTAINING COMPETITIVE ADVANTAGE Competitive business advantage is gained synergy at the and corporate market and

levels

through

share,

respectively. Synergy evolves from size and diversification. By being large, a firm can gain advantage by: (1) paying less interest to its creditors and underwriters; and (2) paying less tax by internally shifting funds from one business to another. Diversified firms can use portfolio planning to produce synergistic advantage by assisting the firm in allocating resources according to the product's relative market share and market growth which in turn, directs the organization in its placement of managers in appropriate cells. Market share derives from three different sources: (1) economies of scale attained through specialization, automation, and vertical integration: (2) experience attained through employee learning as well as product and process development; and (3) market power-which is the amount of control the firm has over suppliers, customers, and competitors. Sources of Competitive Advantage include: 1. Economies of Scale 2. Latest technology

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3. Human resources (Skilled, trained, creative, positive attitude, high EQ and IQ, competitive, etc.) 4. Continuous learning philosophy and knowledge management. 5. Automation BPR, etc. 6. Product and process innovation and development. 7. Diverse workforce. 8. Low cost 9. Development in the external environment favoring the firms business 10. Acquisition of market power and modernization of business processes like implementation of ERP, CAD-CAM manufacturing, E-commerce,

PORTERS CONTRIBUTION 1. THE FIVE FORCE MODEL The model of the Five Competitive Forces was developed by Michael E. Porter 1980. Since that time it has become an important tool for analyzing an organizations industry structure in strategic processes. Porters model is based on the insight that a corporate strategy should meet the opportunities and threats in the organizations external environment. Especially, competitive strategy should base on an understanding of industry structures and the way they change. Porter has identified five competitive forces that shape every industry and every market. These forces determine the intensity of competition and hence the profitability and attractiveness of an industry. The objective of corporate strategy should be to modify these competitive forces in a way that improves the position of the organization. Porters model supports analysis of the driving forces in an industry. Based on - 68 -

the information derived from the Five Forces Analysis, management can decide how to influence or to exploit particular characteristics of their industry. The Five Competitive Forces The Five Competitive Forces are typically described as follows: 1. Bargaining Power of Suppliers The term 'suppliers' comprises all sources for inputs that are needed in order to provide goods or services. Supplier bargaining power is likely to be high when: The market is dominated by a few large suppliers rather than a fragmented source of supply, There are no substitutes for the particular input, The suppliers customers are fragmented, so their bargaining power is low, The switching costs from one supplier to another are high, There is the possibility of the supplier integrating forwards in order to obtain higher prices and margins. This threat is especially high when The buying industry has a higher profitability than the supplying industry, Forward integration provides economies of scale for the supplier,

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The buying industry hinders the supplying industry in their development (e.g. reluctance to accept new releases of products),

The buying industry has low barriers to entry.

In such situations, the buying industry often faces a high pressure on margins from their suppliers. The relationship to powerful suppliers can potentially reduce strategic options for the organization. 2. Bargaining Power of Customers Similarly, the bargaining power of customers determines how much customers can impose pressure on margins and volumes. Customers bargaining power is likely to be high when: They buy large volumes, there is a concentration of buyers, The supplying industry comprises a large number of small operators The supplying industry operates with high fixed costs, The product is undifferentiated and can be replaces by substitutes, Switching to an alternative product is relatively simple and is not related to high costs, Customers have low margins and are price-sensitive, Customers could produce the product themselves, The product is not strategically important for the customer,

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The customer knows about the production costs of the product

There

is

the

possibility

for

the

customer

integrating

backwards. 3. Threat of New Entrants The threat of new entries will depend on the extent to which there are barriers to entry. These are typically: Economies of scale (minimum size requirements for profitable operations), High initial investments and fixed costs, Cost advantages of existing players due to experience curve effects of operation with fully depreciated assets, Brand loyalty of customers Protected intellectual property like patents, licenses etc, Scarcity of important resources, e.g. qualified expert staff Access to raw materials is controlled by existing players, Distribution channels are controlled by existing players, Existing players have close customer relations, e.g. from longterm service contracts, High switching costs for customers Legislation and government action

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4. Threat of Substitutes A threat from substitutes exists if there are alternative products with lower prices of better performance parameters for the same purpose. They could potentially attract a significant proportion of market volume and hence reduce the potential sales volume for existing players. This category also relates to complementary products. The threat of substitutes is determined by factors like: Brand loyalty of customers, Close customer relationships, Switching costs for customers, The relative price for performance of substitutes, etc.

5. Competitive Rivalry between Existing Players This force describes the intensity of competition between existing players (companies) in an industry. Strong competition pressurizes on prices, margins, and hence, on profitability for every single company in the industry. Competition between existing players is likely to be high when: There are many players of about the same size, Players have similar strategies There is not much differentiation between players and their products, etc.

SUSTAINING ADVANTAGE

INTERNATIONAL

COMPETITIVE

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Sustainability of CA depends on the following characteristics of the critical resources involved: 1. The resources need to be valuable to the firm in exploiting opportunities and neutralizing threats. 2. The resources should be rare and of such a nature that they cannot be reproduced individually. 3. The resources should be imperfectly imitable because of casual ambiguity, which: (a) might be due to the historical conditions of its occurrence; (b) makes it difficult for others to see the linkage between the resource and the benefit; and (c) makes the resource socially complex due to corporate culture. Characteristics of sustainable competitive advantage: 1. Creates flexibility and adaptability so that firms products change with the customers Create consumer dependence on your bundle of products Build on the strength of the existing bundle Product development and/or horizontal integration

2. Creates flexibility and alternatives in the sources and means of production Mixed production systems Vertical integration

3. Maintain systems that monitor the environment for change The number one factor associated with the loss of competitive advantage is change o Competitor-induced technologies changee.g. new products and

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Environment-induced changee.g. demographic changes or random events

o Evolutionary vs spontaneous erosion of competitive advantage 4. Develop internal systems that adapt to change quickly and effectively Management is generally adverse to change and most management systems reward consistency. This tends to lead to the slow erosion of competitive advantage This requires the development of an internal reward structure that values new ideas and rewards experimentation (whether it succeeds or fails) 5. Work at protecting, expanding, and building upon the unique assets and strengths of the company This requires using the environmental monitors to look for opportunities to expand the companys expertise or bring new expertise into the company

Competitive advantage, in order to be valuable, needs to be long-lasting. From an economic point of view, a competitive advantage is similar to a monopoly that the company creates for itself and which gives the company a profit advantage (an economic rent). This happens only if this monopoly is not immediately destroyed before imitation. One can generally distinguish three ways of achieving sustainability:

(a) Customer loyalty (b) Positive feedbacks (c) Pre-emption of capabilities.

INTERNATIONAL STRATEGIC ALLIANCES

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MEANING
1. An alliance can be defined as the sharing of capabilities between two or more firms with the view of enhancing their competitive advantages and/or creating new business without losing their respective strategic autonomy. What makes an alliance 'strategic' is that the sharing of capabilities, such as R&D, manufacturing or marketing affects the long-term competitiveness of the firms involved and implies a relatively long-term commitment of resources by partners.

2. A Strategic Alliance is a formal relationship between two or more parties to pursue a set of agreed upon goals or to meet a critical business need while remaining independent organizations. 3. A strategic alliance is when two or more businesses join together for a set period of time. The businesses, usually, are not in direct competition, but have similar products or services that are directed toward the same target audience. STAGES OF ALLIANCE FORMATION A typical strategic alliance formation process involves these steps: 1. Strategy Development: Strategy development involves studying the alliances feasibility, objectives and rationale, focusing on the major issues and challenges and development of resource strategies for production, technology, and people. It requires aligning alliance objectives with the overall corporate strategy. 2. Partner Assessment: Partner assessment involves analyzing a potential partners strengths and weaknesses, creating strategies for accommodating all partners management styles, preparing appropriate partner selection criteria, understanding a partners motives for joining the alliance and addressing resource capability gaps that may exist for a partner. 3. Contract Negotiation: Contract negotiations involves determining whether all parties have realistic objectives, forming high calibre negotiating teams, defining each partners contributions and rewards as well as protect any proprietary - 75 -

information, addressing termination clauses, penalties for poor performance, and highlighting the degree to which arbitration procedures are clearly stated and understood. 4. Alliance Operation: Alliance operations involves addressing senior managements commitment, finding the calibre of resources devoted to the alliance, linking of budgets and resources with strategic priorities, measuring and rewarding alliance performance, and assessing the performance and results of the alliance. 5. Alliance Termination: Alliance termination involves winding down the alliance, for instance when its objectives have been met or cannot be met, or when a partner adjusts priorities or re-allocated resources elsewhere. ADVANTAGES/NEED/RATIONALE/ROLE OF SA The advantages of strategic alliance include: 1. Allowing each partner to concentrate on activities that best match their capabilities, 2. Learning from partners & developing competences that may be more widely exploited elsewhere, 3. Adequacy and suitability of the resources & competencies of an organization for it to survive. 4. Providing the parties each others strengths 5. Gaining market access 6. Facilitating entry to another country 7. Bringing together complementary skills and enable both parties to do together what they could not do separately 8. May facilitate the setting of industry standards 9. Reducing competitive pressure. 10. Others: a. Sustaining competitive advantage b. Sharing market understanding c. Sharing R&D expenditure

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d. New Product Development e. Avoiding Product Failures f. Meeting challenges of technological changes. MANAGEMENT OF STRATEGIC ALLIANCES

The following are key points in structuring and subsequently managing strategic alliances. Choose a partner

who shares your vision of the future whose objectives are complementary to yours who can be trusted not to take advantage of the relationship.

Structure the alliance by:

walling off critical technology establishing contractual safeguards agreeing to swap valuable skills and technology seeking credible commitments.

Manage the alliance by building trust through:

interpersonal contact networking workshops to build interpersonal skills learning from partners so that the relationship carries benefits into the future and through not regarding the alliance as a one-off exercise.

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PART IV
ORGANIZATIONAL STRUCTURE IN INTERNATIONAL BUSINESS
ORGANIZATION DESIGN
The introduction to this chapter noted that Hill's (2005) text gives little attention to basic organization design. If you have not previously studied organization structure, this section is intended to make the textbook chapter easier to understand than it might otherwise be. The structural design of an organization is reflected in its organization chart . The organization chart is the visible representation for a set of underlying activities and processes. The three key components of organization structure are:

the formal reporting relationships, including the number of levels in the hierarchy and the span of control of managers the grouping together of individuals into departments and the grouping of departments into the total organization; and

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the design of systems to ensure effective communication, coordination and integration of effort across departments

These three elements of structure pertain to both the vertical and horizontal aspects or organizing. The first two elements are the structural framework , which is the vertical hierarchy drawn on the organization chart. The third element concerns the pattern of interactions, which provide horizontal information and coordination where and when it is needed. The term vertical differentiation refers to the depth in the structure. Differentiation increases as the number of hierarchical levels in the organization increases. The more levels that exist between top management and operatives, the greater the potential for communication distortion and the more difficult it is to coordinate decisions of managers and for top management to exercise control of subordinates. We examine this further in the next section. The term horizontal differentiation refers to the degree of differentiation between units based on the nature of the tasks they perform, the orientation of members and their education and training. We examine this further in the following section on 'Organization design options'. It is important to realize that vertical and horizontal differentiations are not independent of each other. In your textbook, Hill (2005) condenses vertical differentiation to an argument between centralization and decent realization and then uses horizontal differentiation to explain how an organization creates its subunits. This is an over-simplification: vertical and horizontal differentiations are interdependent. You can assess the truth of that assertion by looking at organizations in a particular industry. Some will be 'tall' with many layers of hierarchy; others will be 'flat' with few layers in the hierarchy.

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CENTRALIZATION AND DECENTRALIZATION The concept of centralization is easy to understand. It refers to decision making. In a centralized organization, decisions are made at the head office; in a decentralized organization, decisions are made by managers 'where the action is'. However, in the real world, decision making is seldom so absolute. There is a range of centralization from high to low and there is a range of functions, some of which may be subject to centralized control, while others are decentralized. Typically, functions such as research and development (R&D) and finance are controlled centrally just as, typically, marketing is decentralized. International shipping companies centralize the control of ships but decentralize report management. For example, P&O runs a worldwide shipping network but has resorts, such as the one on Heron Island on the Great Barrier Reef , which are largely autonomous. Similarly, CSR Ltd is an Australian MNE which has a small headquarters in Sydney and decentralized divisions in the sugar and building materials industries which enjoy a high degree of autonomy. The advantages of centralization are that it:

facilitates coordination of related activities such as production and marketing maintains consistency in decision making avoids duplication of effort (for example, a centralized marketing department rather than multiple decentralized marketing offices) enables senior managers to pursue their 'visions' for the organization with maximum control.

The advantages of decentralization are that it:

relieves top management from information and work overload enables subordinate managers to achieve some measure of selfactualization - which implies freedom from control by superiors

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keeps the organization flexible and able to respond quickly to demands in the marketplace may produce better decisions, made by managers with access to local information leads to autonomy for subordinate managers, which may actually enhance control by top management by allowing them to concentrate on important issues.

The example of Bata Ltd Bata Ltd began in Czechoslovakia before World War II. In 1939, Bata took 100 Czech families and migrated to Canada , the current head office of this MNE. Here are some statistics relating to Bata Ltd:

International sales - $US 3 billion in 115 countries Independent retailers - 125 Factories in 90 countries Operations in some form in over 100 countries Total staff - 85,000

Where possible, Bata owns 100% of the operation. In some countries, this level of ownership is not possible: for example, in India it is 60% and in Japan 10%. In some cases, Bata provides licensing, consulting, and technical assistance to companies in which it has no equity.

ORGANIZATIONAL DESIGN OPTIONS We noted in the section on organizational design that the framework of an organizations structure is dependent upon the extent of both vertical and

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horizontal differentiation. We now look at a biological analogy to see what differentiation is about, using our own body as the exemplar. At the moment of conception, we consist of two cells - one from each of our parents. The fused cells then proceed to multiply until eventually there are billions of cells. Along the way, the cells differentiate: some become nerve cells, others become muscle cells and organs such as the heart, liver, lungs, skin and so on evolve. When an organization is conceived, it goes through a similar process and the organs of our body are analogous to the various departments we find in organizations. The type of departments depend on the purpose of the organization, so let's look at some of the possibilities for creating various departments. We can organise departments or divisions on the basis of function, product, customer or geography , as illustrated in the diagram below.

Basis for an organization structure

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A hybrid organization

We can also create hybrid organizations, incorporating two or more of the above options. A common hybrid employs both the functional and the product options. Matrix structure A matrix uses two or more integrated co-existing structures simultaneously. What distinguishes a matrix from a hybrid structure is its grid-like intersection of multiple lines of authority and responsibility. The firm shown in Figure 8.3 below creates its matrix by superimposing a product division over a functional group. The functional finance, marketing, operations and human resources units give the matrix its vertical structure, while the product division gives it a horizontal structure.

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A matrix structure A major feature of the matrix, which has both advantages and disadvantages, is the dual authority system which requires some managers to be accountable to two bosses at the same time. In Figure 8.3, for example, Manager A is responsible to the Marketing Manager as well as to the Manager for Product A. In Ciba-Geigy, the Swiss chemical and pharmaceutical MNE, Product A might be a new drug. Ciba-Geigy, incidentally, has a matrix of three dimensions - product, function and geography - so Manager A might be a marketing manager in Europe or Australia . Being responsible to two bosses gives rise to conflict, ambiguity and responsibility gaps. This means that managing a matrix requires considerable personal and organizational skills on the part of managers in the matrix.

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INTERNATIONAL STRUCTURE OPTIONS

Many companies go through four stages as they evolve towards full-fledged global operations. In stage one, the domestic stage, the firm is domestically oriented but may want to consider some initial foreign involvement to expand production volume. The structure is domestic, typically functional or divisional and foreign sales are handled through an export department. In stage two, the international stage, the firm becomes multi-domestic and foreign subsidiaries may be established. An international division has replaced the export department of stage one. In stage three, the global stage, there are two alternatives: 1. If the firm has a domestic structure based on function and has a low degree of diversification (that is, relatively few products), it will probably adopt a worldwide area structure as illustrated in Figure below: -

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A worldwide area structure

2. If the firm has a domestic structure based on product and is relatively highly diversified (that is, has many products), it will probably adopt a worldwide product division structure as illustrated in the Figure.

In stage four, the transnational stage, the firm is trying to realise location and experience curve economies, as well as concentrating on local responsiveness and the diverse transfers of core competencies (global learning from page 430 of your textbook). These often conflicting demands suggest a global matrix structure as illustrated in the figure: -.

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INTERNATIONAL HRM
MANAGING INTERNATIONAL EMPLOYEES IHRM policies and practices relate to the management of employees who may be working away from their home country for a specific period of time on assignment in another country which is known as the host country. The home country is often referred to as the parent country. Employees on overseas assignment are called expatriates, which is often colloquially shortened to expats. Expatriates may be either parent country nationals (PCNs) or third country nationals (TCNs). PCNs are those whom most people would identify as being expatriates. They are the employees from the parent (home) country who are sent overseas because of their managerial knowledge or specialist skills. Most research we will be examining when referring to expatriates usually refers to PCNs. Although TCNs are often overlooked in the literature they too are

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expatriates because they are moving on assignment from one country, which is not their home country, to another country. With the help of the following figure, an example may help clarify the above terms. An Australian MNE [Firm X] that has subsidiaries in Singapore [Country C - Firm X 1] and India [shown in the figure as 'any other country'] may send Australian employees (PCNs) to Singapore and transfer employees in the Indian subsidiary to the operations in Singapore (TCN). When the Australian MNE employs Singaporean citizens in the subsidiary in Singapore , then these employees are known as host country nationals (HCNs).

Movement of international employees in an MNE

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Another term that is sometimes used is inpatriate. The inpatriate refers to an employee from an overseas subsidiary [Country C - Firm X 1 ] who is on assignment in the MNE home country headquarters of operations [Country A Firm X]. As Briscoe explains, inpatriates could be local-country hires or third country hires from the firm's foreign operations who are either being developed by the firm for further management responsibilities or who have special skills or experiences that the firm needs in the home country. Perhaps another definition will help. Hill defines inpatriates as being 'expatriates who are citizens of a foreign country working in the home country of their multinational employer'. STAFFING Staffing deals specifically with the acquisition, training and allocation of the organizations human resources. In both the domestic and the international context, the staffing process can be seen as a series of steps that are performed on a continuing basis to keep the organization supplied with the right people in the right positions at the right time. The steps in this process are:

human resource planning (this is part of the organizations strategic plan) recruitment selection induction and orientation training (to improve job skills) development (to educate people beyond the requirements of their present position) performance appraisal remuneration and rewards transfers Separations.

In an international business, the way in which these steps are administered depends very much on the firm's strategy and the staffing policy chosen to support that - 89 -

strategy. There are four choices in policy: the ethnocentric approach, the polycentric approach, the geocentric approach and the regiocentric approach. What follows is a shorthand description based on Dowling and Welch (2004) of the four using the same criteria for each approach. You should use these descriptions as the 'skeleton' of your understanding of the four approaches and use the reading from Hill (2005) to provide the 'flesh'.

Ethnocentric approach Definition: Ethnocentricity (ethnocentrism) is a belief in the superiority of one's own ethnic group. The firm basically believes that parent-country nationals are better qualified and more trustworthy than host country nationals. Rationale and advantages: Experience curve effects derive from standardisation of production. The firm produces in the home country initially and transfers its core competency to the host country under the guidance of expatriate managers. These managers have the knowledge to create value through core competencies. They also contribute to the maintenance of the corporate culture. Problems and disadvantages: Denies advancement to host country nationals. This may breed resentment and diminish the firm's public image. Expatriate managers are expensive to maintain: they may become insular in their attitudes and be prone to cultural myopia. The latter may result in management overlooking market niche opportunities. Polycentric approach Definition: Polycentricity (polycentrism) is a belief that local people know the local environment better than outsiders. Rationale and advantages: Gives hope for profit maximisation through flexibility - 90 -

because local managers can react quickly to market needs in the areas of pricing, production, product life cycle, and political activity. Absence of problems associated with expatriate managers including cultural myopia. Provides continuity in the management of foreign subsidiaries. Problems and disadvantages: No synergy because there is little communication between national units. Limits experience of host nationals to their own country. Corporate headquarters may become isolated from national units and lead to lack of integration. This in turn may lead to corporate inertia. Geocentric approach Definition: Geocentricity (geocentrism) is the notion that the best people should be employed, regardless of their nationality. Enables the firm to make best use of its human resources Rationale and advantages: and builds a cadre of executives who feel comfortable working in any culture. Ethnocentric and polycentric pressures are balanced in favour of optimising the company's operations. The ethnocentric pressure for low cost standardised operations is satisfied because enough of the right kinds of products exist in the global customer base to permit scale economies and experience curve effects. The polycentric pressure for local responsiveness is satisfied because of the need to meet the distinctive characteristics which remain in every market. Problems and disadvantages: May be contrary to host countries' desire for the MNE to employ local citizens. Expensive to implement because of the need for considerable cross-cultural training and development.

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Regiocentric approach

(Note: This option is not covered by Hill (2005); it is included here for interest and to indicate that other authors have a perspective which is different from Hill (2005).

Definition:

Regiocentricity is the variation of staffing policy to suit particular geographic areas.

Rationale and advantages:

Policy varied to suit the nature of the firm's business and product strategy. Allows interaction between executives because of inter-regional transfers. Shows some sensitivity to local conditions. Provides a 'stepping stone' for a firm wishing to move from an ethnocentric or polycentric approach to a geocentric approach.

Problems and disadvantages: May produce federalism at a regional (rather than a country) basis and constrains the firm from taking a global stance. May improve career prospects at the national level, but only to the regional level: staff may never attain positions at corporation headquarters. The following are the various advantages and disadvantages of using expatriates (PCNs and TCNs) and locals (HCNs) when considering which category of staff to employ for international operations: -

Expatriate managers No matter which staffing policy a firm has adopted, it usually has some parent-country nationals (PCNs) who serve in foreign positions, generally at managerial level. The individual success of these expatriate managers is usually very important to the success

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of the company. To understand the importance of expatriate managers, consider the possible indirect costs of their failure to do a good job):

foreign governments may be alienated foreign suppliers, creditors and customers may be lost foreign contracts may be lost loss of market share foreign operators may be inefficient foreign employees, that is HCNs, may be alienated, resulting in industrial relations problems such as morale and productivity the company's international reputation may be damaged the manager's self esteem will be damaged, leading to adverse long-term consequences both for the manager and the company other potential expatriates and their families may be deterred from undertaking foreign assignments.

There has been considerable research into the selection and training of expatriate managers to avoid the consequences listed above. Dowling and Welch (2004) suggest that because of the high costs associated with expatriate failure, which occurs when an expatriate returns early from an overseas assignment or is ineffective in the overseas posting, developing selection criteria that predict success is vital. Selecting potential expatriates is a more complex process than selecting domestic employees because, in addition to predicting successful job performance, the HR manager is also attempting to predict the expatriate's ability to adjust to a different cultural environment. An important point made by Dowling and Welch (2004) is that a person's ability to perform job tasks (technical ability) in the domestic business does not necessarily translate into that person performing well abroad because of the need for the expatriate to adapt to a different cultural environment. That is, domestic ability is not necessarily a valid predictor of international success.

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SELECTION AND TRAINING OF EXPATRIATE MANAGERS , we have been referring to the need for managers to have cross-cultural literacy. In this section we look at the selection and training of managers and the supporting facilities an organization must provide when managers have taken up their positions in the host culture. . Several factors need to be considered in selecting an expatriate manager. First, a manager must be psychologically suited to the job. In practical terms, this means such a person should:

have a good self-image without being too egotistical be able to interact freely with people have reasonably high intelligence be self-motivated have tolerance for ambiguity.

Second, the manager should have few prejudices and be non-discriminatory in terms of race, gender or ethnic background. Third, the manager must have the skills to do the job and a broad general knowledge of the area related to the assignment. Specific skills required include job knowledge, communication skills and a working knowledge of the language of the host country. TRAINING AND MANAGEMENT DEVELOPMENT Having selected the manager for the job, he or she must be trained. However, it is not sufficient to provide training only for the manager: the whole family must be trained. The training of a spouse/partner may be more important than training the manager because everyday activities involving school, shopping, interaction with neighbors, dealing with telephone and postal services, and selecting and managing domestic help are usually the responsibility of the partner.

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Training should include at least two phases. Pre-departure training should focus on language, history and culture for the whole family and on job-specific training for the manager. On arrival in the new country two or three weeks without too much job-related activity should be allowed for adaptation to the new culture. Transition training should continue with language and culture training as well as meetings at which the new expatriates have the chance to mix with local residents and other foreign nationals. We should be clear that training and development are two different but related issues. Training is concerned primarily with the acquisition of skills (for example, learning a language), but may also refer to the acquisition of awareness (for example, cultural training). Development is the term used to describe a process in which the person is changed: that is, 'developed' through the acquisition of knowledge via some form of education program which may include some 'training'. The distinction between training and development may be made clearer by discussing the forms they take. Thus training may be:

Cultural training, in which the trainee learns about the host country's culture, history, politics, economy, religion and social and business practices Language training, in which the trainee learns a language other than his or her native tongue Specific skills training, in which the trainee learns communication skills, negotiation skills, and other skills needed by a practising manager. In this latter category we might find training in performance appraisal, total quality management, and training (as in 'train the trainer').

Management development might also be called 'general education' where the manager goes to school to learn how to be a manager. Management development subsumes a range of activities including:

skills training in-house programs on a wide range of company-related topics

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external seminars and conferences on a wide range of topics relevant to company activities university courses job rotation and/or transfers within the company, including overseas postings exchange visits with other companies, usually within the same corporation networking with other managers within the company, with government officials and with manages of suppliers, customers and so on.

PERFORMANCE APPRAISAL Training and development also involve performance appraisal. Managers at all levels use appraisal to communicate expectations and to help subordinates improve personal deficiencies. However, in international business performance appraisal has problems not usually encountered in the domestic company. These problems fall generally into the category of bias. Let's see how bias arises because of the expatriate manager's location. Expatriate managers are assessed by their superiors in both the host country and the home country. From these different perspectives:

Host country assessors may be biased by their cultural frame of reference and set of expectations. Home country assessors may be biased by their distance from the host country and by their own lack of experience in the host country. Their cultural frame of reference may be the same as that of the person being assessed, but their expectations of that person may or may not be realistic. Home country assessors rely on facts and figures in making their assessment: facts and figures do not take account of the 'soft' variables associated with working in another culture.

It is usually very difficult for an expatriate manager to counter an adverse performance appraisal arising from these biases. For this reason, expatriates often see little benefit for their careers in overseas postings. Companies which are aware of this focus their performance evaluation on factors which are within the scope of control of - 96 -

the person being evaluated. This in itself presents difficulties because there are many types of decisions over which expatriate managers have little control. COMPENSATION Differences in the economies and compensation practices of various countries make the compensation of expatriate managers a thorny problem for administrators. Let's begin by noting differences in the compensation packages of CEOs in several countries as reported by Hill (2005, p. 633). The average remuneration of a CEO in a large US corporation is nearly twice that of his of her Canadian or British counterparts and two and a half times that of an Australian CEO. The various approaches to staffing relate to compensation by being concerned primarily with:

parent country nationals (PNCs) - ethnocentric and geocentric locals or host country nationals (HCNs) - polycentric third country nationals (TCNs) - geocentric and regiocentric.

It follows that three of these four staffing approaches - ethnocentric, regiocentric and geocentric - rely on extensive use of expatriate managers (PCNs and TCNs). There are three approaches or policies to international compensation. These policies are:

Home-based policy. T his policy links the base salary for PCNs and TCNs to the salary structure of the relevant home country. For example, a US executive transferred to France would have a compensation package based on the US base salary rather than that applicable to the host country France . All PCNs and TCNs are treated equitably in relation to their home countries but they may be paid different amounts for doing the same work. For example, in the London branch of an American bank, a US expatriate and an Australian (TCN) may perform the

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same banking duties but the American will receive a higher salary than the Australian because of differences in their respective home country base salary levels.

Host-based policy. The base salary is linked to the salary structure of the host country but supplementary allowances for cost of living, housing, schooling and so on are linked to the home country salary structure. This policy is attractive to TCNs where host country salaries are greater than those in their home countries, but equally unattractive to expatriates who home country salary levels are greater than those of the host country.

Region-based policy. This is something of a compromise between the home based and host based policies whereby expatriates working in their home regions (for example, an Italian in Germany) are compensated at lower levels than those working in regions far from home, for example, an American working in Saudi Arabia.

The balance sheet accommodates four categories of expenses likely to be incurred by expatriate families. According to Dowling and Welch (2004, pp. 146-147), these are:

Goods and services: home country outlays for items such as food, clothing, personal care, household furniture, recreation, transportation and medical care Housing: the major costs associated with the employee's principal residence Income taxes: payments to federal and local governments for personal income taxes Reserve: contributions to savings, benefits, pensions, investments, education expenses, and so on.

GLOBAL OPERATIONS MANAGEMENT CHOICE OF MANUFACTURING LOCATION

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Following is the list of factors to be considered in the choice of an optimal manufacturing location:

Country factors include factor costs, politics and culture Technological factors include set-up costs, minimum efficient scale and the availability of flexible manufacturing technology Product factors include value-to-weight ratio and whether or not the product serves universal needs.

Major factors to be considered are:

availability of raw materials skilled but (preferably) inexpensive labor sources of energy Transportation facilities.

Other factors are:

perishability of the product value-to-weight ratio weight loss in processing (for example, canned fruit, oil products) available services (for example, transportation, power) location of competitors; and location of complementary producers Requirements of specific industries are as follows: Machinery manufacture The manufacture of machinery requires creative and skilled labour, energy for processing raw materials, an economy in need of such products and the means for distributing the finished goods. For example, the large farms of the US and Canada led to the invention and manufacture of large scale farm machinery.

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Electronic products Electronic products required skilled labour, an established machinery industry and investment capital. For example, the location of the computer hardware industry in Silicon Valley in Northern California is due largely to the initial R&D conducted in the laboratories of universities and corporations in the San Francisco area. Shipbuilding The industry must be located adjacent to deep, quiet waters. Skilled labour must be available and raw materials, especially steel, must be manufactured nearby. Examples of this are the Tyne and Clyde Rivers in England before World War II , Japan after World War II and Korea more recently because of lower labour costs. Product factors Two product features influence location decisions. They are:

value-to-weight ratio universal needs. Value-to-weight ratio High value-to-weight ratio products such as electronic goods have low transportation costs and, other things being equal, it makes sense to produce them in one optimal location and serve world markets from there. Low value-weight ratio products such as sugar, bulk chemicals, paint and petroleum products have large transportation costs. Wherever possible after consideration of all issues, it makes sense to produce these goods in multiple locations close to their markets.

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Universal needs Products which satisfy common needs such as steel, bulk chemicals and personal computers are best produced at a single location because there is little need for local responsiveness.

MAKE-OR-BUY DECISIONS
International businesses invariably face decisions about whether they make all or just some of the components used in their final product and therefore buy in from other sources ( outsourcing ) those components they decide not to make. This make-or-buy decision is related to the degree to which a firm is vertically integrated: that is, the extent to which a firm is its own supplier and market. At one extreme a firm can make all of its own inputs and be its own supplier; at the other extreme, it can buy all its inputs and rely on external suppliers. Partial integration implies that some components are made and others bought. A major benefit of making inputs (backward or upstream integration) is the degree of control maintained over cost, quality and timeliness of delivery. Major drawbacks are the cost of investment and expertise needed to provide these inputs. A benefit of buying is the ability to choose one or more suppliers. A corresponding drawback is the reliance on suppliers. The trade-offs associated with make-or-buy decisions are summarized in following table: -

Make control over costs Advantages control over quality control over delivery

Buy choice among suppliers avoid their business risks no additional investment no need to learn about a

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not competing for supply new business develop new expertise increased investment Drawbacks need for expertise need for management supplier may go out of may be inefficient overspecialization Make-or-buy decisions in an international firm may be complicated because they are made relative both to the whole company and to each of its subsidiaries. Three make-or-buy options exist:

reliance on outsiders need to compete for

supplies

business

a subsidiary is fully integrated and makes its own parts a subsidiary is vertically integrated with other parts of the company and buys inputs from other subsidiaries or from the parent company. there is no vertical integration and inputs are obtained from outside suppliers. The 'real world' is seldom so simple and a wide variety of combinations is possible. However, there is another way to obtain some of the benefits of vertical integration without incurring some of the costs: through strategic alliances. Bear in mind from our discussion in Chapter 8 that strategic alliances have costs as well as benefits. The principal cost may be giving away technological know-how. Strategic alliances in the make-or-buy context may be said to come in two sizes. The larger is between two or more companies of similar size. Your textbook cites alliances between Kodak and Canon to manufacture copiers to be sold by Kodak; between Motorola and Toshiba to cross-licence their respective technologies; and between General Motors and Toyota to build the Chevrolet Nova as a joint - 102 -

venture. The smaller size of strategic alliance is between a large company such as Toyota and a number of small-parts suppliers, some of whom supply only Toyota while others supply most of their output to Toyota . This is the more likely scenario in make-or-buy situation, where Toyota does not have production facilities for all of the thousands of parts needed to construct a motor vehicle.

MATERIALS MANAGEMENT
Materials management and physical distribution are concerned with the means by which inputs get to the production site and the finished product gets to the customer. If we show this process from suppliers to customers, it could be displayed as in the figure: -

There are other support activities that go hand in hand with procurement. These are purchasing (if the inputs are bought rather than made), maintenance of buildings and equipment, and technical functions which provide the production facility with manufacturing specifications. The procurement process ends with the supply of inputs to production, but the system must be geared to providing the right quantity of inputs. Is a materials inventory to be held or is there a just-in-time (JIT) system in operation? We will address JIT in the next section, but if an inventory is to be held, what level of stock is appropriate? Decisions such as these are germane to the position of the materials management cell in the organisation structure.

PRODUCTION AND MATERIALS TECHNOLOGY

New manufacturing technologies introduced over the last two or three decades include robots, numerically-controlled machining tools and computer software for product design, engineering analysis and control of manufacturing machinery. This technology is called computer-integrated manufacturing (CIM): it is also

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called flexible manufacturing systems. CIM coordinates robots, machines, product design and engineering analysis through a single computer. CIM is able to produce products of different sizes, types and customer requirements on the one assembly line without slowing production. It does this through three sub-components:

computer-aided design (CAD) . Computers are used to assist in the drafting, design, and engineering of new parts. Hundreds of design options can be explored, as can scaled-up or scaled-down versions of the original.

computer-aided manufacturing ( CAM ). Computer-controlled machines in materials handling, fabrication, production and assembly greatly increase the speed at which products can be manufactured. CAM also permits a production line to shift rapidly from producing one product to any variety of other products by changing the instruction tapes or software in the computer.

administrative automation . The computerised accounting, inventory control, billing and shop floor tracking systems allow managers to monitor and control the manufacturing process. The JIT system, as discussed in the reading from your textbook, is part of this total system

PART II

CULTURAL ENVIRONMENT, MANGING DIVERSITY, HOFSTED STUDY, EDWARD T HAL STUDY>>> REFER SLIDES FOR THIS PORTION.

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CULTURE DEFINED The word 'culture' is derived from the Latin cultus, meaning cult or worship. The word culture in our society has many connotations: artistic, elitist and biological to name but a few. In the context of international business, culture may be defined as learned patterns of behavior or guidelines for behavior which are primarily passed on from parents to their children but also by social organizations, special interest groups, the government, schools, and churches. Common ways of thinking and behaving that are developed are then reinforced through social pressure. This learning and adjusting is called acculturation. Another definition of culture is that it is a learned, shared, compelling, interrelated set of symbols the meaning of which provides a set of orientations for members of a society. The latter definition contains five important elements:

culture is learned behavior culture is shared: the group transcends the individual and thus defines membership of the society culture is compelling: individuals are not aware that their behavior is determined by culture culture is interrelated: each facet of culture may not be understood in isolation, meaning that the culture must be studied as a complete entity culture provides orientation: groups react in the same way to a given stimulus, so that understanding culture can help to determine how individuals might react in various situations

Individuals may be influenced by cultures other than the societal culture defined above, and the societal culture may be subjected to the influence of national laws, the type of government in power, the state of the economy, and even technology. We will call this composite entity the societal or national culture. Other cultures which affect individual behavior are:

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Corporate Or Organizational Culture : the set of values, guiding beliefs, work systems and practices, understandings, rules and codes of conduct and ways of thinking shared by members of an organization, and taught to new members as correct (Nankervis et al. 2005); and

Professional Culture: the set of values, beliefs, understandings and ways of thinking shared by members of a profession (for example, accountants, engineers, managers).

CULTURAL DIMENSIONS OF BUSINESS

All cultural phenomena do not have the same importance for business. In this section we examine those cross-cultural issues that practicing managers of international business must understand. 1. Social structure Social structure includes a number of cultural features that can influence the quality of workers available to an international business. The more important of these are:

Ranking by ethnic, racial, economic, educational or caste background Commonly cited examples are the position of native Indians in Latin America, Algerians in France, the Buraku people of Japan , the Osi of Nigeria, and the Dalits of India. In the US , which likes to consider itself classless, many barriers exist for such groups as Jews, African-Americans, Hispanics - and women. Such barriers effectively deny organizations considerable talent and may also lose potential customers. A newspaper article by Macwan (2001, p. 11) in the Straits Times estimates there are 250 million people in South Asia 'condemned to servitude and segregation by caste discrimination'. For example, in India where the caste system was abolished in 1949, lower caste people known as the Dalits still - 106 -

exist and are discriminated against. Dalits make up 16% of India 's one billion population, that is, 160 million, or about eight times the population of Australia ! Read Figure 2.3 for examples of the difficulties faced by these socalled untouchables of the 21st century.

Occupational Status Societies vary considerably in the status they accord different occupations. In Australia, top students have been, traditionally, attracted to the professions of medicine and law, but not to engineering. In Germany and Japan, engineering is a high status occupation. In Argentina, law and architecture are more prestigious than business or engineering.

2. Language As the vocabulary and grammatical structure of every language are highly idiosyncratic, current theories about language and culture argue that language affects the way in which people think. A common vocabulary and syntax results in common thought patterns among the people within a particular language group as well as common behaviors, attitudes and emphases. For example, in Arabic there are about 6000 words for describing the camel and its equipment; similarly the Inuit have over 200 words for describing snow. English by contrast has fewer words for describing camels and snow, but its multiple origins (Greek, Latin, French and others) give it a broad scope and it has an extensive vocabulary for business-related issues. For this reason, English is the most commonly used second language for those for whom it is not the 'mother tongue'. Communication difficulties for international business managers arise when: - 107 -

the manager does not speak or understand the local language the manager speaks and understands the language a little, but not sufficiently to understand the nuances of meaning which are present in all languages the manager has to rely on the services of a translator who may not be equally fluent in both languages and either misses a point or mistranslates it; and/or wishes to gain some personal advantage by deliberately mis-translating

However, there are times when we may understand the language but not the slang. 3. Time Concepts of time vary widely between cultures. In some countries 'time is money': in other countries this attitude is considered vulgar and even offensive. In Europe and North America, punctuality is respected and to arrive late for an appointment is considered disrespectful. In the Middle East and parts of Africa and South America, being late for a meeting may be acceptable. Closely related to the concept of time is the cultural view of the future. In most English speaking countries, people believe they have the power to control, or at least influence, future events. This belief is a very positive view of time. Other people express a more negative view and behave accordingly, stoically submitting to a fate that they see as beyond their control. 4. Religion, ethics and superstition Managers are also interested in the dominant or state religion of the country, the importance of religion in the society, the degree of religious homogeneity or heterogeneity and the degree of tolerance of religious diversity, ethics and superstition. Religion: The dominant religion influences everyday activities such as opening and closing times, holidays, ceremonies and available foods. A company's

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operations must be geared to these factors. Sunday, for example, is the Sabbath day in Christian countries; Friday is the Sabbath in Islamic countries. The dominant religion affects production because of these issues, but it is worthwhile remembering that it also affects consumption. The importance of religion is also a concern for business. Where religious beliefs are fundamental to the society there will be little flexibility in terms of adherence to religious holidays and low tolerance of religious mistakes by foreigners. Take the example of the heavily commercialized celebration of St Valentine's Day where romantics at heart exchange cards, flowers, chocolates, and gifts as expressions of their love. Each year Hindu nationalists issue warnings that they will shave the heads of young lovers celebrating St Valentine's Day and beat them. The reasoning for this is that the Hindu nationalist Shiv Sena party consider the celebration obscene and a violation of the Hindu cultural ethos. However, where religion plays a relatively minor role, people will be more relaxed about religious issues and more tolerant of the mistakes of foreigners. The degree of religious homogeneity or heterogeneity, and the degree of tolerance of religious diversity, will of course have varying degrees of significance for managers. Ethics: According to Hill 'ethical systems refer to a set of moral principles, or values, that are used to guide and shape behavior'. Ethics is a set of moral principles usually derived from religion. Thus there are Christian ethics, Islamic ethics, and Buddhist ethics and so on. Largely (but by no means exclusively) because of corporate misconduct, business ethics have become extensively important. Concern for stakeholders and the environment is increasingly relevant for managers of international businesses, as is bribery. Superstitions: These also affect international business in much the same ways as religion. Colors for example, should be used with great care. Black is the color for mourning in Christian countries as well as being the color for trendy clothing,

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whilst in the Middle East it stands for modesty. White is the color for mourning in Islamic countries. Red is considered lucky in China, as is yellow in Thailand. White carnations, which are often worn at formal events in some English speaking countries, are a symbol of death in some East Asian countries. 5. Wealth and material possessions In most countries, wealth and material possessions are viewed as desirable attributes, but in some cultures, such as some Pacific Islanders, individuals work only long enough to earn a little money and then cease work until those funds have been exhausted. In other, generally more affluent cultures, people live to work and are interested in job security, participation in management and selfactualization rather than only straight monetary rewards. Managers in international business must identify the types of rewards that are considered important by employees in a particular culture. 6. Decision making Decision making in Western societies is typically the province of top management. In other cultures - Japan being the archetype - decision making is shared with subordinates to some degree. In some cultures it might be inappropriate for top managers to consult subordinates since executives are supposed to be knowledgeable in all matters. In such situations, it would be impossible to institute a participative management system. 7. Bribery In international business, bribery has two forms. The first involves large sums of money offered (generally) to political figures to give multinational enterprises an unfair advantage. This form of bribery is illegal and generally frowned upon in most cultures.

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The second form involves the payment of relatively small sums of money to minor officials to expedite some government procedures such as clearing goods through customs. These petty bribes are often called tips or gifts and are thought of by some as analogous to the tips given to waiters in restaurants. Other examples may be hiring extra employees, 'sponsoring' a host country manager's child by providing them accommodation in your own country and assisting their application to a university. These bribes are not seen as harmful or even illegal: they represent reasonable payment for services by civil servants who are often grossly underpaid by Western standards. However, they present a dilemma for managers from cultures where even the smallest bribe is deemed unethical.

HOFSTEDES STUDY
Gerard Hendrik Hofstede (born 2 October 1928, Haarlem) is an influential Dutch writer on the interactions between national cultures and organizational cultures, and is an author of several books including Culture's Consequences (2nd, fully revised edition, 2001) and Cultures and Organizations, Software of the Mind (2nd, revised edition 2005, with his son Gert Jan Hofstede). Hofstede's study demonstrated that there are national and regional cultural groupings that affect the behaviour of societies and organizations, and that are very persistent across time. Culture - Geert Hofstede's Model Based on his IBM study in 72 different countries, Hofstede identifies five of these differences in mental programming, which he calls five dimensions: 1. Power distance Power distance measures how subordinates respond to power and authority. In highpower distance countries (Latin America, France, Spain, most Asian and African countries), subordinates tend to be afraid of their bosses, and bosses tend to be paternalistic and autocratic. In low-power distance countries (the US, Britain, most of the

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rest of Europe), subordinates are more likely to challenge bosses and bosses tend to use a consultative management style. Power Distance Index (PDI) focuses on the degree of equality, or inequality, between people in the country's society. A High Power Distance ranking indicates that inequalities of power and wealth have been allowed to grow within the society. These societies are more likely to follow a caste system that does not allow significant upward mobility of its citizens. A Low Power Distance ranking indicates the society de-emphasizes the differences between citizen's power and wealth. In these societies equality and opportunity for everyone is stressed. 2. Collectivism versus Individualism In individualistic countries (France, Germany, South Africa, Canada, etc.), people are expected to look out for themselves. Solidarity is organic (all contribute to a common goal, but with little mutual pressure) rather than mechanical. Typical values are personal time, freedom, and challenge. In collectivist cultures (Japan, Mexico, Korea, Greece) individuals are bounded through strong personal and protective ties based on loyalty to the group during ones lifetime and often beyond (mirrored on family ties). Values include training, physical condition, the use of skills. See Appendix 2 for comments on differences between American and Chinese society on this dimension. What makes individualism in the United States is not so much the peculiar characteristics of each person but the sense each person has of having a separate but equal place in society.... This fusion of individualism and equality is so valued and so basic that many Americans find it most difficult to relate to contrasting values in other cultures where interdependence, complementary relationships, and valued differences in age and sex greatly determine a person's sense of self. Individuality is different and appears to be much more the norm in the world than United States-style individualism is. Individuality refers to the person's freedom to act differently within the limits set by the social structure. Compared to the United States, many other cultures appear to be much more tolerant of "eccentrics" and "local characters." This confusion of one kind of individualism with individuality at first appears paradoxical: We

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might suppose that a society which promises apparently great personal freedoms would produce the greatest number of obviously unique, even peculiar people, and yet for more than a century visitors to the United States have been struck by a kind of "sameness" or standardization. As one writer interpreted it, U.S. freedom allows everybody to be like everybody else.... While the individual (glorified as "the rugged individualist") is praised, historically individuals in the United States have made their achievements in loose groupings. What is different here is that the independent U.S. self must never feel bound to a particular group; he must always be free to change his alliances or, if necessary, to move on.... Cultures better characterized by values of individuality are likely to lack this kind of independence from the group, as well as individual mobility. Thus it may be that such cultures allow for greater diversity in personal behavior in order to give balance to the individual vis--vis the group, whereas the United States, characterized by loose groupings and high mobility, does not.

Individualism (IDV) focuses on the degree the society reinforces individual or collective, achievement and interpersonal relationships. A High Individualism ranking indicates that individuality and individual rights are paramount within the society. Individuals in these societies may tend to form a larger number of looser relationships. A Low Individualism ranking typifies societies of a more collectivist nature with close ties between individuals. These cultures reinforce extended families and collectives where everyone takes responsibility for fellow members of their group. 3. Femininity versus Masculinity Hofstedes study suggested that mens goals were significantly different from womens goals and could therefore be expressed on a masculine and a feminine pole. Where feminine values are more important (Sweden; France, Israel, Denmark, Indonesia), people tend to value a good working relationship with their supervisors; working with people who cooperate well with one another, living in an area desirable to themselves and to their families, and having the security that they will be able to work for their company as long as they want.

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Where the masculine index is high (US, Japan, Mexico, Hong Kong, Italy, Great Britain), people tend to value having a high opportunity for earnings, getting the recognition they deserve when doing a good job, having an opportunity for advancement to a higher-level job, and having challenging work to do to derive a sense of accomplishment. Masculinity (MAS) focuses on the degree the society reinforces, or does not reinforce, the traditional masculine work role model of male achievement, control, and power. A High Masculinity ranking indicates the country experiences a high degree of gender differentiation. In these cultures, males dominate a significant portion of the society and power structure, with females being controlled by male domination. A Low Masculinity ranking indicates the country has a low level of differentiation and discrimination between genders. In these cultures, females are treated equally to males in all aspects of the society. 4. Uncertainty avoidance When uncertainty avoidance is strong, a culture tends to perceive unknown situations as threatening so that people tend to avoid them. Examples include South Korea, Japan, and Latin America. In countries where uncertainty avoidance is weak (the US; the Netherlands; Singapore; Hong Kong, Britain) people feel less threatened by unknown situations. Therefore, they tend to be more open to innovations, risk, etc. Uncertainty Avoidance Index (UAI) focuses on the level of tolerance for uncertainty and ambiguity within the society - i.e. unstructured situations. A High Uncertainty Avoidance ranking indicates the country has a low tolerance for uncertainty and ambiguity. This creates a rule-oriented society that institutes laws, rules, regulations, and controls in order to reduce the amount of uncertainty. A Low Uncertainty Avoidance ranking indicates the country has less concern about ambiguity and uncertainty and has more tolerance for a variety of opinions. This is reflected in a society that is less rule-oriented, more readily accepts change, and takes more and greater risks. 5. Long-term versus Short-term orientation A long term orientation is characterized by persistence and perseverance, a respect for a hierarchy of the status of relationships, thrift, and a sense of shame. Countries include China; Hong Kong; Taiwan, Japan and India. A short-term orientation is marked by a

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sense of security and stability, a protection of ones reputation, a respect for tradition, and a reciprocation of greetings; favors and gifts. Countries include: Britain, Canada, the Philippines; Germany, Australia Geert Hofstede added the following fifth (5th) dimension after conducting an additional international study using a survey instrument developed with Chinese employees and managers. That survey resulted in addition of the Confucian dynamism. Subsequently, Hofstede described that dimension as a culture's long-term Orientation. Long-Term Orientation (LTO) focuses on the degree the society embraces, or does not embrace, long-term devotion to traditional, forward thinking values. High Long-Term Orientation ranking indicates the country prescribes to the values of long-term commitments and respect for tradition. This is thought to support a strong work ethic where long-term rewards are expected as a result of today's hard work. However, business may take longer to develop in this society, particularly for an "outsider". A Low Long-Term Orientation ranking indicates the country does not reinforce the concept of long-term, traditional orientation. In this culture, change can occur more rapidly as longterm traditions and commitments do not become impediments to change. Dr. Geert Hofstede conducted perhaps the most comprehensive study of how values in the workplace are influenced by culture. From 1967 to 1973, while working at IBM as a sychologist, he collected and analyzed data from over 100,000 individuals from forty countries. From those results, and later additions, Hofstede developed a model that identifies four primary dimensions to differentiate cultures. He later added a fifth dimension, Long-term Outlook. As with any generalized study, the results may or may not be applicable to specific individuals or events. In addition, although the Hofstede's results are categorized by country, often there is more than one cultural group within that country. In these cases there may be significant deviation from the study's result. An example is Canada, where the majority of English speaking population and the minority French speaking population in Quebec has moderate cultural differences. Geert Hofstede's dimensions analysis can assist the business person or traveler in better understanding the intercultural differences within regions and between counties.

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"Culture is more often a source of conflict than of synergy. Cultural differences are a nuisance at best and often a disaster." - Dr. Geert Hofstede CRITICISM OF HOFSTEDES MODEL Geert Hofstedes depiction of enduring and powerful national cultures or national cultural differences is legendary. If his findings are correct they have immense implications for management within and across countries, and for the future of nation states - including the prospects for greater European integration. However, closer examination of his research reveals that it relies, in my view, on fundamentally flawed assumptions. This article examines four crucial assumptions upon which his measurements are based. These assumptions are crucial in the sense that each is necessary for the plausibility of his identification claims. It is argued that they are all flawed and that therefore his national cultural descriptions are invalid and misleading.

CULTURAL ADAPTATION THROUGH SENSITIVITY TRAINING

Globalization not only requires the adoption of a cross-cultural perspective in order to successfully accomplish goals in the context of global economy but also needs a new and higher standard of selection, training, and motivation of people. As a result, cross-cultural training is fast becoming a recognizably important component in the world of international business. Cultural differences exist at home and abroad but, in many cases, international interaction creates problems, since people are separated by barriers such as time, language, geography, food, and climate. In addition, peoples' values, beliefs, perceptions, and background can - 116 -

also be quite different. In some cultures, e.g. the Germans, Swiss, and Austrians, punctuality is considered extremely important and lateness is not tolerated. By contrast, in other European and Latin American countries there is a different, somewhat ``looser'' approach to time with some degree of tolerance for lateness. Sojourners or expatriates who lack sensitivity or awareness of this ``time'' orientation can make severe interpersonal blunders, and then need cross-cultural training to avoid culture shock. THE NEED FOR CROSS-CULTURAL TRAINING Chen and Starosta (1996) believe that people have to develop their intercultural communication competence in order to live meaningfully and productively in the global village. According to Landis and Brislin (1983), as the workforce in various countries becomes more culturally diverse, it is necessary to train people to become more competent and thus to deal effectively with the complexities of new and different environments.. People who are sent abroad must develop such competence in order to be successful. Cross-cultural training has long been advocated as a means of facilitating effective cross-cultural .The importance of such training in preparing an individual for an intercultural work assignment has become increasingly apparent Numerous benefits can be achieved by giving these expatriates crosscultural training. It is seen as: A distinct advantage for organizations; A means for conscious switching from an automatic, homeculture international management mode to a culturally appropriate, adaptable and acceptable one; an aid to improve coping with unexpected events or culture shock in a new culture;

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A means of reducing the uncertainty of interactions with foreign nationals; and A means of enhancing expatriates' coping ability to by reducing stress and disorientation. It can reduce or prevent failure in expatriate assignments.

THE CROSS-CULTURAL CYCLE

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The Cross-Cultural Cycle describes the concept of cultural change which represents a transition between one's own culture and a new culture. Cultural change is part of a problem-solving process undergone by users. Here, the users are identified as sojourners and expatriates who experience a new culture which is unfamiliar and strange. In the initial stage of confrontation with the new culture, the user experiences a culture shock. Then full or partial acculturation takes place, depending on factors such as former experience, length of stay, cultural distance between home and new culture, training, language competency among other factors. The greater the users' ability to acculturate, the less the impact of culture shock on them. The ability to acculturate and reduce the impact of the culture shock can - 119 -

be developed through an appropriate and effective cross-cultural training. Apart from that, training can also help the users to develop intercultural communication competence, which is needed to adapt better and perform well in the new environment. As a result, once sojourners and expatriates have succeeded in completing the cycle, they will be more familiar with it the next time they confront a new culture. The change process will be improved and becomes less complicated. However, the success or failure of the users to adjust and perform depends on how they respond to the cycle. Culture Culture is the complex whole, which includes belief, knowledge, art, law, morals and customs and any capabilities and habits acquired by a person as a member of a society. According to Hall (1959), culture is communication and communication is culture. Acculturation Acculturation is defined as, ``Changes that occur as a result of firsthand contact between individuals of differing cultural origins'' (Redfield et al., 1936). It is a process whereby an individual is socialized into an unfamiliar or new culture. In short, it refers to the level of adoption of the predominant culture by an outsider or minority group. According to Gordon, 1967; Garza and Gallegos, 1985; Domino and Acosta, 1987; Marin and Marin, 1990; Negy and Woods, 1992, the greater the acculturation, the more the language, customs, identity, attitudes and behaviors of the predominant culture are adopted. However, many sojourners and expatriates experience difficulty in fully acculturating, only adopting the values and behaviors they find appropriate and acceptable to their existing cultures. It is a question of willingness and readiness.

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Culture shock Many expatriates experience what is called ``culture shock'' when they first confront or come into contact with a different culture. Adler (1997) defines this as the frustration and confusion as a result of being bombarded by too many new and un-interpretable cues. Culture shock is also the expatriate's reaction to a new, unpredictable, and consequently uncertain environment (Black, 1990) Cross-cultural training Training in general can be defined as any intervention aimed at increasing the knowledge or skills of the individual. This can help them cope better personally, work more effectively with others, and perform better professionally. It is an organized educational experience with the objective of helping expatriates learn about, and therefore adjust to, their new home in a foreign land. Cross-cultural training may be defined as any procedure used to increase an individual's ability to cope with and work in a foreign environment. There are many types of training that can be given to people to be sent abroad depending upon their objectives, the nature of their responsibilities and duties, the length of their stay, and their past experiences. As Kealey and Protheroe also point out, ``The effectiveness of the various types of training will naturally depend to some extent on the time and resources available for undertaking them, the quality of trainers, and the possibilities for in-country training'' (p. 149). Some of the types of training available to expatriates are technical awareness, training, practical information, area studies, and cultural intercultural effectiveness skills, interpersonal

sensitivity training. Intercultural communication competence

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Many theorists have wrestled with the exact nature of the definition of ``competence'' in the context of cross-cultural adaptation. However, one of its most common definitions is ``effectiveness'' (Hawes, and Kealey, 1979; Abe and Wiseman, 1983; Gudyskunst and Hammer, 1984). This effectiveness is generally described in terms of skills, attitudes, or traits which the sojourner and expatriate use to build a successful interaction (Ruben, 1976). Scholars have also argued that the concept of communication competence can be broken down into three broad sets of skills: affective, cognitive, and behavioral (Chen and Starosta, 1996). Wiseman and Koester (1993) examined the relationship between intercultural communication competence, knowledge of the host culture, and cross-cultural attitudes. As a result, they conceptualized intercultural communication competence as: Culture-specific understanding of the other; Culture-general understanding; and Positive regard of the other.

SENSITIVITY TRAINING
Sensitivity training is about making people understand about

themselves and others reasonably, which is done by developing in them social sensitivity and behavioral flexibility. Social sensitivity in one word is empathy. It is ability of an individual to sense what others feel and think from their own point of view. Behavioral flexibility is ability to behave suitably in light of understanding. Sensitivity training is often offered by organizations and agencies as a way for members of a given community to learn how to better understand and appreciate the differences in other people. It asks training participants to put themselves into another person's place in hopes that they will be able to better relate to others who are different - 122 -

than they are. Sensitivity training often specifically addresses concerns such as gender sensitivity, multicultural sensitivity, and sensitivity toward those who are disabled in some way. The goal in this type of training is more oriented toward growth on an individual level. Sensitivity training can also be used to study and enhance group relations, i.e., how groups are formed and how members interact within those groups. Sensitivity Training involves such groupings as T-Groups, encounter groups, laboratory-training groups and human awareness groups. Sensitivity training attempts to teach people about themselves and why and how they relate to, interact with, impact on and are impacted upon by others. PROCEDURE OF SENSITIVITY TRAINING Sensitivity Training Program requires three steps: 1. Unfreezing the old values It requires that the trainees become aware of the inadequacy of the old values. This can be done when the trainee faces dilemma in which his old values is not able to provide proper guidance. The first step consists of a small procedure: a. An unstructured group of 10-15 people is formed. b. Unstructured group without any objective looks to the trainer for its guidance c. But the trainer refuses to provide guidance and assume leadership d. Soon, the trainees are motivated to resolve the uncertainty e. Then, they try to form some hierarchy. Some try assume leadership role which may not be liked by other trainees - 123 -

f. Then, they started realizing that what they desire to do and realize the alternative ways of dealing with the situation

2. Development of new values With the trainers support, trainees begin to examine their interpersonal behavior and giving each other feedback. The reasoning of the feedbacks are discussed which motivates trainees to experiment with range of new behaviors and values. This process constitutes the second step in the change process of the development of these values. 3. Refreezing the new ones This step depends upon how much opportunity the trainees get to practice their new behaviors and values at their work place. The objectives of sensitivity training are: 1. Increased understanding, insight, and self-awareness about ones own behavior and its impact on others, including the ways in which others interpret ones behavior. 2. Increased understanding and sensitivity about the behavior of others, including better interpretation of both verbal and nonverbal clues, which increases awareness and understanding of what the other person is thinking and feeling.

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3. Better understanding and awareness of group and inter-group processes, both those that facilitate and those that inhibit group functioning. 4. Increased diagnostic skills in interpersonal and inter-group situations. 5. Improvement in individuals ability to analyze their own behavior, as well as to learn how to help themselves and others with whom they come in contact with to achieve more satisfying, rewarding and effective interpersonal relationships.

CULTURAL SENSITIVITY Extensive research across disciplines has investigated the question of how to create culturally competent managers (e.g., Chen and Starosta, 1996; Hinckley and Perl, 1996; Post, 1997; Shanahan, 1996; Spitzberg and Cupach, 1989). From the numerous definitions of competence, one subsumes the ongoing discussion quite well: competence may be described as (work-related) knowledge, skills and aptitudes, which serve productive purposes in firms. It distinguishes outstanding from average performers (Dalton, 1997; Kochanski, 1997; Nordhaug, 1998; Nordhaug, 1993). When operationalizing cultural competence, previous research has mostly focused on one of the following dimensions: the affective (motivation), the cognitive (knowledge) or the conative (skills) dimension. However as results have shown, this emphasis on just one dimension falls short of depicting this complex construct. Therefore, more recent attempts to measure cultural competence integrate all three dimensions. Among these holistic approaches, the so-called Third Culture Approach by Gudykunst et al. (1977) has found a particularly widespread reception in the field. Under the Third-

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Culture approach, a manager displays cultural competence, when he/she interprets and judges culturally overlapping situations neither from an ethnocentric perspective, nor from an idealised host culture perspective, but assumes a neutral position. To achieve this neutral position, Gudykunst et al. (1977) stress the importance of the affective component of cultural competence, which may be called cultural sensitivity. In their model, cultural sensitivity is a prerequisite which instils the acquisition of knowledge (cognitive dimension) and skills (conative dimension). Gudykunst et al. (1977) see cultural sensitivity as the psychological link between home and host culture. This notion clearly contradicts the current business practice mentioned earlier, where language or professional knowledge and skills are deemed key prerequisites for successful foreign assignments. Cultural Sensitivity is the ability to be open to learning about and accepting of different cultural groups. It leads to Cultural Competency. The following diagram shows an individuals path to cultural competency: -

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Multiculturation Selective Adoption Appreciation/Valuing

Acceptance/Respect Understanding Awareness Ethnocentricity

Individuals Path to Cultural Competency 1. Ethnocentricity This is a state of relying on our own, and only our own, paradigms based on our cultural heritage. We view the world through narrow filters, and we will only accept information that fits our paradigms. resist and/or discard others. 2. Awareness This is the point at which we begin to realize that there are things that exist which fall outside the realm of our cultural paradigms. 3. Understanding- This is the point at which we are not only aware that there are things that fall outside our cultural paradigms, but we see the reason for their existence. We

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4. Acceptance/Respect - This is when we begin allowing those from other cultures to just be who they are, and that it is OKAY for things to not always fit into our paradigms. 5. Appreciation/Value- This is the point where we begin seeing the worth in the things that fall outside our own cultural paradigms. 6. Selective Adoption - This is the point at which, we begin using things that were initially outside our own cultural paradigms. 7. Multiculturation- This is when we have begun integrating our lives with our experiences from a variety of cultural experiences.

A CULTURAL SENSITIVITY TRAINING OUTLINE

When developing cultural sensitivity in the context of international business, a major focus lies on preparing managers confronted with culturally overlapping situations with respect to two goals: (1) identifying features of the host countrys cultural orientation systems which have an effect on activities and actions, and (2) incorporating these features in their spectrum of actions to accomplish specific marketing tasks under foreign cultural frameworks and in interaction with partners shaped by these frameworks. As will be explained later on in more detail, cultural orientation systems are developed through socialisation within a specific cultural environment. They influence perception, thought, values and behaviour of society members and, in their way, establish membership of this society. Despite the high

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failure rates of international assignments due to a lack of international managers cultural sensitivity and the unsuccessful integration of family members into the host culture (e.g., Bird and Dunbar, 1991; Black, 1988; Black and Gregersen, 1991; Harvey, 1985), participants in such training most commonly do not expect major difficulties regarding their competence in culturally overlapping situations. They have hardly any idea about which effects cultural differences can have on private and business matters (Bittner, 1996; Bittner and Reisch, 1994). Taking these circumstances into account, an exemplary sequence of training issues in intercultural preparatory programs is outlined below: Create a learning need: The first step in a culture training is to create awareness among the participants that a confrontation of different cultural orientation systems is bound to lead to problems in interaction. Participants need to realise that misunderstandings are not a result of personality or character, but are due to the unreflected transfer of home-country cultural patterns. In this phase, it is also necessary to encourage reflection on ones own culture and personality. This facilitates learning success and prevents the establishment of learning barriers (e.g., Bittner, 1996; Goodman, 1994). Put received judgements into perspective: This training step aims at understanding and accepting different cultural standards which represent the operationalisation of a countrys cultural orientation system. This training phase focuses on the fact that the mere knowledge of a different cultural framework does not necessarily lead to a willingness to accept and to adjust to these conditions. This training step addresses the problem of different cultures significance and superiority, which often results in highly visible ethnocentric arrogance (Hentze and Kammel, 1994). The - 129 -

learning effect consists of questioning internalized values, which are often accepted without reflection and therefore seen as superior to others. Partially adopt local judgements: This training step demonstrates to trainees why the majority of interaction partners in the target country appreciate their own culture as it is. This appears necessary in order to partially adopt cultural values. Mentally, it imposes entirely different behaviour on the trainees than merely accepting the fact that some aspects of ones own cultural orientation system are (unfortunately so far) not common in the target culture (e.g., Bittner, 1996; Landis and Bhagat, 1996). Weighting the personal influence: Here, the training intention can be subsumed under the label of training humbleness. Due to the intensive analysis of intercultural matters, the trainees realise that opportunities to influence a local culture are far less than expected before the training. Bittner (1996) calls it the path from a managers self-understanding as a highcarat manager towards a mediator between cultural worlds. This changed perspective can produce massive insecurity which needs to be dealt with adequately. For a final integration of single training steps, it seems desirable to give a robust orientation framework (Bhawuk and Triandis, 1996). This leads to the fundamental question of which concept of culture represents the theoretical foundation for such a training. For the purpose of developing cultural sensitivity, the concept of culture selected should provide extensive coverage of the complex phenomenon culture and, for applicability purposes, be actionrelevant than merely abstract. In the following section, key concepts of - 130 -

culture are presented and evaluated for their practical relevance to cultural sensitivity training.

WORKFORCE DIVERSITY
Workplace diversity refers to the variety of differences between people in an organization. That sounds simple, but diversity encompasses race, gender, ethnic group, age, personality, cognitive style, tenure, organizational function, education, background and more. Diversity not only involves how people perceive themselves, but how they perceive others. Those perceptions affect their interactions. For a wide assortment of employees to function effectively as an organization, human resource professionals need to deal effectively with issues such as communication, adaptability and change. Diversity will increase significantly in the coming years. Successful organizations recognize the need for immediate action and are ready and willing to spend resources on managing diversity in the workplace now.

Workforce Diversity refers to policies and practices that seek to include people within a workforce who are considered to be, in some way, different from those in the prevailing constituency. In this context, here is a quick overview of seven predominant factors that motivate companies, large and small, to diversify their workforces: As a Social Responsibility Because many of the beneficiaries of good diversity practices are from groups of people that are disadvantaged in our communities, there is certainly good reason to consider workforce diversity as an exercise in good corporate responsibility. By diversifying our workforces, we can give individuals the break they need to earn a living and achieve their dreams.

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As an Economic Payback Many groups of people who have been excluded from workplaces are consequently reliant on tax-supported social service programs. Diversifying the workforce, particularly through initiatives like welfare-to-work, can effectively turn tax users into tax payers. As a Resource Imperative The changing demographics in the workforce, that were heralded a decade ago, are now upon us. Todays labor pool is dramatically different than in the past. No longer dominated by a homogenous group of white males, available talent is now overwhelmingly represented by people from a vast array of backgrounds and life experiences. Competitive companies cannot allow discriminatory preferences and practices to impede them from attracting the best available talent within that pool. As a Legal Requirement Many companies are under legislative mandates to be non-discriminatory in their employment practices. Non-compliance with Equal Employment Opportunity or Affirmative Action legislation can result in fines and/or loss of contracts with government agencies. In the context of such legislation, it makes good business sense to utilize a diverse workforce. As a Marketing Strategy Buying power, particularly in todays global economy, is represented by people from all walks of life (ethnicities, races, ages, abilities, genders, sexual orientations, etc.) To ensure that their products and services are designed to appeal to this diverse customer base, smart companies, are hiring people, from those walks of life - for their specialized insights and knowledge. Similarly, companies who interact directly with the public are finding increasingly important to have the makeup of their workforces reflect the makeup of their customer base. As a Business Communications Strategy - 132 -

All companies are seeing a growing diversity in the workforces around them - their vendors, partners and customers. Companies that choose to retain homogenous workforces will likely find themselves increasingly ineffective in their external interactions and communications. As a Capacity-building Strategy Tumultuous change is the norm in the business climate of the 21st century. Companies that prosper have the capacity to effectively solve problems, rapidly adapt to new situations, readily identify new opportunities and quickly capitalize on them. This capacity can be measured by the range of talent, experience, knowledge, insight, and imagination available in their workforces. In recruiting employees, successful companies recognize conformity to the status quo as a distinct disadvantage. In addition to their jobspecific abilities, employees are increasingly valued for the unique qualities and perspectives that they can also bring to the table. According to Dr. Santiago Rodriguez, Director of Diversity for Microsoft, true diversity is exemplified by companies that hire people who are different knowing and valuing that they will change the way you do business. For whichever of these reasons that motivates them, it is clear that companies that diversify their workforces will have a distinct competitive advantage over those that dont. Further, it is clear that the greatest benefits of workforce diversity will be experienced, not by the companies that that have learned to employ people in spite of their differences, but by the companies that have learned to employ people because of them.

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