Você está na página 1de 234

i

INTERNATIONAL BUSINESS CASE STUDY


QCF Level 6 Unit

Contents
Chapter Title Introduction to the Study Manual Unit Specification (Syllabus) Coverage of the Syllabus by the Manual 1 Introduction to the Case Study Introduction Getting to Grips with the Scenario Appendix: Delta Airlines International Business Planning Introduction Planning Process Individual Region/Country Annual Plans Planning and Forecasting Techniques Planning and Change The World Trade Environment Introduction The World Trading Environment Classifying the World A New Focus Global Convergence Theories of International Trade The Composition of World Trade International Institutions Globalisation Analysing the International Business Environment Introduction Political Factors Economic Factors Social/Cultural Factors Technological Factors Legal Factors Ethical and Green/Environmental Issues The Three Cs Framework Using International Environment Analysis Techniques The Micro and Internal Environment Introduction Internal (Situational) Analysis Analysis of Competitive Market Structure Page v vii xiii 1 2 4 7 21 22 22 27 30 34 37 39 39 40 43 45 49 54 57 63 65 65 66 69 73 76 77 82 84 89 90 90 96

ABE

ii

Chapter Title 6 Defining Overarching Intent: Mission, Goals and Policies Introduction The Concept of Mission Goals and Policies Mission and Strategy Development Selection and Evaluation of Strategies Introduction Ansoff Growth Matrix Porters Generic Strategy Model Bowman's Strategy Clock Harrel and Keifer's Business Portfolio Strategies for Hypercompetitive Markets: Reducing the Impact of Competition Marketing Mix Strategic Options Strategic Direction and Implementation Market Entry Strategies Introduction Market Entry Options Selection of Entry Modes The Entry Decision Management, Organisation and the International Business Introduction Organisation and Management Organisational Culture International Human Resources Management Strategy International Labour Relations Finance and the Multinational Company Introduction Obtaining Funds Internationally Transfer Pricing International Investment Decisions Implementation, Evaluation and Control Introduction Managing the Implementation Process Performance Evaluation and Control Techniques of Performance Management Management and Change in International Organisations Introduction The Dynamics of Change The Driving Forces of International Change The Nature of Change The Process of Change Organisational Culture and Change

Page 107 108 108 111 113 115 116 116 121 123 125 126 127 135 139 140 140 144 148 153 154 154 160 162 169 171 172 172 174 177 183 184 184 185 189 195 196 196 196 199 201 207

10

11

12

ABE

iii

Chapter Title 13 Analysing the Case Study and the Examination Introduction Conducting the Analysis The Examination

Page 211 212 212 216

ABE

iv

ABE

Introduction to the Study Manual


Welcome to this study manual for International Business case Study

The manual has been specially written to assist you in your studies for this QCF Level 6 Unit and is designed to meet the learning outcomes listed in the unit specification. As such, it provides thorough coverage of each subject area and guides you through the various topics which you will need to understand. However, it is not intended to "stand alone" as the only source of information in studying the unit, and we set out below some guidance on additional resources which you should use to help in preparing for the examination. The syllabus from the unit specification is set out on the following pages. This has been approved at level 6 within the UK's Qualifications and Credit Framework. You should read this syllabus carefully so that you are aware of the key elements of the unit the learning outcomes and the assessment criteria. The indicative content provides more detail to define the scope of the unit. Following the unit specification is a breakdown of how the manual covers each of the learning outcomes and assessment criteria. The main study material then follows in the form of a number of chapters as shown in the contents. Each of these chapters is concerned with one topic area and takes you through all the key elements of that area, step by step. You should work carefully through each chapter in turn, tackling any questions or activities as they occur, and ensuring that you fully understand everything that has been covered before moving on to the next chapter. You will also find it very helpful to use the additional resources (see below) to develop your understanding of each topic area when you have completed the chapter. Additional resources ABE website www.abeuk.com. You should ensure that you refer to the Members Area of the website from time to time for advice and guidance on studying and on preparing for the examination. We shall be publishing articles which provide general guidance to all students and, where appropriate, also give specific information about particular units, including recommended reading and updates to the chapters themselves. Additional reading It is important you do not rely solely on this manual to gain the information needed for the examination in this unit. You should, therefore, study some other books to help develop your understanding of the topics under consideration. The main books recommended to support this manual are listed on the ABE website and details of other additional reading may also be published there from time to time. Newspapers You should get into the habit of reading the business section of a good quality newspaper on a regular basis to ensure that you keep up to date with any developments which may be relevant to the subjects in this unit. Your college tutor If you are studying through a college, you should use your tutors to help with any areas of the syllabus with which you are having difficulty. That is what they are there for! Do not be afraid to approach your tutor for this unit to seek clarification on any issue as they will want you to succeed! Your own personal experience The ABE examinations are not just about learning lots of facts, concepts and ideas from the study manual and other books. They are also about how these are applied in the real world and you should always think how the topics under consideration relate to your own work and to the situation at your own workplace and others with which you are familiar. Using your own experience in this way should help to develop your understanding by appreciating the practical application and significance of what you read, and make your studies relevant to your

ABE

vi

personal development at work. It should also provide you with examples which can be used in your examination answers. And finally We hope you enjoy your studies and find them useful not just for preparing for the examination, but also in understanding the modern world of business and in developing in your own job. We wish you every success in your studies and in the examination for this unit. The Association of Business Executives June 2011

ABE

vii

Unit Specification (Syllabus)


The following syllabus learning objectives, assessment criteria and indicative content for this Level 6 unit has been approved by the Qualifications and Credit Framework.

Unit Title: International Business


Guided Learning Hours: 210 Level: Level 6 Number of Credits: 25

Learning Outcome 1
The learner will: Understand the international business environment facing global operators. Assessment Criteria The learner can: 1.1 Identify and describe the key challenges facing global businesses and organisations. Indicative Content 1.1.1 The fundamental shift taking place in the world economy and the inexorable move from a world of nation states to a borderless world. 1.1.2 The independent regional and global economic system with the opportunities created for businesses to extend their reach, expand their revenues, drive down costs and accelerate profitability. 1.1.3 The trends in the growth of economic and political regional groupings such as the EU, NAFTA, ASEAN, MERCOSUR, ECOWAS, and other trade blocs. 1.1.4 The changing balance of world trade with the growth of the BRIC nations (China, India, Brazil and Russia). 1.1.5 The advantages and benefits conferred by the Information Telecommunication (ITC) revolution sweeping the business and consumer worlds, and the associated changes in logistics, distribution and supply chains. 1.1.6 The accelerated flows of foreign direct investment (FDI), leading to the dislocation between production and consumption, ending the dependence on national coherence. 1.2.1 Define globalisation and its implications for regions, countries, markets and customers: 1. The pros and cons of globalisation, i.e. prosperity and impoverishment. 2. The key aim of globalisation: combining high cost reduction pressures and high pressure for local responsiveness. 1.2.2 The two main components: the globalisation of markets (customers), and the globalisation of production to deliver best possible value to all markets served by the organisation.

1.2 Describe globalisation and international trade and recognise the key drivers.

ABE

viii

1.2.3 The key drivers of globalisation and international trade i.e. ICT developments (internet, mobile phones), multinationals, transnationals, urbanisation, global consumers, together with the prevailing counter culture as typified by the G20 protests, with the use of the internet (social networks) as responses to globalisation. 1.2.4 The role of international institutions such as the World Trade Organisation (WTO), World Bank, International Monetary Fund (IMF), Organisation for Economic Co-operation and Development (OECD), the G20 and other facilitating/transitional/policy-making bodies and forums. 1.3 Evaluate the impact of emerging issues on international activities. 1.3.1 The dynamic international environment as evidenced by the global financial crisis of 2008/09 and the issues associated with global warming. 1.3.2 The increasing impact of microprocessors, telecommunications, transportation technology and the internet on creating paradigm shifts in production, consumption and supply chain relationships. 1.3.3 The growing role of nation states and regions in monitoring and challenging the pace of change for organisations and consumers. 1.3.4 The activities and policies of international environmental organisations and NGOs. 1.3.5 The significance and growing importance of Corporate Social Responsibility (CSR) globally.

Learning Outcome 2
The learner will: Know how to develop a strategic business plan for an international organisation. Assessment Criteria The learner can: 2.1 Explain the role of strategy in the international context. Indicative Content 2.1.1 The role of strategy, the issues of strategic choice: defining what is necessary to achieve the corporate objective(s), e.g. to most business organisations the principal goal is to be highly profitable, and that profitability comes from adding value and by lowering costs, i.e. differentiation or low cost strategy (or both). 2.1.2 The concept of Strategic Business Units (SBUs) and the value chain in the context of international business. 2.1.3 The five key strategic decisions: export strategy, international strategy, multi-domestic strategy, global strategy, transnational strategy. 2.2.1 The academic and business models used in the development of strategy and their application to the creation and development of the business plan. Notably these include: Porters Generic Strategies, Ansoff Matrix, Boston Consulting Group Matrix(BCG), General Electric (GE)

2.2 Identify and analyse strategic outcomes using the relevant academic and business models.

ABE

ix

Matrix, Shell Directional Matrix, Harrell and Keifer (1993) Business Portfolio and Bowmans Strategy Clock. 2.2.2 The strategic appraisal (audit) of organisations by applying relevant frameworks such as Porters Five Forces Model, McKinseys 7Ss, Value Chain, SWOT and Stakeholders Analysis. 2.2.3 The relevant financial metrics and measures of performance such as Kaplan and Nortons Balanced Scorecard. 2.3 Formulate recommendations embracing domestic as well as international strategies. 2.3.1 The strategic options and their importance in implementing international operations, from exporting through to strategic alliances. 2.3.2 The basis for the stronghold position: cost and quality, innovation, financial resources, timing and knowledge. 2.3.3 Evaluation of the entry strategies options: simple exporting through indirect and direct exporting, leading on to overseas production and the establishment of overseas subsidiaries. 2.3.4 A critical assessment of the applicability of joint ventures, strategic alliances, mergers and acquisitions

Learning Outcome 3
The learner will: Understand how to evaluate the implementation of a strategic business plan. Assessment Criteria The learner can: 3.1 Examine the cross functional issues that affect the implementation of business plans. Indicative Content 3.1.1 The management structures which are appropriate to the four strategic options (international, multidomestic, global and transnational). 3.1.2 The structural issues that underpin the effective implementation within the four basic management approaches (ethnocentric, polycentric, region-centric, geocentric). 3.1.3 Key HR issues involved with dealing with expatriate managers, such as the training and development of local managers, performance appraisal, and corporate acculturation. 3.1.4 International labour relations and the differing employment laws and cultures. 3.2.1 The attitudes towards the concepts of control and control systems on a regional level. 3.2.2 The identification of Critical Success Factors/Key Performance Indicators. 3.2.3 The use of techniques such as Benchmarking.

3.2 Explain how international business plans are monitored, measured and controlled.

ABE

3.3 Explain the role of financial management in international business.

3.3.1 International investment decisions, global financial markets, political and economic risk, transactional taxation and transfer pricing. 3.3.2 The different accounting standards globally. 3.3.3 The key financial indicators of performance.

Learning Outcome 4
The learner will: Know how to evaluate and recommend organisational structures for international operations. Assessment Criteria The learner can: 4.1 Assess how cultural values play a major role in shaping customs and practice in the organisation. Indicative Content 4.1.1 The body of knowledge on cultural diversity and its effect on organisational practices and customers, notably Terpstra and Sarathys model of the determinants of culture, and Hofstedes framework. 4.1.2 The relationship between cultures, the costs of doing business in a country, and the understanding that a culture is underpinned by a set of values and norms that should be explained together with the relationship between society and the nation state. 4.1.3 The extent of the need for cultural adaptation and the level of cultural consistency across borders and regions. 4.2.1 The various approaches to international organisational structures. 4.2.2 The role of organisational culture in implementation of the structure. 4.2.3 The impact on key relationships both internally and externally. 4.3.1 The role played by corporate HQ in establishing corporate objectives and strategies plus the development of the corporate business plan over the longer period. 4.3.2 The impediments to co-ordination with an understanding that formal and informal mechanisms need to be established.

4.2 Identify and describe the various methods and approaches to international organisational structures and make recommendations relevant to the needs of the organisation and the environment. 4.3 Describe and explain the linkages between corporate headquarters and the regional and local subsidiaries.

Learning Outcome 5
The learner will: Understand the importance of leadership, strategic direction and change management within the international business context. Assessment Criteria The learner can: 5.1 Explain the issues underpinning motivational change and the creation of readiness for this change. Indicative Content 5.1.1 The important role of change management for developing international business. 5.1.2 The basic theories of change: Lewins change model of unfreezing, change and refreezing; the action research model and its contemporary adaptations.

ABE

xi

5.1.3 The different types of planned change depending on the magnitude of the change and the degree of organisational involvement. 5.1.4 The drivers for change such as the re-defining of traditional boundaries between industries/markets/ product categories e.g. mobile phones are now cameras, computers. 5.2 Evaluate the strategic role of leadership in developing successful international operations. 5.2.1 The need for leadership in developing internationally, the creation of a vision and the communication of this to diverse audiences. 5.2.2 The importance of team building as a change agent internationally and its contribution to sustaining momentum in the implementation of the vision. 5.3.1 The planning cycle and implementation issues. 5.3.2 The merits and pitfalls of top down versus bottom up planning theory. 5.3.3 The methods used to forecast the future such as scenario planning, expert opinion and the Delphi technique.

5.3 Explain the role played by planning in the shaping of the future direction for the organisation.

Learning Outcome 6
The learner will: Understand the macro environmental factors that affect the international organisation. Assessment Criteria The learner can: 6.1 Evaluate the impacts of the different political and legal systems that organisations operate within. Indicative Content 6.1.1 The impact of different political systems on international operations, from collectivism, individualism and democracy to authoritarianism. 6.1.2 The influence of different political systems in the shaping of the economic and legal frameworks with which the global operator must comply, with knowledge of their origins. 6.1.3 Key elements of different legal systems in terms of protection of employment, property rights, intellectual capital, product safety, product liability and other relevant areas of the law/regulation depending on the specific situation. 6.2.1 The measurement of economic development and the categorisation of countries and regions accordingly. 6.2.2 The diversity of economic development and the structural difficulties within political and customs unions with the even greater differences between unaffiliated countries. 6.3.1 The growing role and significance of corporate social/ethical responsibility and the impact of consumer movements. 6.3.2 The role of stakeholders from governments through to individual customers in terms of trust, values,

6.2 Explain how countries are at different stages of economic development and how international business solutions will reflect these stages. 6.3 Evaluate the growing importance of corporate social responsibility (CSR).

ABE

xii

attitude to the environment, human rights and dignity, transparency and accountability and governance. 6.3.3 The impact on CSR caused by global communications driven by the growing penetration of the internet leading to immediate flows of information around the world.

ABE

xiii

Coverage of the Syllabus by the Manual


Learning Outcomes The learner will: 1. Understand the international business environment facing global operators Assessment Criteria The learner can: 1.1 Identify and describe the key challenges facing global businesses and organisations 1.2 Describe globalisation and international trade and recognise the key drivers 1.3 Evaluate the impact of emerging issues on international activities 2.1 Explain the role of strategy in the international context 2.2 Identify and analyse strategic outcomes using the relevant academic and business models 2.3 Formulate recommendations embracing domestic as well as international strategies Manual Chapter Chaps 3, 4 & 10 Chaps 3, 4 &7 Chaps 3 & 4

2. Know how to develop a strategic business plan for an international organisation

Chaps 2, 5, 6&7 Chaps 2, 5, 6, 7 & 11 Chap 2, 5, 6, 7 & 8

3. Understand how to evaluate the implementation of a strategic business plan

3.1 Examine the cross functional issues that Chap 9 affect the implementation of business plans 3.2 Explain how international business Chap 11 plans are monitored, measured and controlled 3.3 Explain the role of financial Chap 10 management in international business 4.1 Assess how cultural values play a major Chaps 4 & 9 role in shaping customs and practice in the organisation 4.2 Identify and describe the various Chap 9 methods and approaches to international organisational structures and make recommendations relevant to the needs of the organisation and the environment 4.2 Describe and explain the linkages Chap 9 between corporate headquarters and the regional and local subsidiaries

4. Know how to evaluate and recommend organisational structures for international operations

ABE

xiv

5. Understand the importance 5.1 Explain the issues underpinning of leadership, strategic motivational change and the creation of direction and change readiness for this change management within the 5.2 Evaluate the strategic role of leadership international business in developing successful international context operations 5.3 Explain the role played by planning in the shaping of the future direction for the organisation 6. Understand the macro environmental factors that affect the international organisation 6.1 Evaluate the impacts of the different political and legal systems that organisations operate within 6.2 Explain how countries are at different stages of economic development and how international business solutions will reflect these stages 6.3 Evaluate the growing importance of corporate social responsibility (CSR)

Chap 12

Chaps 6 & 12 Chap 2

Chap 4

Chaps 3 & 4

Chap 4

Note about Chapters 1 and 13 These two chapters deal specifically with approaches to the case study in the examination and do not, therefore, address any particular elements of the syllabus as set out above.

ABE

Chapter 1 Introduction to the Case Study


Contents
Introduction Approach to the Examination The Case Study Approach The Case Study Itself

Page
2 2 2 3

A.

Getting to Grips with the Scenario Initial Reading What does the Case Study Tell You Making Notes

4 4 4 5

Appendix:

Delta Airlines

ABE

Introduction to the Case Study

INTRODUCTION
The method of assessment for the International Business Case Study module is a three hour, open book examination based upon an actual organisation that has significant international involvement. This chapter is aimed at giving you an introduction to the process and the final chapter will give further information on preparing for the examination. At the end of each chapter in this study manual, we shall present a number of activities designed to help you develop the skills of analysis and evaluation of case study materials. The cases themselves are drawn from past examinations and they are all available on the ABE website. We have, though, reproduced in full one of these that on Delta Airlines (from the December 2009 examination) in an appendix to this chapter, so that you can immediately get an idea of the overall approach.

Approach to the Examination


The ABE will send you the actual case study upon which you will be examined approximately four weeks before the actual examination date. This is to enable you to study the case and ensure that you are thoroughly familiar with it before going into the examination room where you will be given a number of questions to answer about it. The examination itself is an "open book" examination that is, you can take any materials you like with you into the examination to help you answer the questions. You can, therefore, make detailed notes about the case study beforehand, and identify other sources of information that you think may help you, and use them during the examination. Thus, you will not need to memorise background information, models and analytical frameworks. Rather, these can be prepared beforehand and you can then apply whatever materials and approaches are most suitable to the questions about the case that you encounter in the actual examination. (Note that any notes and other materials should not be handed in as part of your answers you will only be marked on what you write during the three hours of the examination itself.) It is important, then, that you make the best of the time between receiving the case study and the examination date to prepare for the examination. The approach we recommend, and that which is set out in this manual, is as follows: Initial reading identifying the general background and main themes, and issues described in the case, including clarifying all the terminology. Detailed analysis working through the case in more detail to identify the nature of the organisation, the underlying issues and potential solutions, and also to pick out information that you can use to support your analysis. Getting ready for the examination organising your notes and preparing for the written examination itself.

We shall cover the first of these elements in this chapter, and detail the second two elements in the final chapter of the manual. Note that, as you work through this and the final chapter, examples are given to illustrate the process of preparation and analysis, rather than the content. When you start working on your examination case study for real, you will need to consider the whole broad range of international business concepts as covered in the study manual and the recommended further reading, as well as bringing in further ideas and concepts from other subjects studied, and select from those according to the content and context of the actual case study.

The Case Study Approach


Case studies are used extensively in professional management training to give an insight into "real life" situations. Also, the study of issues and solutions through the detailed

ABE

Introduction to the Case Study

consideration of such situations has long been a feature of many globally acknowledged business schools. It enables students to obtain experience from analysis of real organisations in contemporary settings. A case, though, is not just a limited and fixed description of a situation. It is dynamic in the sense that it is the result of past events and changes in organisation, its finances or personnel, and is subject to future influences from within and from outside the organisation which may affect decisions. In essence, you are the "case analyst" and are required to bring to the study a broad knowledge of business principles and techniques, understanding of human behaviour in the work environment, and ability to assess the pressures and influences that affect an organisation. This means asking the questions: What has happened in the past? What is the current situation for the business itself and its business environment? What are the emerging issues? What should be done now and for the future?

One of the central themes of the case study approach here is that a plan should be prepared so that not only the current situation can be understood but what the future for the organisation should be. With this is in mind, the manual is structured around the framework of a plan.

The Case Study Itself


Cases specifically directed to International Business can involve you in situations in manufacturing, financial, distributive or service organisations in many parts of the world. Within these varied spheres of operations, issues arise in similar ways for example, in organisation, planning, personnel attitudes and relationships, procedures, systems, techniques, laws and socio-economic pressures. You must be prepared to undertake your analysis in any of these fields, from knowledge and experience acquired in your work and previous studies. Thus, the rationale for the selection of the organisation that is the subject of the case depends firstly on the significance of the international dimension to their business. In essence, that will usually mean looking at truly global organisations whose income and sales are larger worldwide than in their domestic base. Another choice factor depends on the international profile of the organisation. This can be determined by many factors including their global profile (as, for example, the case of Marks and Spencer, used in December 2008) or other significant aspects such as events leading to changes in their global businesses. Another important choice factor is a need to offer variety and accessibility. In terms of variety we are conscious that Toyota (June 2009) and Delta Airlines (December 2009) were both in the broad field of transportation, albeit in different sectors of that market. Accessibility means that the organisation that is selected has a clear market presence and that the industry sectors within which it operates are able to be understood with few complications. We take care in the selection of the subject organisation to avoid obscure and overly complex businesses. Therefore, although the case may relate to an industry that is unfamiliar to you, within the pre-examination period you should be able to research how such a business would operate in real life. As an example, we set out in the Appendix to this chapter the full case study, with the questions in the examination, from December 2009. This should give you a general idea about what a case looks like although don't try and work through it in any detail at this stage and we shall refer to it at points through the manual.

ABE

Introduction to the Case Study

A. GETTING TO GRIPS WITH THE SCENARIO


Initial Reading
When you receive the case study, set some time aside for a first reading. This should be a "read through" only do not consciously try to make any judgments at this stage. They will come later. The object is to read it as you would read an article in a newspaper or business magazine to get a general overall impression of what has taken place. The case provides a scenario in which the current situation is presented, often set against a historical background and setting out certain information about the personnel and other main factors involved. Read it informally, without pausing, and delay your formal analysis so as to allow a period during which you can digest what you have read. In this way, you give time for ideas to develop. Do not be tempted to concentrate on a point which appears to you to have immediate interest it is unlikely to be something which can be considered in isolation and so it is better to obtain an overall impression of events at the first reading and study the detail later when you look for issues, evaluate them and consider what to do. At the end of this stage, you need to have a good understanding of the situation and you may need to clarify some terms and expressions particular to the organisation and the industry/business sector.

What does the Case Study Tell You


Whilst each case is different in form and detail, there is a fundamental basic structure, which enables you, the analyst, to assess the main activities involved. In a study of a global trading organisation, for example, the main features presented may be: Current situation within the company and the business environment Organisation, objectives and strategies History of change and development Functional performances related to company strategies.

Try to visualise the company described in the case what is going on, what would it be like to work there and what are the main defining characteristics. Even if you have no experience of the particular industry, you will no doubt have some experience of similar situations and the sort of issues that can occur, and this will help you bring in new thoughts and insights. The initial reading should aim to pick out the general picture of developing events against a background of the organisation and its corporate development over a period of time. However, be careful of jumping to conclusions at this stage. For example, you may initially think that the issues centre on human resources and staff attitudes and relationships. This may be so, but you may find other issues within the organisation as a whole which will lead you to take a wider view and understanding of what may be the challenges that the organisation faces, what ought to have been done and what you consider should be done. You should be looking for information about the organisation in the form of performance data (financial or otherwise), management structures, processes and procedures, personnel, etc. which will indicate the strengths and weaknesses of the enterprise. You also need to assess the environment within which the business is operating to see what factors are impacting on it both on its internal organisation and procedures, and its strategies and policies in relation to the market. Note that these features will be presented in different degrees of detail according to the particular situation and this will give you a clue as to where the key themes and issues lie. You will need to understand and evaluate these main features, assessing the degree of emphasis given to the constituent parts, in order to identify the key issues and what opportunities there are for action to be taken to remedy them.

ABE

Introduction to the Case Study

As you start to understand the situation, consider the extent to which the areas in which these key themes and issues lie contribute towards the provision of an efficient service and to organisational profitability. From the evidence given, ask yourself how far these two objectives are fulfilled and the reasons for any shortcomings which you find. A clear understanding of the situation within an organisation is a key step towards identifying the problems (or issues) and asking why it has occurred, to what extent and how long it has existed, and what are the results now and for the future. Issues may be organisational, process or procedural, financial or a question of personal relationships, but what we see initially are often the symptoms only. Just as a doctor's first study of an illness is of the symptoms, so, in studying an organisation, you may see only the symptoms arising from underlying issues within the organisation. For example, issues of late delivery, apparently requiring an organisational upheaval in distribution, may in fact be caused by inefficient inventory control allowing insufficient lead times to allow for efficient production. Uncompetitive high prices may be due less to efficient production processes than to a lack of standardisation, perhaps caused by a reluctance on the part of design to consider the savings potential of standardisation or to the use of acceptable commercial tolerances available in the supply market at lower prices. Issues present symptoms and their solution normally dispels the surface symptoms. But be wary there are cases where symptoms may still appear when the problem has been solved. For example, a bad image created by the closure of an overseas manufacturing plant may linger in the shape of a poor reputation. This does not necessarily apply to all cases, but is an example of why the identification of a problem must depend on the need to diagnose underlying issues rather than simply their symptoms.

Making Notes
At this stage, having obtained a general idea of the situation, you will find it useful to start making notes of ideas, which come to mind. These need not necessarily be in any particular order initially, but they will form the basis for a more formal arrangement later. The following headings, for example, may be useful in describing the company's situation. (a) Current situation (b) (c) What sort of organisation are you dealing with? Is it large or small how many employees are there? What does it do the core business? Where does it operate? Who are the key players? How long have they been there? How is the company controlled? How are decisions made? What are their aims? What are the key current strategies Are there any future plans

Company organisation

Company strategy/policies

ABE

Introduction to the Case Study

(d)

Company finances What is the general situation with the company's finance? Is it profitable? Where is the company situated? Is there more than one site? Does this cause logistical issues? How many are there? Over how many sites? What sort of age groupings/nationalities? What are the symptoms especially in relation to efficient service provision and profitability What particular issues have you identified so far?

(d)

Company location

(e)

Company staff

(f)

Company issues

After you have made notes and when you are sure you understand the scenario, the next step is to start to analysis what you have established and then organise your findings.

ABE

Introduction to the Case Study

APPENDIX: DELTA AIRLINES (Case Study from December 2009)


Preamble to the Examination:
1 2 3 4 5 Time allowed: 3 hours. Answer ALL questions. Questions carry different marks. Note the mark allocation and budget your time accordingly. Calculators, including scientific calculators, are allowed. This is an open-book examination and you may consult any previously prepared written material or texts during the examination. You must not insert such material into your answer book. Only answers that are written during the examination in the answer book supplied by the examination centre will be marked. Candidates who break ABE regulations, or commit any misconduct, will be disqualified from the examinations. Question papers must not be removed from the Examination Hall.

6 7

Preamble to the Case Study:


As in real life, anomalies may be found in this Case Study. Please simply state your assumptions where necessary when answering questions. The ABE is not in a position to answer queries on Case data. Candidates are tested on their overall understanding of the Case and its key issues, not on minor details. There are no catch questions or hidden agendas. After the publication of the Case Study subsequent developments may occur. The examination is based on the published Case Study and students who do not mention such developments will not be penalised. However, students may consider such developments in their answers if they wish.

ABE

Introduction to the Case Study

Delta-Northwest
Delta predicted declines in international demand during the first quarter of 2009 as its Northwest Airlines subsidiary announced that passenger load factors* were down seven-tonine points for the February and March periods. The company explained that the data points are within [their] expectations for this environment but expressed uncertainty in predicting further declines. We just dont know where to predict the bottom of the recession is going to hit but were utilising all the levers that we can. (Lori Ranson, 2009)1 (See references at end of case text.) * Passenger load factor This term describes a comparative measure of an airlines performance in terms of being able to fill the available capacity on its planes. The passenger load factor (PLF) of an airline, sometimes simply called the load factor, is a measure of how much of an airlines passenger carrying capacity is used. It is passenger kilometres fl own as a percentage of seat kilometres available. This is a measure of capacity utilisation. As airlines frequently have heavy fixed costs and are capital intensive, the efficiency with which assets are used is crucially important. This is an important efficiency measure, but it does not consider the pricing and the profitability at which the capacity is sold. Delta has one of the highest PLFs of the airlines with operating bases in the USA. In 2008, Delta Air Lines was one of the four largest passenger airlines in the world. From the turn of the new millennium the company faced financial difficulties due to increasing price competition from discount airlines, and in September 2005 the company was forced into bankruptcy (see Appendix 1 for the companys 2005 Operating Statistics). The signs of downturn became increasingly evident in 2004, as can be seen from the following table. Delta Air Lines Inc. (millions of US$) 2006 13,303 -790 -6.4 2005 13,305 -1,287 -10.44 2004 13,879 -1,230 -9.99 2003 16,741 815 6.58

Net Operating revenues Net Profit Earnings per share ($)

From 2007, Delta followed a revised operating strategy involving a network shift towards more profitable international routings. However, despite operational improvements, the company continued to face threats to its profitability, the most prominent among these being the price of oil. Increasing worldwide demand, compounded by investor speculation, led oil prices to peak at over $145 per barrel in the second half of 2008 (see table below), costing the company billions of dollars during the first half of the year. In January 2009, however, oil prices dropped to below $50 per barrel, which resulted in Delta losing around $500 million on oil hedging contracts. Approximate mid-year oil price 1997-2008 (US$ per barrel) 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 17 10 17 25 23 25 25 25 35 55 75 100

In late 2008, Delta and Northwest Airlines formally merged to form a new joint airline (Delta) and at the beginning of December of the same year, the company announced that it would cut an additional 6-8% of capacity in 2009. It was predicted that the merger could result in a reduction in domestic capacity of up to 10%. Delta also said that it would eliminate an undetermined number of jobs. Delta President Ed Bastian called the cuts dramatic and said that the total seat capacity, domestic and international, over the two-year 2008-2009 period,

ABE

Introduction to the Case Study

will be reduced by 20%. This was considered a required step, due to the downturn in both business and leisure travel. (The Wall Street Journal, 2 December 2008) During this time, Delta shares had rallied to around $8.48, partly on the back of the market. However, further decline was to set in shortly afterwards and into 2009 as shown in the following graph. Delta Share Price in US$ from May 2007 to February 2009

Deltas Operations
Mission According to the companys website, the mission of Delta is to build on its traditions and always meet customers expectations while taking service to ever higher levels of excellence. Within this aspiration, the company stands for safe and reliable air transportation, distinctive customer service, and hospitality from the heart. Delta and Northwest Services Delta Air Lines operated services to more worldwide destinations than any airline, with Delta and Delta Connection flights covering 306 destinations in 58 countries. During the period 2007 to 2009, Delta added more international capacity than any other major United States (US) airline and was the leader across the Atlantic with flights to 37 trans-Atlantic markets. Delta offers more than 517 weekly flights to 57 destinations covering Latin America and the Caribbean. Deltas marketing alliances allowed its passengers to earn and redeem SkyMiles on nearly 16,409 flights offered by SkyTeam and other partners. Delta was a founding member of SkyTeam, a global airline alliance that provided customers with one of the worlds most extensive networks of worldwide destinations, flights and services (see Appendix 1 for membership composition). Including its SkyTeam and worldwide codeshare* partners, Delta offered flights to 841 worldwide destinations in 162 countries. * The term codesharing is an aviation business term which was first coined in the 1970s and is an interline partnership where one carrier markets the air-service and places its designator code on another carriers flights. This arrangement allows carriers an opportunity to provide flights to destinations not in their basic route structure. Northwest Airlines operated hubs at Detroit, Minneapolis/St. Paul, Memphis, Tokyo and Amsterdam, and carried out approximately 1,400 daily departures. Northwest was a member

ABE

10

Introduction to the Case Study

of SkyTeam. Northwest and its travel partners served more than 1,000 cities and in excess of 160 countries on six continents.

The Delta - Northwest Airlines Merger


In late 2008, Delta and Northwest formally merged to form a new joint airline called Delta and in 2009 it was the largest airline in the world, by both enterprise value and available seat miles. In the previous April, the companies had announced an agreement in which the two carriers would combine in an all-stock transaction with a combined enterprise value of $17.7 billion and a total of 786 aircraft. Previously, the management of airlines had largely resisted industry-changing deals, in part because of concerns over integration problems and a generally poor record for airline mergers. However, Deltas CEO, Richard Anderson, said that consolidation could make sense for Delta if its done thoughtfully from a position of strength. Northwests CEO, Douglas M. Steenland, called further industry consolidation inevitable. Other factors favouring consolidation were the high fuel prices and the possible impact on demand of recession.2 Following the anti-trust overview by the US Department of Justice, the deal was not blocked but approved as expected, due to the minimal overlap between the two airlines routes and very little threat to competition in the industry. By the end of September 2008, both Deltas and Northwests shareholders had approved the merger and at the end of October, the United States Department of Justice approved Deltas plan to acquire Northwest. Government lawyers concluded that the merger would likely drive down costs for consumers without curbing competition. It was considered that the proposed merger was likely to produce substantial and credible efficiencies that would benefit US consumers. By 2009, Delta was the second largest airline in the USA and had a fleet of mostly Boeing aircraft. Cities it served stretched from limited markets in Japan and South Korea to several destinations in South America and Europe and eastwards to the United Arab Emirates and India. Northwest had hubs in Detroit, Minneapolis and Memphis and offered high capacity flights to many small cities across the Great Plains as well as extensive long haul services to Asia and Europe. It had strong codeshare relationships in several US West Coast focus cities. Recently, Northwest added hundreds of Airbus aircraft to their fleet which had consisted predominantly of Boeing and Douglas aircraft. While US network carriers had shed more than 150,000 jobs and lost more than $29 billion since 2001, the combination of Delta and Northwest was considered to have created a company with a more resilient business model, better able to withstand volatile fuel prices than either company could on a stand-alone basis. Combining Delta and Northwest was the most effective way to offset higher fuel prices and improve efficiencies, increase international presence and fund long-term investment in the business. The merger was expected to generate more than $1 billion in annual revenue and cost synergies due to more effective aircraft utilisation, a more comprehensive and diversified route system and cost synergies from reduced overhead and improved operational efficiency. It was anticipated that there would be one-time cash costs not exceeding $1 billion to integrate the two airlines. The result would be a stronger, more durable financial base and one of the strongest balance sheets in the industry, with expected liquidity of nearly $7 billion. Under the terms of the transaction, Northwest shareholders received 1.25 Delta shares for each Northwest share they owned. This exchange ratio represented a premium to Northwest shareholders of 16.8% based on 14 April 2008 closing prices. Richard Anderson, Deltas CEO, stated at the time: We said we would only enter into a consolidation transaction if it was right for all of our constituencies; Delta and Northwest are a perfect fit. Today, were announcing a transaction that is about addition, not subtraction, and combines end-to-end networks that open up a world of opportunities for our customers and

ABE

Introduction to the Case Study

11

employees. We believe that by partnering with our employees, including providing equity to US-based employees of Delta and Northwest, this combination is off to the right start. Together, we are creating Americas leading airline an airline that is financially secure, able to invest in our employees and our customers, and built to thrive in an increasingly competitive marketplace.3 In response, Northwests CEO, stated: Todays announcement is exciting for Northwest and its employees. The new carrier will offer superior route diversity across the USA, Latin America, Europe and Asia, and will be better able to overcome the industrys boom-and-bust cycles. The airline will also be better able to match the right planes with the right routes, making transportation more efficient across our entire network. In short, combining the Northwest and Delta networks will allow the strengthened airline to realise its full global potential and invest in its future.4 The Delta-Northwest combination was considered to be pro-competitive. There was little overlap in the non-stop routes served by the two airlines. There was only direct competitive service on 12 of more than 1,000 non-stop city pair routes then fl own by both airlines. The merger was judged to have created a stronger, more efficient global competitor. Discount carriers, which carried around one third of domestic passengers, and other network airlines, remained competitors in the airlines markets. Delta and Northwests complementary networks and common membership in the SkyTeam alliance were anticipated to ease the integration risk that had complicated some airline mergers. The carriers participated in a joint SkyTeam frequent-flyer programme with common customer lounges and airline partner networks. Furthermore, they shared a common IT platform, which was partially integrated through the existing alliance between Delta and Northwest. The combination of Delta and Northwest also enabled an accelerated joint venture integration with Air France/KLM, creating the industrys leading alliance network.

Northwests Activities
Airline Alliances Long-term alliance partnerships are an effective way for an airline to enter markets that it would not be able to serve alone. Alliance relationships can include codesharing, reciprocal frequent-flyer programmes, through luggage check-in, reciprocal airport lounge access, joint marketing, sharing of airport facilities and joint procurement of certain goods and services. A commercial alliance agreement is designed to connect carriers domestic and international networks and provide for codesharing, and such things as reciprocity of frequent-flyer programmes, airport club use and other cooperative marketing programmes. In September 2004, Northwest, together with KLM and Continental, joined the global SkyTeam Alliance. The addition of Northwest, KLM and Continental made SkyTeam the worlds second largest airline alliance. The eleven members of the SkyTeam Alliance: Northwest, KLM, Continental, Delta, Air France, Alitalia, Aeromexico, China Southern, CSA Czech Airlines, Korean Air and Aeroflot, and three associate members: Air Europa, Copa Airlines, and Kenya Airways. The Alliance currently serves over 427 million passengers annually, with more than 16,400 daily departures to 841 destinations in 162 countries. Regional Partnerships Northwest formed airline services agreements (ASAs) with three regional carriers: Pinnacle, Mesaba and Compass. In accordance with the ASAs, these regional carriers are required to operate their flights under the Northwest (NW) code and operate as Northwest Airlink. The purpose of these ASAs is to provide a service to small cities and a more frequent service to larger cities, increasing connecting traffic at Northwests domestic hubs. The business terms of these agreements involve capacity purchase arrangements. Under these

ABE

12

Introduction to the Case Study

arrangements, Northwest controls the scheduling, pricing, reservations, ticketing and seat inventories for Pinnacle, Mesaba and Compass flights. Northwest is entitled to all ticket, cargo and mail revenues associated with these flights. The regional carriers are paid for certain expenses based on operations and receive reimbursement for other expenses. Cargo Northwest is the largest cargo carrier among US passenger airlines, based on revenue, and the only one to operate a dedicated freighter fleet. In 2007, cargo accounted for 6.7% of the companys operating revenues, with approximately 76% of its cargo revenues resulting from cargo originating in or destined for Asia. Through its cargo hubs in Anchorage and Tokyo, the company serves most major air freight markets between the USA and Asia with a dedicated fleet of Boeing 747-200 freighter aircraft. In addition to revenues earned from the dedicated freighter fleet, the company also generates cargo revenues in domestic and international markets through the use of cargo space on its passenger aircraft. In October 2005, Northwest Airlines Cargo joined SkyTeam Cargo, the largest global airline cargo alliance. The eight members of SkyTeam Cargo, Northwest Airlines Cargo, Aeromexico Cargo, Air France Cargo, Alitalia Cargo, CSA Czech Airlines Cargo, Delta Air Logistics, KLM Cargo, and Korean Air Cargo, currently serve more than 728 destinations in more than 149 countries on six continents. This alliance offers customers a consistent standard of performance, quality and detailed attention to service. Other Travel Related Activities MLT Inc., an indirect wholly-owned subsidiary of Northwest, is one of the largest vacation wholesale companies in the USA. MLT develops and markets Worry-Free Vacations that include air transportation, hotel accommodation and car rental. In addition to its Worry-Free Vacations charter programmes, MLT markets and supports Northwests WorldVacations travel packages to destinations throughout the USA, Canada, Mexico, the Caribbean, Europe and Asia, primarily on Northwest Airlines. Northwest is subject to the regulations of the US Department of Transport (DOT) and the Federal Aviation Administration (FAA) because it holds certificates of public convenience and necessity, air carrier operating certificates and other authority granted by those agencies. The FAA regulates flight operations, including air space control and aircraft standards, maintenance, ground facilities, transportation of hazardous materials and other technical matters. Northwest operates its international routes under route certificates and other authorities issued by the DOT. Many of Northwests international route certificates are permanent and do not require renewal by the DOT. With respect to foreign air transportation, the DOT must approve agreements between air carriers, including codesharing agreements, and may grant antitrust immunity for those agreements in some situations. Northwests right to operate to foreign countries, including Japan, China and other countries in Asia and Europe, is governed by aviation agreements between the USA and the respective foreign countries. Many aviation agreements permit an unlimited number of carriers to operate between the USA and a specific foreign country, while others limit the number of carriers and flights on a given international route.

SkyTeam
Formed in 2000, SkyTeam is the second largest airline alliance in the world, partnering carriers from four continents. SkyTeam also operates a cargo alliance called SkyTeam Cargo. Through the worlds largest hub network, the Sky Team alliance provides its hundreds of thousands of passengers with a global flight network which comprises several thousand annual flights to 728 destinations located in more than 149 countries around the world.

ABE

Introduction to the Case Study

13

In a joint statement following SkyTeams formation, the airlines CEOs stated that it would alter the competitive landscape for airline alliances to provide more choices, better service and improved benefits. SkyTeams route system covered all the major destinations in the Northern Hemisphere, where nearly 80% of the worlds traffic flies. SkyTeams integrated information technology network enables passengers to contact SkyTeam members call centres, city ticket offices, or airport ticket offices, to find out flight schedules, service details (such as aircraft type and meal information), booking and departure confirmations, seat assignments and published fares. Passengers are also able to find all of this information about a flight by logging onto the SkyTeam website. In airports around the world, passengers connecting from one partner airline to another are able to save time by checking in only once. Frequent flyers earn miles in their existing accounts when flying with any of the partner airlines. Miles can be exchanged for a reward ticket on any SkyTeam airline. In addition, toptier flyers on each of the alliance airlines automatically attain SkyTeam Elite and Elite Plus status with enhanced benefits. Elite and Elite Plus status are supplementary to the current frequent flier programme offerings of all member airlines. Cargo customers benefit from the alliance partnership through reserved cargo space and marketing agreements.

Regulatory Factors in the Industry


Operations to and from foreign countries are subject to the applicable laws and regulations of those countries. Additionally, slots for international flights are subject to certain restrictions on use and transfer. On 30 March 2008, a new Air Transport Agreement between the USA and the EU Member States came into effect and created new competitive opportunities and competition on routes between the USA and Europe. For example, it enabled Northwest to commence services to London Heathrow Airport, subject to the availability of slots. In November 2007, the DOT issued a proposal to increase by 100% the minimum amount of compensation that airlines must pay to consumers who have been denied boarding on oversold flights. Under the direction of the United Nations International Civil Aviation Organization (ICAO), world governments, including the USA, continue to consider more stringent aircraft noise certification standards. A new ICAO noise standard was adopted in 2001 that established more stringent noise requirements for newly manufactured aircraft after 1 January 2006. Airlines are subject to Federal Aviation Authority (FAA) jurisdiction pertaining to aircraft maintenance and operations, including equipment, dispatch, communications, training, flight personnel and other matters affecting air safety. To ensure compliance with its regulations, the FAA requires all US airlines to obtain operating, airworthiness and other certificates, which are subject to suspension or revocation for cause. Airlines are subject to regulation under various environmental laws and regulations, including the Clean Air Act, the Clean Water Act and Comprehensive Environmental Response, Compensation and Liability Act of 1980. In addition, many state and local governments have adopted environmental laws and regulations to which airlines operations are subject. Environmental laws and regulations are administered by numerous federal and state agencies. Most, if not all, airlines depend on automated systems to operate their business, including internal airline reservation systems, flight operations systems, telecommunication systems and commercial websites. These websites and reservation systems must be able to accommodate a high volume of traffic and deliver important flight information, as well as process critical financial transactions. Substantial or repeated failures in website reservation

ABE

14

Introduction to the Case Study

systems or telecommunication systems could reduce the attractiveness of an airlines services versus its competitors and materially impair its ability to market its services and operate its flights. Airlines rely extensively on third-party providers to perform a large number of functions that are integral to their business, such as the operation of certain regional carriers, provision of information technology infrastructure and services, provision of maintenance and repairs and performance of aircraft fuelling operations, among other vital functions and services. Failure of these parties to perform as expected, or unexpected interruptions in the airlines relationships with these providers or their provision of services, could have an adverse effect on finances and operations.

Airline Industry Risk and Competitive Factors


Because fuel costs are a significant portion of operating costs, substantial changes in fuel costs materially affect operating results. Fuel prices continue to be susceptible to: political unrest in various parts of the world; Organization of Petroleum Exporting Countries (OPEC) policy; the rapid growth of economies in China and India; the levels of inventory carried by industries; the amounts of reserves built by governments; disruptions to production and refining facilities; and the weather, among other factors. In 2005, Hurricane Katrina and Hurricane Rita caused widespread disruption to oil production, refinery operations, and pipeline capacity in parts of the US Gulf Coast. As a result of these disruptions, the price of jet fuel increased significantly and the availability of jet fuel supplies diminished during the fall (autumn) of 2005. These, and other factors that impact the global supply and demand for aircraft fuel, may affect financial performance due to its high sensitivity to fuel prices. For example, a one cent change in the cost of each gallon of fuel would impact operating expenses by approximately $1.4 million per month (based on 2007 mainline and regional aircraft fuel consumption). The airline industry is intensely competitive. Competitors include major domestic airlines as well as foreign, regional, and new entrant airlines, which have varying financial resources and cost structures. Revenues are sensitive to numerous factors, and the actions of carriers in the areas of pricing, scheduling and promotions can have a substantial adverse impact on revenues. Industry revenues are also impacted by the growth of low cost airlines and the use of internet travel websites. Taking advantage of low unit costs, driven in large part by lower labour costs, low cost carriers, and carriers who have achieved lower labour costs, are able to operate profitably while offering substantially lower fares. Internet travel websites have driven significant distribution cost savings for airlines, but have also allowed consumers to become more efficient at finding lower fare alternatives than in the past, by providing them with more powerful pricing information. Such factors become even more significant in periods when the industry experiences large losses, as airlines under financial stress, or in bankruptcy, may institute pricing structures intended to protect market share, or raise cash quickly, irrespective of the impact on long-term profitability. A significant portion of operations may well be conducted in foreign locations. As a result, operating revenues and, to a lesser extent, operating expenses, in addition to assets and liabilities, will be denominated in foreign currencies. Thus, fluctuations in foreign currencies can significantly affect operating performance and the value of assets and liabilities located outside of the host country. The industry is exposed to changes in interest rates. An increase in interest rates would likely have an overall negative impact on earnings, as increased interest expense would only be partially offset by increased interest income. From time to time, financial instruments may be used to hedge exposure to interest rate fluctuations. However, these hedging strategies may not always be effective.

ABE

Introduction to the Case Study

15

The airline industry is seasonal in nature. Due to seasonal fluctuations, operating results for any interim period are not necessarily indicative of those for the entire year. The airline industry is labour-intensive, and collective bargaining agreements (CBAs) provide standards for wages, hours of work, working conditions, settlement of disputes and other matters. The Airline Deregulation Act of 1978, as amended, eliminated domestic economic regulation of passenger and freight air transportation in many respects. Nevertheless, the industry remains regulated in a number of areas. The DOT has jurisdiction over international route authorities and various consumer protection matters, such as advertising, denied boarding compensation, baggage liability and access for persons with disabilities.

Open Skies Agreement


In April 2007, the US and the European Union (EU) approved an open skies air services agreement that provides airlines from the USA and EU Member States open access to each others markets, with freedom of pricing and unlimited rights to fl y beyond the USA and beyond each EU Member State. Under the open skies agreement, which went into effect on 30 March 2008, every US and EU airline was authorised to operate between airports in the USA and Londons Heathrow, Gatwick and other airports. As a result of the open skies agreement, Delta announced an expansion of its transatlantic route network with three new daily nonstop flights to London Heathrow from Detroit, Minneapolis/St. Paul and Seattle.

References
1 2 3 4 Lori Ranson, US airlines brace for shift of premium traffic to the back cabin, AIRLINE BUSINESS, 2 February 2009. 2008: The Year of the Big Airline Merger?, New York Times, 9 January 2008. The Merger, Delta.com, 15 April 2008. The Merger, Delta.com, 15 April 2008.

ABE

16

Introduction to the Case Study

Appendix 1
Deltas Operating Statistics - 2005 Employees: Delta Daily Flights: Delta Connection Inc. Daily Flights: Daily Flights + Partners: Delta Destinations: Passengers Enplaned in 2005: Delta Connection Inc. Carriers: 47,000+ 1,534 2,533 6,795 500 worldwide destinations in 105 countries 118,853,189 Atlantic Southeast Airlines (ASA) Chautauqua Airlines Comair Freedom Airlines Pinnacle Shuttle America SkyWest Aeroflot AeroMexico AirEuropa Air France Alitalia China Southern Continental Airlines CSA Czech Airlines Copa Airlines KLM Royal Dutch Airlines Kenya Airways Korean Air Northwest Airlines Alaska Airlines American Eagle Avianca China Airlines Royal Air Maroc Atlanta Cincinnati New York (JFK) Salt Lake City Atlanta to Europe and Latin America Cincinnati to Europe and Latin America Los Angeles to the Pacific New York (JFK) to Europe and beyond

SkyTeam Alliance:

Codeshare Partners:

Major US Hubs:

Major International Gateways:

ABE

Introduction to the Case Study

17

Appendix 2
DELTA Profit and Loss Account as at 31 December (in US$ millions) PERIOD ENDING Total Revenue Operating Expense Operating Income (Loss) Total Other Income (Expenses) Net Earnings Before Interest And Taxes Interest Expense Income Before Tax Minority Interest Income After Tax Preferred Stock And Other Adjustments Net Income Applicable To Shareholders 2008 22,697 (31,011) (8,314) (22) (8,336) 705 (9,041) (8,922) (8,922) 2007 19,154 (18,058) 1,096 1,375 2,471 652 1,819 1,612 1,612 2006 17,171 (17,113) 58 (6,156) (6,098) 870 (6,968) (6,203) (2) (6,205) 2005 16,191 (18,192) (2,001) (826) (2,827) 1,032 (3,859) (3,818) (18) (3,836)

ABE

18

Introduction to the Case Study

Appendix 3
DELTA Balance Sheet as at 31 December (in US$ millions) 2008 Cash & Equivalents Short-Term Investments Total Debtors/Receivables Total Inventory Prepaid Expenses Other Current Assets Total Current Assets Property, Plant & Equipment Goodwill Net Intangible Assets Net Other Long-Term Assets Total Assets Total Current Liabilities Total Long-Term Debt Other Liabilities Total Liabilities Total Shareholder Equity 4,255 212 2,582 388 637 830 8,904 20,627 9,731 4,944 808 45,014 11,022 15,411 17,707 44,140 874 2007 2,648 138 1,066 262 464 662 5,240 11,701 12,104 2,806 572 32,423 6,605 7,986 7,719 22,310 10,113 2006 2,034 614 915 181 489 1152 5,385 12,973 227 89 948 19,622 5,769 6,509 20,937 33,215 (13,593) 2005 2,008 0 819 172 512 969 4,480 14,280 227 74 978 20,039 5,265 6,557 17,865 29,687 (9,648)

ABE

Introduction to the Case Study

19

Appendix 4
Northwest Airlines Accounts as at 31 December US $millions, except per share data Statements of Operations 2007 Operating revenues Passenger Regional carrier Cargo Other Total operating revenues Operating expenses Operating income (loss) Net income (loss) Cumulative effect of accounting Net income (loss) Eps (Basic) $ Balance Sheets 2007 Cash and cash equivalents Total assets Long-term debt Long-term obligations Pension/other benefits Liabilities subject to compromise Preferred redeemable stock Stockholders equity (deficit) 3,034 24,517 6,961 127 3,720 7,377 2006 2,058 13,215 4,112 185 13,572 277 (7,991) 2005 1,262 13,083 1,159 11 264 14,328 280 (5,628) 2004 2,459 14,042 8,411 361 4,095 263 (3,087) 2003 2,757 14,008 7,866 419 3,756 236 (2,011) 9,428 1,405 840 855 12,528 11,424 1,104 2,093 2,093 21.33 9,230 1,399 946 993 12,568 11,828 740 (2,835) (2,835) (32.48) 8,902 1,335 947 1,102 12,286 13,205 (919) (2,464) (69) (2,533) (29.36) 8,432 1,083 830 934 11,279 11,784 (505) (862) (862) (10.32) 7,632 860 752 833 10,077 10,342 (265) 248 248 2.75 2006 2005 2004 2003

ABE

20

Introduction to the Case Study

International Business Case Study Delta and Northwest Airlines Answer ALL questions
Q1 Using suitable frameworks, evaluate the international business environment facing the airline industry as a whole. You are expected to draw upon examples from the case to support your analysis. (25 marks) Compare and contrast the strategies and performances of Delta and Northwest. Discuss the extent to which you consider these have influenced the decision to merge the two organisations. In your answer, include a full financial analysis and evaluation. (40 marks) Discuss the options for future business strategies that you consider to be appropriate for the merged company and evaluate the likely impact of airline alliances such as Sky Team. In your discussion, include suggestions of how the organisation can forecast the future environment. (35 marks)

Q2

Q3

ABE

21

Chapter 2 International Business Planning


Contents
Introduction

Page
22

A.

Planning Process The Planning Framework Approaches to Planning Benefits of Planning Difficulties of Planning in International Markets

22 23 25 26 26

B.

Individual Region/Country Annual Plans Elements of the Annual Business Plan

27 28

Planning and Forecasting Techniques Scenario Planning Associated Techniques What if? Questions

30 30 32 33

D.

Planning and Change What Changes will be Necessary? Control and Evaluation

34 34 35

ABE

22

International Business Planning

INTRODUCTION
The focus of the International Business Case study is the plan. This is central to international operations as the plan is the basis of how companies decide what they are trying to achieve and how they might get there. It involves the development and agreement of objectives and the consideration of different strategic options. In this chapter we will review the planning process and consider the main elements and decisions of strategic international business plans. This chapter will be the framework for the rest of the study manual. We start by exploring the need for a planned approach, the different planning stages and the key elements of international business plans, together with some of the difficulties associated with planning for international markets. We concentrate on the key decisions in the international business and some of the major factors that will serve to influence and shape these decisions. Throughout, we emphasise the additional complexities and issues that arise compared to developing purely domestic plans. Important options for the international business include, for example, the importance of non-domestic sales to the company, the range of countries, selection of individual countries and modes of market entry. Once these decisions have been made, the business must further consider how the strategic options will be put in place.

A. PLANNING PROCESS
The process of business planning is concerned with forecasting the future and deciding what changes to implement in order to take advantage of the opportunities which exist and to minimise the main problems faced. It is crucial for companies of all sizes that they plan their activities. It is very wasteful to rely on reaction as a management process for example, opportunities might come and go before the reactive company adopts a business strategy aimed at meeting the needs of a specific international market. In large and complicated organisations, planning becomes even more important as a means of co-ordinating and integrating the geographically spread organisation. So, what is the basis on which planning takes place? Objectives are perhaps the most important foundation for the planning process. The organisation needs to decide what it wants to achieve. However, this is bound up with other processes. For example, what can be achieved will, at least in part, be determined by the means available for getting to those objectives. These means we refer to as strategies, and if poor quality strategies are selected, it will not be possible to achieve the results wanted good sales and profits. The objectives that can be realistically set will, therefore, be strongly interrelated with the strategies that are identified. Other factors are, of course, influential in the actual results that are achieved, including: The quality of the implementation The accuracy of forecasting the future The nature and intensity of competitive actions.

We shall consider these factors in later chapters

ABE

International Business Planning

23

The Planning Framework


The process of developing an international business plan is shown diagrammatically in Figure 2.1. You will recognise that the main elements of the framework are essentially the same for international planning as those found in purely domestic business. Figure 2.1: The International Planning Process 1. Identification and analysis of business opportunities Company mission statement and stakeholder expectations Assessment of company resources and capabilities

2. International business objectives

3. Development of strategic options

4. Selection of strategic options

5. Implementation of strategies

6. Evaluation and control

1.

Analysis of strengths and weaknesses; the company mission statement and stakeholder expectations As in all strategic planning, the process starts with the analysis of strengths, weaknesses, opportunities and threats. This involves the identification and analysis of markets in which the company can effectively compete and therefore also includes an assessment of company resources and capabilities. Through research and intelligence gathering activities, the business must seek to achieve a strategic fit between the companys capabilities and the opportunities presented by a dynamic environment. (We shall discuss the analysis of business opportunities in the Chapters 4 and 5.) At this stage, the company should also consider its mission statement and stakeholder expectations. These concepts serve both to shape and constrain business strategies. In the international market remember that stakeholders will include not only domestic country stakeholders, but also those of any host country in which the international business operates, including, for example, local employees, pressure groups, host country governments and host country communities. Obviously having such a potentially wide range of stakeholders to consider in international markets makes this task that much more difficult.

ABE

24

International Business Planning

2.

International business objectives This stage of planning involves the company determining what it wants to achieve. Without clear objectives, an organisation is unable to delineate and select between strategies, nor to evaluate the extent to which desired outcomes have been achieved. Remember that objectives should ideally be Specific, Measurable, Achievable, Realistic and Timed (the SMART criteria). When it comes to international business the company must not only decide what sales and profits it wishes to generate from international operations, but also the related issue of, for example, what degree of involvement and commitment the company wishes to achieve for its international operations. (Objectives, along with mission statements, in international business are considered in Chapter 6.)

3.

Development of strategic options This stage in the development of the international business plan involves identifying the broad strategic routes between which a company can select in order to achieve its objectives. There are a number of ways of thinking about strategic options and a number of models of strategic alternatives have been developed. Perhaps one of the best known of these, however, is again one that you will probably be familiar with and indeed can be used in both domestic and international markets, namely the Ansoff Growth Matrix. We look at the use of this, and consider other issues to do with strategic options, in Chapter 7.

4.

Selection of strategic options Having identified the strategic options, the next step is to select those that are most appropriate. A number of considerations are important here. Obviously the options must match the companys resources and capabilities and the companys mission statement and stakeholder expectations. The options must also be assessed with regard to factors such as risk and investment requirements.. Needless to say, the options selected should be those that enable the company to meet its international business objectives in the most cost-effective way.

5.

Implementation of strategies The implementation stage involves decisions about the nature and application of operational activities designed to meet the businesss objectives. This involves acquiring and deploying the necessary resources financial and human and establishing the organisational structures and management systems which enable those resources to be appropriately applied in the pursuit of the companys objectives. It will also include designing and implementing the appropriate marketing mix for the environment within which the business will be operating. We shall look at the issues involved in all aspects of implementation and operation in Chapters 9 11.)

6.

Evaluation and control The final stage in the framework is the assessment of the extent to which the plan has worked and objectives have been met. Control involves the measurement and analysis of performance against evaluative criteria established as part of the objectives, and the taking of corrective action. We look at this element in Chapter 12.)

Recently, research and literature on planning strategies in practice has illustrated the fact that very often actual strategies arise in very different ways to the text book planned fashion of a sequence of logical and intended steps as set out above. Instead of planning being a linear and systematic approach, it is suggested that much strategy arises as a result of companies actions over time. There are many reasons why this happens, but the intended strategy can

ABE

International Business Planning

25

be changed as a result of changes in the business environment such as cultural and political changes that in turn require changes to the intended and planned strategy. Of course, it could be argued that such changes should themselves be planned for in the intended strategic plan through the use of contingency planning. Any surprises that force the business to change plans in mid-stream, therefore, could be looked at as a failure or deficiency in the planning systems. However, a number of factors make such surprises and changes to intended strategies more prevalent these days, and more importantly, more appropriate to effective business operations. These two factors are the increasingly dynamic nature of the international business environment together with the ability of organisations to access ever increasing amounts of detailed information through on-line systems and thus make speedy decisions. Taking the first of these, the dynamic nature of the international business environment, the speed and pace of change in this environment puts an increasing premium on companies being flexible in their planning systems rather than developing plans and then sticking to these whatever the circumstances. The pace of change in the environment requires that management be alert and responsive to these changes and be able to incorporate them in modified strategies. Indeed, speed of response and flexibility are key facets in competitive international business strategy. Such emergent strategies, as they are often referred to, are based on the notion of organisational learning over time. Effective strategies, therefore, are based on managers being sensitive to environmental signals through environmental scanning and by evolving strategy in small-scale steps to match these. Clearly, there is a danger in this approach that companies are pulled off target and away from their intended objectives and strategies, a process sometimes referred to as strategic drift. This can result in companies simply muddling through a series of crisis changes as the organisation is battered by the vagaries of a stormy environment. Needless to say, such an ad hoc approach to planning is not to be recommended.

Approaches to Planning
The way in which organisations approach the issue of planning may differ as follows: Planning and the organisational hierarchy There are three main ways in which the planning process may be undertaken: (i) The top-down planning approach is one in which the most senior managers prepare broad strategic plans and then rely on local managers at country level to implement the plans. Bottom-up planning is the reverse process. Here, managers at country level prepare their plans, which are then passed on to the central headquarters for senior managers to adjudicate. This approach uses local knowledge and encourages local involvement, but can be time-consuming before the final plan is agreed. It can also be frustrating if the local plan is extensively modified or even rejected in total. In an attempt to gain from the positive features of top-down and bottom-up planning, some companies use goals-down, plans-up planning. This approach aims to achieve a blend of consistent strategic planning through setting objectives or goals and deciding the main strategic options at the corporate level, with locally developed and implemented plans.

(ii)

(iii)

Moving towards strategic planning Even though there are differences, the development of a planned strategic approach to domestic markets and to international markets might well evolve through approximately the same stages. These stages are:

ABE

26

International Business Planning

(i) (ii)

Unplanned stage The company manages in a reactive way without a planning process or a formal written plan. Budgeting stage The company develops a plan, but the plan is primarily composed of numbers that have little justification from business research or market opportunity analysis. The figures in the budget reflect financial forecasts of sales, cash flows and profits. These figures are often projected from past results. The great weakness with this approach is that it makes little attempt to forecast what customers will want to buy in the future. Annual business plan stage This approach to planning shows a considerable improvement on the budget stage. In an attempt to gain more accurate forecasts of the future and to involve managers actively in the planning process, the next stage in planning is reached. The plan is developed across the business functions of production, finance and marketing but is often limited in time-scale to the next financial year. Strategic planning stage This approach to planning takes a longer-term perspective. Whereas the earlier approaches will be based on a one- or two-year cycle, strategic planning will operate over five to ten years or maybe longer. This longer-term plan is much more appropriate for international business because it often takes a long time after entering a country market before substantial market shares are established. An important step in good strategic planning is to build the more detailed annual planning into the overall strategic direction. If this is achieved, it avoids the annual plan being a tactical implementation of something that is always remote from the long-term strategic plan.

(iii)

(iv)

Benefits of Planning
The benefits of planning include the following: The company is encouraged to be proactive rather than reactive. It tries to anticipate environmental change, changing buyer needs and wants and competitor activities. It is most unlikely that the company will forecast the future with total accuracy, so it will therefore have to react to some unforeseen events, but it is obviously better to plan proactively and take the benefits from this approach and to confine reactive activities to those areas that were not anticipated. Planning encourages the involvement of many international personnel in a process of analysis, discussion and decision. The end result should be one of improved decisionmaking about the need for future activities. It should also provide some sense of ownership in the final international business plans. The clear statement of time-scaled objectives, and the strategies to be employed to achieve those objectives, should prevent misunderstandings and delays in the implementation of plans in different country markets around the world. There is the opportunity to develop consistent business information systems to help inform decision-making. The evaluation and control of implementation will be easier if there is a consistent process and written-down plan.

Difficulties of Planning in International Markets


If there are many benefits to international business planning, there are also many difficulties. In fact, international planning poses several difficulties and complexities over and above those encountered in purely domestic business. Some of the reasons for this added difficulty and complexity are listed below:

ABE

International Business Planning

27

The planning process is often done at a distance from where the plans are implemented. Planning may be done in the context of an unfamiliar environment. Related to the above, the planning must take account of the needs of different cultures. Information is more difficult to obtain especially in developing markets. The political environment is often much more uncertain. Different stakeholder expectations have to be dealt with. Evaluation and control are more difficult.

B. INDIVIDUAL REGION/COUNTRY ANNUAL PLANS


A companys overall corporate plan sets the broad objectives and strategies for a companys international business operations. At the corporate level, strategic decisions regarding international business encompass areas such as the degree of commitment to international markets in the context of the overall business, the selection of regions or countries to be involved in, the methods of entry and broad decisions regarding the shape of the international business mix, including issues such as the extent of standardisation versus adaptation. Within this context, the annual plan prepared for each country in which a company operates provides the mechanism for implementing overall corporate strategies, whilst at the same time reflecting and accommodating the needs of the different countries and situations. Because the annual plan considers the local environment and customer needs of specific markets, it enables the business to develop business programmes that reflect these local environments and customer needs. Essentially, the annual plan enables the management to adapt the business to meet the specific demands of each market under consideration, including tasks of essentially a more tactical nature compared to those found in the overall corporate international plan. So, for example, within the general framework of a policy set at corporate level encompassing, say, the promotional element of the business mix, we wouldnt expect the details of media scheduling to be exactly the same in every market in which the business operated. Effective implementation requires these more detailed aspects to be considered and incorporated within plans for each country. The business plan helps analyse each individual countrys specific requirements and the competitive environment before translating these into specific action programs. Developing a plan for each country ensures that the business has anticipated and understood the following: Individual market needs and market trends. Competitive market structure and competitive strengths and weaknesses in the market. The specific business objectives, strategies and tactics that would be most effective in a particular market. The required structure and balance of the business operations to be used in each particular market. The required budget and resource implications. The key issues in the implementation process.

Without an annual business plan for each market, the business is unable to control and coordinate activities across markets and the overall business strategy is unlikely to be implemented effectively.

ABE

28

International Business Planning

Elements of the Annual Business Plan


Remembering that the organisation should have already established overall corporate and business objectives and strategies, a detailed annual business plan is required for each market. The main elements of this detailed plan should include the following: Analysis For each individual country market, the business should start with a detailed analysis. This analysis should encompass the following: (i) (ii) (iii) (iv) (v) Market size and trends. Business environment and trends, political, economic, social/cultural, technological, legal and environmental/ethical (PESTLE analysis). Competitor and competitive market structure analysis. Internal analysis, product portfolio, market share, strengths and weaknesses and current performance levels. Customer analysis including needs and motives, segmentation, purchasing patterns and processes, purchasing timings, customs and practices.

All of these elements are important in developing the plan for a particular country market inasmuch as the analysis will highlight the local issues, and in particular, the needs of customers in their local environment. Ultimately, the business will possibly be seeing and dealing with customers as individuals and therefore will need to adapt the elements of the business and programmes to meet the specific demands of the individual markets under consideration. Based on this analysis stage, and again against the framework of overall corporate and business strategies, the business can now proceed to the next element of the annual business plan, namely the production of a detailed SWOT analysis for each market in question. SWOT analysis For each market, the business must prepare a detailed SWOT appraisal. You should be familiar with the meaning and use of SWOT analyses and this will be covered in the Chapter 5. In the context of the annual business plan, the SWOT analysis should identify those opportunities and threats that will affect decisions about business objectives and programmes in a particular market over the planning horizon of the forthcoming year. Business objectives and strategies Once again, remember that the objectives and strategies are those that would be pursued over the forthcoming year in each market. This element of the annual business plan should encompass: (i) The specific objectives and sub-objectives relating to specific products, segments and customers. These objectives should be specific, measurable, actionable, realistic and timed (SMART) and should include objectives for sales, profits and market share. The selection of specific market segments and targets. The strategies for competing i.e. the basis of differential advantage to be used. The desired product and brand positioning.

(ii) (iii) (iv)

ABE

International Business Planning

29

Programmes for implementation of the business plan This element of the plan should include detailed programmes for the implementation of business activities in a country and, again, should relate to specific products, segments and customers. Unlike the corporate plan which is concerned with broad thrusts of strategy and decision-making (such as the selection of country markets, methods of entry and issues concerning the degree of standardisation or adaptation of the business elements), at the individual country level, the annual plan will include much more detailed programmes for each element of the business operations. You should remember that individual country annual plans represent an opportunity to meet the needs of customers in their local environment and therefore to adapt the elements of the business operations in a more tactical manner to meet the specific demands of each market under consideration. The implementation element of the annual business plan should encompass each of the elements of the business operations including, where appropriate, the extended business operation elements for services. For example, the sort of detail included in an annual marketing plan can be illustrated if we consider what the plan might contain with regard to, say, promotional elements. The plan might encompass the following aspects with regard to the promotional programme: (i) Detailed promotional objectives for each product/market/customer, for example, to increase brand awareness of our brand amongst target customers from its current 10% to 20% within 12 months. Detailed advertising and promotional programmes, for example, details of advertising campaigns, (advertising platforms, media selection and planning, including timing and frequency), advertising research, point of sale material programmes, details of PR and publicity activities and details of sales promotion campaigns, Detailed budgeting requirements and spend patterns for the elements of the promotional campaign. Detailed timing and scheduling activities for the programme over the year including, for example, agency briefings, timings of press conferences, the distribution of point of sale and other promotional material. Detailed evaluation and control activities for the different elements of the promotional mix for example, advertisement pre-testing research, recognition and awareness tests.

(ii)

(iii) (vi)

(v)

If we take into account the fact that these detailed programmes would be required to be planned for each element of the business operations and, where appropriate, for each product, market segment and/or customer, you will appreciate how much more detailed the annual country marketing programme is compared to the overall corporate and marketing strategy plans. Again, we should also remember that this amount of detail is necessary in order to ensure that the needs of customers in their local environment are met, together with the specific demands of each market. Specification of tasks, responsibilities, costs and budgets This element of the business plan should include detailed outlines of the specific tasks to be performed together with the allocation of these tasks to functions and, ultimately, individuals. Weaknesses in this area of task allocation are, in fact, among the major reasons for ineffective implementation of business programmes. Examples of weaknesses in implementation include a failure to communicate with, and, as

ABE

30

International Business Planning

importantly, agree the responsibilities of, those individuals charged with ensuring that the required business tasks are performed. It is important that those charged with these responsibilities understand what they are, and moreover, have the resources and skills to achieve them. Failure to communicate and agree responsibilities may mean that no one takes responsibility for the actions outlined in the business plan, with the obvious consequences that are likely to result. In addition to ensuring that tasks and responsibilities are allocated and agreed, it is also important to ensure that costs and budgets have been assessed. In particular, it must be ensured that the required financial resources are available at the right time to implement the approved plans.

PLANNING AND FORECASTING TECHNIQUES

In environments which are relatively stable, and forecasts of the future can be based on what has happened in the past, the tools of scanning and trend analysis are useful. However, an organisation may be faced with sudden discontinuities, such as the introduction of a new technology which renders its products obsolete like video recorders when programmes are available on-line. or major uncertainties, such as oil price rises, which can be difficult to foresee. In these circumstances, planning needs to take into account a range of different scenarios, forcing managers to 'think the unthinkable' for example what would happen if the Germany withdrew from the Euro!

Scenario Planning
Strategies and strategic planning are inherently concerned with the future. Because of this the strategic planner is often concerned to assess the future as an input to developing corporate strategic plans. This is particularly true in the area of environmental analysis in corporate planning. The corporate planner must attempt to assess how the environment of the organisation might be configured in the future so as to develop corporate plans to take account of these envisaged configurations. A technique which has been widely used in this respect is the technique of using scenarios in developing plans for the future. Scenarios comprise of detailed and plausible views of how the business environment of an organisation might develop in the future couched in such a way that the corporate planner is able to develop a range of strategic objectives and actions to best deal with the envisaged futures. It is important to stress that scenarios are not the same as forecasts. Forecasts are made on the basis of assumptions that the future can be predicted whereas scenarios are generated on the assumption that it can't. Scenarios are especially useful in the following circumstances: (a) (b) (c) Where it is important to take a long-term view of strategy Where there are a limited number of key factors influencing strategic options Where there is a high level of uncertainty about such influences.

Unlike a forecast, which tries to predict precisely what the future will be, scenarios represent simply plausible narratives of how the future might turn out. Building Scenarios The basic approach of scenario planning is to identify existing trends and key uncertainties and then combine them in a number of scenarios that are internally consistent and within the realm of the possible. The purpose of the scenarios is not to cover all future eventualities,

ABE

International Business Planning

31

but to identify the boundaries of future outcomes and to stimulate creative thinking and opportunities for managers to look ahead. There are three steps in scenario planning which precede the building of the scenarios themselves: Determining the parameters of the analysis, such as the time frame, the scope and the stakeholders whose actions need to be considered. Identifying existing trends and conditions that will significantly affect the organisation's future within the time frame. Identifying key uncertainties, such as the possibility of a fundamental technological breakthrough or the effect of a change in government policy.

By combining the trends and uncertainties we can develop internally consistent, wide-ranging scenarios. One approach is to put all the positive elements into one scenario and all the negative elements into another and then to consider whether they are internally consistent. These extreme scenarios offer starting points from which to develop different, but consistent alternative future scenarios. Each of these alternatives needs to be consistent and to have some probability of occurring. So, how are scenarios built and used in the corporate planning process? Using the example of an oil company we can first consider the steps in building scenarios. (a) The first step in building scenarios is to establish the purpose of the scenario i.e. what is the scenario to consider and be used for? The purpose may be wide-ranging (such as "what will the energy market look like in the future?"), or more focused, to support key decisions facing the organisation (such as "should we invest in developing solar-powered energy sources?"). The second step is to identify the strategic issues or drivers of change in the environment i.e. the factors in the environment which may affect the future with respect to the purpose of our scenario and about which we are uncertain... Usually these factors are readily identifiable: continuing our example, key drivers about which we are uncertain might include oil costs, discovery of new reserves; and environmental protection legislation,. The number of factors identified at this stage of scenariobuilding should be kept relatively small, since the number of possible scenarios can quickly become unmanageable. Those drivers selected should be those that have the greatest impact on possible future strategies for the organisation and about which we are most uncertain. Clearly the selection of strategic issues or drivers of change is crucial to the development of scenarios and therefore should ideally use the most expert and informed managers inside (or sometimes even outside) of the organisation. Membership of the scenario-building team is a crucial factor. Having identified the key driving factors in our scenario analysis, the next step is to identify different possible plausible futures by factor. Again continuing our example, the scenario team can assess, say, the likely future possibilities regarding environmental protection legislation. The fourth step is then to combine to build scenarios of plausible configurations of factors, considering the possible range of permutations and combinations of the driving factors selected so as to build "complete pictures" of a possible future. The planner can then develop plausible configurations of developments of driving factors from the previous stage, developing and fleshing out the narrative of the predicted scenarios and assessing possible likely outcomes for each.

(b)

(c)

(d)

When this has been done then the corporate planner can begin to assess the likely implications of the scenarios developed for corporate strategic plans. This may encompass determining objectives to deal with future scenarios, assessing strategic options for the future, and in particular for developing possible contingency plans.

ABE

32

International Business Planning

These, then, are the main steps in developing and using scenarios in the corporate planning process. There are a number of other considerations in the process, such as determining the membership of the scenario-building team; the timescales for scenarios; and the number of scenarios to be developed. All of these affect the nature and effectiveness of process. Scenarios have proved to be a useful approach to dealing with unpredictable and volatile environments where conventional techniques of forecasting have proved ineffective and inappropriate. Again, it is important for the planner to remember that scenarios are not forecasts, but they can be a very creative and useful approach to trying to assess the implications of an uncertain future environment.

Associated Techniques
There are a number of further techniques which can be used as part of scenario planning, or in their own right, to help analyse and plan for uncertainties in the future. Cross-impact analysis This approach seeks to identify a set of key trends and asks the question "if A occurs, what impact will this event have on other trends?". Demand/hazard forecasting This sets out to identify major events which would have an impact on the organisation. Each event is rated for its convergence with other major events taking place in society and its appeal to the public: (a) (b) the greater the event's convergence and appeal the more likely it is to happen; the higher-rated events are the ones which management takes more account of.

Expert Opinion In the expert opinion method, appropriate managers within the organization and external experts in the particular area (either geographical or market/sector) assemble to discuss their opinions on what will happen to the market in the future. Since these discussion sessions usually resolve around hunches or experienced guesses, the resulting forecast is a blend of informed opinions. This process is often used as a basis for scenario planning.

Delphi Method In a similar way to expert opinion, the Delphi Method also gathers, evaluates, and summarises expert opinions as the basis for a forecast, but the procedure is more formal than that for the expert opinion method. The Delphi Method has the following steps: Step 1 Various experts are asked to answer, independently and in writing, a series of questions about the future of the market or whatever other area is being forecasted Step 2 A summary of all the answers is then prepared. No expert knows how any other expert answered the questions Step 3 Copies of the summary are then given to the individual experts with the request that they modify their original answers if they think it necessary Step 4 Another summary is made of these modifications, and copies again are distributed to the experts. This time, however, expert opinions that deviate significantly from the norm must be justified

ABE

International Business Planning

33

Step 5 A third summary is made of the opinions and justifications, and copies are once again distributed to the experts. Justification in writing for all answers is now required Step 6 The final forecast is generated from all of the opinions and justifications that arise from step 5. The process can be conducted in real time by using on-line collaboration across the Internet. Both expert opinion and the Delphi method have been used in circumstances where the nature of the market means that there is no relevant history, such as in a new market concept, or the number of variables in the business environment make forecasting difficult. In the UK. the Monetary Policy Committee which meets monthly to set the Base (Interest) Rate is a form of Expert Opinion. It is designed to give an independent view thus reducing the impact of political views on this key area of the economy. These methods are extremely relevant for large global corporations, especially with regard to establishing medium and long term plans. For example, Airbus and Boeing would both have certainly used them in developing their new aircraft for the 21st century and it is interesting that both companies ruled out the possibility of supersonic aircraft, although they took different approaches with the introduction of the A300 and Dreamliner aircraft respectively.

What if? Questions


We can consider the consequences for international business strategies by playing the What if? game. For example, if you took the SLEPT plus C environment framework and asked What if? concerning each of the factors, it would set you thinking about a number of possible future scenarios. The following is one approach to this, although you will probably be able to develop some equally plausible scenarios for yourself. What if socio-cultural change? If the cultural values that have been significantly different in the past become more Westernised through exposure to, say, US films and television and a market forces type society, will this make it more or less difficult for Western companies to penetrate Asian markets? What if legal change? If Islam becomes a more dominant religious force in certain parts of the world, will this influence the relative importance of Islamic law in adjudicating international trade? What if economic change? If China and India continue their rapid economic growth, will they become the dominant economic forces in the world, replacing the USA, Japan and Europe? If this happens, in which markets will Chinese and Indian companies come to dominate? Which markets in China and India will be significant opportunities to companies from other countries? What if political change? If countries in various parts of Africa, Asia and South America become more capable, through political change, in the economic management of their countries, will this create new opportunities for international business managers? What if technological change? If the pace of technological change increases, will smaller companies be able to survive? If technological innovation becomes concentrated on Japan and the US, what impact will this have on the international business strategies for companies in Europe and in other parts of the world?

ABE

34

International Business Planning

What if currency changes? If the Chinese Yuan continues to appreciate against the US dollar, what consequences will this have? Will it make it more and more likely that foreign direct investment will be from China into the US rather than the other way round? What would be the nature of the investment. Will the European single currency make exporting more convenient to Europe? Will it be more beneficial to other European companies or to non-European companies?

D. PLANNING AND CHANGE


In the development of strategic plans in international business, we have to take account of future change. The strategies that are being implemented now are based on analysis that took place in the past. It is, though, highly probable that some of the assumptions that were used in the formulation of the strategy will prove to be incorrect. In addition, new elements such as new top managers or the opening of new major world markets (as has happened over recent years in Central and Eastern Europe and in India and China) can mean that new strategies need to be formulated.

What Changes will be Necessary?


In a world in which major change seems likely, but will be difficult to predict with consistent accuracy, international business managers need to continuously improve their whole strategic approach to order to achieve sustainable competitive advantage. Analysis will need to provide a better and, importantly, a quicker assessment of the environment, covering all aspects of the political, economic, social, technological, legal and ethical factors impacting of the organisation worldwide. Research will need to be at the heart of this and information systems will need to cope with large flows of information from some countries and very poor flows of information from other countries. Business managers will need to become more international to minimise the problems caused by self-reference criteria. The development of strategies will need to take account of different types of option. For example, joint ventures and strategic alliances have been popular means to speed the process of international expansion and to share the costs of major new product development. However, it is not certain how enduring joint ventures and alliances will be. If they break up, what new structures will be put in their place? If strategic alliances are used, how will this influence the evolution of worldwide competition? It is likely that companies will have to take particular account of how to gain and sustain competitive advantage in situations in which technological advantages will be swiftly countered. Differentiation through excellent customer service, through creatively appropriate marketing and through innovating effectively will become very important. As some companies become more and more significant in the world marketplace, the need to develop and implement competitive strategies that are co-ordinated across country markets will become more important. Market segmentation will be crucial and assessment of the way in which the global market can be segmented efficiently and effectively, both within and across country boundaries, will be central. In the implementation of international business strategies, companies will need to develop a more international culture. This will mean more experienced, truly international, international managers. The equidistant manager might be a long way off, but certainly the ethnocentric manager influence needs to be substantially reduced. To be successful in the world marketplace, international businesses need to balance the financial implications of their strategic options and of the implementation of their

ABE

International Business Planning

35

preferred option. We have looked at the financial implications as we have moved through the international business strategy process. In the future, the likelihood is that the increased scale of international operations will make the appraisal of financial risk and return even more important than it currently seems to be.

Control and Evaluation


The annual business plan should include details of expected operating results including sales, profit, financial ratios and other softer elements of business performance, such as customer service levels, and brand awareness,. It is against these expected operating results that the business can establish and implement key control standards together with any details of actions required where operating results are not being achieved. Again, at this level of the business planning process, control mechanisms and actions should be detailed, specifying exactly what action will be taken, under what circumstances, and by whom. In the measurement of the annual business plan, it is best to have at least quarterly, and preferably monthly, reviews to ensure that plans are on course and also that plans can embody the most up-to-date information on any changes that have occurred.

PRACTICAL ACTIVITIES
1. The planning framework is central to the case study and forms a framework within which to assess the current situation and evaluate options for the future. To practice the overall approach involved in drawing up a business plan, draw up a structured plan to cover your study of the International Business Case Study Unit. For an industry that you know well identify the key factors that will affect it in the next ten years. Draw up different scenarios to assess the impact of these factors. E-Readers such as the Kindle from Amazon and other similar products will undoubtedly have an impact upon the traditional bookselling and publishing business. Using the forecasting techniques discussed in this chapter, try to predict the future for the market globally and draw up possible scenarios. Now consider the case of Delta Airlines (as set out in chapter 1) or any of the other examination case studies on the ABE website. Work through and consider the business plans which lie behind the organisation's operations in respect of: What the business objectives of the organisation are and whether they are appropriate in the circumstances described What approaches would be appropriate to developing the business plans What the relationship is between the corporate plans and any separate plans for individual regions or countries.

2. 3.

4.

ABE

36

International Business Planning

ABE

37

Chapter 2 The World Trade Environment


Contents
Introduction

Page
39

A.

The World Trading Environment A Shrinking World Uncertainties/Turbulence The Internet and Mobile Communications

39 39 40 40

B.

Classifying the World Classifying by Gross National Product Classifying by Stage of Economic Development A New Focus Global Convergence Drivers of the Global Approach Forces Working to Keep Markets Localised

40 40 41

C.

43 43 45

D.

Theories of International Trade Theories of Advantage and Factors of Production The Competitive Advantage of Nations Porter's "Diamond" International Product Life Cycle

45 46 47 48

E.

The Composition of World Trade World Trade Shares Trade Barriers

49 50 51

F.

International Institutions The World Trade Organisation (WTO) International Monetary Fund The World Bank International Telecommunication Union International Maritime Organisation The Commonwealth European Bank for Reconstruction and Development

54 54 55 55 56 56 56 57 (Continued over)

ABE

38

The World Trade Environment

Organisation of Economic Co-operation and Development (OECD) Organisation of Petroleum Exporting Countries

57 57

G.

Globalisation Influences on Globalisation Arguments for and against Globalisation Emerging Issues Uncertainties and Turbulence within the Global Environment

57 58 59 60

ABE

The World Trade Environment

39

INTRODUCTION
This is the first of three chapters examining the environment of international business. It is essential that you understand the background within which business is conducted across national borders, since it provides the context for developing business strategies and plans. This is a key feature of all the case studies set in the International Business examination. In the next two chapters we shall consider the external, internal and competitive environments. Here, we start by looking at world trade.

A. THE WORLD TRADING ENVIRONMENT


The world trading environment has changed substantially over the years, and indeed will continue to do so. The international business organisation needs to understand how different forces and factors have shaped the current world trading environment and how this environment might change in the future. Perhaps one of the most significant developments in the world trading environment since World War II has been the growth of what is often termed internationalism. Quite simply, individuals, organisations, governments and whole societies have become increasingly open to the exchange of goods, services, people and ideas, etc. with other parts of the world. The growth of international trade and business is in large measure due to this increased openness to, and acceptance of, internationalism. As the world has grown more affluent on the back of burgeoning international trade, so factors such as increased travel, international communication networks and more cosmopolitan consumers and lifestyles have fuelled the growth of internationalism. Another key factor in this growth, however, has been the increased recognition and acceptance of the need for, and value of, open and improved international relations between countries. For obvious reasons, a major impetus to this recognition and acceptance was the terrible consequences and effect of the Second World War itself. Immediately after the Second World War, therefore, international co-operation began to develop, reliant to a considerable extent on the United States, in an effort to encourage the orderly reconstruction of the world economy. For a variety of reasons, the United States, backed by the United Kingdom, took active responsibility for helping the crushed economies of Germany and Japan to re-emerge. The Marshall Aid Plan and the Bretton Woods Agreement are examples of early efforts to help the world economy and to promote the growth of international relations and trade. Admittedly, with many hiccups and problems along the way, this desire to build international relations and trade has continued over the post-war years and up to the present day.

A Shrinking World
In more recent years, since the 1970s, another set of factors has increasingly affected the world trading environment. This is the speed and ease of travel and the growth of global communication technologies. These have resulted in what is often referred to as a shrinking world. This, in turn, has had a number of effects on the pattern and nature of world trade; for example, the speed at which transactions can occur between business and customer has been substantially increased. Communications are now virtually all electronically based and facilitated. Initially, it was the more developed economies that have benefited from these developments at the expense of the lesser-developed countries. However, with the continuing fall in the cost of technology, global communications have become easily within the reach of those lesser-developed countries and the world has started to see a major shift in the patterns and power in the trading and economic environment.

ABE

40

The World Trade Environment

Uncertainties/Turbulence
Always an uncertain environment in which to trade compared to the domestic market, the world trading environment has become more turbulent and dynamic in recent years. There is a high degree of political and economic uncertainty when conducting business across international boundaries. Changes can occur very rapidly. Take, for example, the collapse of the Soviet Bloc and the removal of the Berlin Wall as a prelude to the reunification of Eastern and Western Germany. Both businesses and governments try to remove some of these uncertainties and turbulence through, for example, trading agreements, political treaties and so on. But the speed at which social, technological, political and economic changes take place in the world trading environment has been itself increased by some of the developments already discussed such as global communications, speed of travel and so on. There is no doubt that the world trading environment of the future will continue to be uncertain and turbulent for business.

The Internet and Mobile Communications


These now ubiquitous technological development have already affected world trading patterns and practices and we shall return to this area, therefore, at several points during the later chapters. Global trading through the Internet is now a dominant force on the nature, patterns and practices of world trade. In particular, though, these technologies facilitate both the ease and speed of conducting transactions across national boundaries. Communication is now more or less instant around the world and this has led to an explosion of information across the globe. Increasingly, individuals can access up-to-the-minute information (and misinformation) about anything that is going on anywhere in the world. This has opened up the whole world into one global market where consumers (or at least, potential consumers) can see the latest developments and often have the means to buy from whichever companies and countries can satisfy their needs, doing all this from the comfort of their own homes.

B. CLASSIFYING THE WORLD


There are over 200 countries in the world. In a changing world, changes in nation states sometimes happen quite easily and sometimes with great difficulty. Namibia emerged in 1990 after a considerable struggle to gain independence from South Africa. Yugoslavia was ripped apart during the 1990s, with the end result of establishing country divisions taking the best part of two decades. On the other hand, the division in 1993 of Czechoslovakia into two countries, based on Czech lands and Slovakia, was negotiated peacefully. Political instability continues to this day throughout Africa and the Middle East.

Classifying by Gross National Product


It would be possible to rank all the countries in the world according to the total size of their gross national product (GNP). GNP data is available for most countries in the world, making it one of the most widely available statistics, and this makes it helpful in comparative analysis. To facilitate comparison, it is necessary to convert the total GNP for every country to a common currency. It is usual to use US dollars ($), but you should note that, as exchange rates vary, often considerably, the process of conversion causes some distortions and can give different rankings from one time period to another. GNP figures give an indication of the likely business opportunities in a country. In a very general way, countries with high GNPs will provide larger market sizes than countries with lower GNPs. However, the figures themselves can be misleading as some countries include certain items, whereas others omit them.

ABE

The World Trade Environment

41

A more useful approach than using total GNP is to compare countries on the basis of per capita GNP (GNP per person in the total population). This allows account to be taken of the number of people living in a country to give a more realistic view of spending power. Using this basis, we can divide countries into high income and low income countries. We need to take some dividing line between high and low. This is open to debate, but if, say, $5,000 per capita were taken, we would obtain the breakdown shown in the following two tables. Examples of High Income Countries Australia EU countries (exc. Portugal) EFTA countries Israel Japan Kuwait Libya New Zealand Oman Saudi Arabia United Arab Emirates United States of America

Examples of Low Income Countries Afghanistan Bangladesh Brazil Myanmar (Burma) Chad Ethiopia Gambia Ghana India Kenya Pakistan Malaysia Uganda Vietnam Zaire

Classifying by Stage of Economic Development


Classification by GNP or per capita GNP gives a general indication of the overall wealth of a country and its citizens and is useful for identifying the potential size of markets. However, this tells us little about the economic development of the country and its potential as a trading nation in its own right, competing on the world stage. There are a number of different ways of grouping countries by stage of economic development. For our purposes we do not need to go into great detail, but one of the most common ways of classifying by stage of economic development is into lesser-developed countries (LDCs), newly industrialised countries (NICs) and highly industrialised countries. Lesser-developed countries (LDCs) This group includes most of sub-Saharan Africa, some of Asia and South America. These countries are poor, have low GNPs and often lack many of the conditions for economic development. In particular, they might lack capital, trained and well educated workers and managers, natural resources (for example, good agricultural land, energy sources, and raw materials), a developed infrastructure of transport and communications and political stability.

ABE

42

The World Trade Environment

On the face of it, LDCs offer little encouragement for business. They are often associated with greater environmental uncertainty as political regimes can change abruptly, and this, linked with low market size, discourages long-term investment by international companies. There are, however, some market opportunities and sometimes the hope of growth in the future. Opportunities can result from the spending associated with economic aid packages from richer countries or projects financed through loans from institutions like the World Bank. Newly industrialised countries (NICs) This group includes China, India and Brazil, together with the so-called "tiger economies" of South East Asia and the Far East (including South Korea). In the past, there were considerable variations in the industrial development of the NICs. For example, during their development some countries, such as Brazil, ran into substantial economic difficulties, resulting in high inflation rates, balance of payments difficulties and the imposition of government controls on foreign exchange. However, they have been growing rapidly since the mid-1990s and are now exerting a major influence on the world economy. NICs can offer considerable business opportunities. Their growth has opened up massive opportunities for consumer and industrial products which the highly industrialised countries have been keen to exploit. However, NICs also pose something of a threat. In the process of growth, they have aggressively developed their production capabilities as well as their approach to exporting, taking export markets from other established exporters and even penetrating domestic markets of the more developed nations. In addition, NICs usually provide a low cost base for production. Increasingly, production and other operations are being moved to these countries, boosting their GNPs and enabling them to develop their own capabilities to compete on a more equal footing. At the same time, employment opportunities and GNP in the more advanced countries have fallen, forcing them to move increasingly into more sophisticated products and services with higher amounts of added value. Highly industrialised countries One manifestation of the major industrialised nations is the so called G8 countries comprising, Canada, France, Germany, Italy, Japan, the United Kingdom, Russia and the United States who, as the eight wealthiest nations in the world, meet once a year to discuss economic and political issues. This group of countries is especially attractive to business. They have high levels of income spent on a variety of consumer and industrial goods and, whilst there are various restrictions placed on exports to these countries (including tariffs, quotas, technical standards and health and safety requirements), they are usually much more open to international trade than the LDCs and NICs. The sheer attractiveness of this group of countries also results in them being very difficult markets. The existing companies fight hard to maintain market share and they are usually very aggressive towards new entrants into their markets. The Japanese market is usually portrayed as particularly difficult. This is partly the result of very competitive domestic (i.e. Japanese) companies, partly the result of strong cultural differences between Japan and the rest of the world, partly the result of Japanese restrictions, and partly the result of poor quality marketing by companies attempting to enter the Japanese market. What has traditionally been this established grouping of the wealthiest nations has changed somewhat in recent years with the emergence of the NICs as truly competitive

ABE

The World Trade Environment

43

nations on the world stage. The G8 is set to become the G20 and include a far wider representation. However, the power of the major trading nations the USA, Japan and Western Europe, sometimes referred to as the "Triad" remains strong.

C. A NEW FOCUS GLOBAL CONVERGENCE


Most companies start by selling to their local or regional markets. There is then a development, as the domestic market becomes saturated, towards an international focus, based on the following pattern: Domestic sales Domestic sales with a few exports, usually resulting from reacting to orders received Domestic sales plus exports, where exports are seen as important to the company and it will become more proactive in seeking such opportunities The development of international markets by investing in other countries i.e. setting up sales offices, distribution depots and production units The development of an international approach that looks at world opportunities, a global approach.

Note that the trend is not necessarily a linear one through the various stages in terms of the growth of a company. In very large countries like the United States, companies can become very large, but still not have a complete coverage of their national market, whereas in much smaller countries, for example, Finland, Sweden or Switzerland, companies can quickly develop in their own national market and then seek to grow through export markets well before the American company. Also, whilst many companies experience a gradual development towards more sales to non-domestic markets until they reach a point in which international sales are more important than domestic sales, other companies quickly develop a strategic approach that seeks to achieve international success. There are a number of forces that have encouraged the development of this global approach. However, not all forces are moving companies in this direction and there are significant factors pushing in the opposite direction.

Drivers of the Global Approach


We can identify eight major forces: Similarity in market needs Some markets cannot be adequately segmented within country boundaries. The market for jeans or pop music, for example, is widespread and is not restricted to any particular country. Despite significant basic cultural differences, the product appeals to a worldwide audience. In business-to-business markets there are increasingly similar needs around the world for computer systems, telecommunications solutions and for, say, business travel. The high cost of new technologies New technologies are usually much more expensive to develop than the ones that they replace. Old electro-magnetic telephone systems are being replaced by high cost electronic ones driven by costly software systems. Previously, the electro-mechanical system costs could be recovered by sales within the country. This is no longer possible as the costs are too high. The result is that fewer companies can afford the high research and development costs and few have the operational capability to sell across the world on a sufficient scale to break even on the initial costs. Those that do are the companies that have to take a much wider world view a global approach.

ABE

44

The World Trade Environment

Communication and transport systems The development of communication and transport systems that enable rapid message transmission, personal transport and freight delivery around the world has resulted in the feeling that the world is becoming a global village. Whilst this is an exaggeration, it is undoubtedly true that the differences in the world are being reduced by international air travel and international voice and data transmission.

Controlling costs Increasingly, survival in a tough world depends on driving down costs whilst maintaining or improving quality. Lower costs are increasingly achieved through buying, sometimes called sourcing, products from low-cost countries, particularly newly industrialised countries such as China or others in the Far East or South East Asia. Other companies have established their own factories (or joint ventures) to take advantage of lower labour costs and lower land costs.

Competition There is a need to develop a more sophisticated approach to competition strategy and the extent of increasing internationalism is very much influenced by the actions of competitors. If competitors are more efficient because they operate globally, then this becomes a strong driving force. With some companies using a co-ordinated global strategy, those competing on a simple national level are at a disadvantage. Companies are being forced to look at markets together, to attack in some and to defend in others.

Transference of experience and learning The ability of large companies to transfer experience from one market to another and learn from business activities in different parts of the world means that they are able to apply that knowledge quickly in other parts of the world. They can learn how to do things, and how to do things cheaper, to obtain competitive advantages and improvements in efficiency in all parts of their operations. The opportunities to standardise, make economies and to transfer good practice from one market to another encourage moves to a more and more international approach.

The development of world region markets European colonisation of large parts of the world had a profound impact on the patterns of world trade over the period from the 16th to the mid-20th century. In some senses, for the developed countries of Western Europe, this trade was almost an extension of domestic selling in that their markets were essentially the colonists in another country. However, the patterns and links between countries built up during this period have endured to provide worldwide markets for both the former colonising powers and the ex-colonies themselves. Regional groupings like the ASEAN group of countries in South-East Asia and the European Union have similarly encouraged a wider focus. The development of the Single European Market has led companies in Europe to consider countries with which they had never traded before as being their natural markets. When this is linked with the pattern of trade resulting from the history of European colonisation, you can see the opportunity for a more global approach.

Quality Quality has become a major factor in market success. Good quality has always been important, but in increasingly competitive market places, the goal is a zero defect, total quality every time philosophy. Japanese companies spearheaded this approach and their success has meant that others have had to follow suit.

ABE

The World Trade Environment

45

A further factor here is the increasing use of benchmarking. This is the process of a company comparing its performance across a range of indicators with others in the same or similar industry. The aim is to achieve continual improvements along the path to the goal of excellence. The approach of drawing comparisons with the best performing companies inevitably causes the company to look at international competitors. The reason why quality necessitates a global approach is that high quality demands excellent systems. It is easier to spread the costs of those systems if the sales volume is high, hence the need for a wider than domestic approach. We should note, though, that developing approaches to take advantage of these drivers is not, of itself, a guarantee of success. As with all business, it is necessary to develop sustainable differentiation to achieve success. Whilst lower costs need to be gained, it is difficult to sustain lower costs than the competition over a long period of time. Technologies change, markets change and, therefore, past cost advantages can disappear. Companies have to develop superior systems and superior brand and company images to make customers prefer their product.

Forces Working to Keep Markets Localised


Whilst these drivers toward global business are strong, you should not form the impression that the trend is inevitable in all aspects. There remain a number of forces that work to keep markets localised: Market differences There will always be particular differences between markets. For example, different countries have different climates and different cultures warm clothing is necessary in Scandinavia, but cool clothing in Central Africa, and the demands for air conditioning units is low in temperate climates compared to countries that experience hotter weather. History Companies will have different market shares and different competitive positions in different country markets. It is often difficult to standardise these differences to go for a global approach. National controls/barriers to entry As we shall see later in the chapter, most countries have tariff or non-tariff barriers (NTBs). These restrict entry and increase costs and delays, all resulting in difficulties in the development of global business. Management myopia and organisational culture In some companies, the wider international and global opportunities are not seen because management is too wrapped up in its domestic market. The global approach requires vision, international experience and a good understanding of managing complicated organisations.

D. THEORIES OF INTERNATIONAL TRADE


International trade, of course, is not new; nations have been trading, and often fighting to trade, with other nations for thousands of years. The simple reason for this is that trade, and especially international trade, brings wealth and economic growth. Furthermore, few countries if any, can be totally self-sufficient in all the goods and services that are needed to be consumed within a country. The only solution is to do without or trade with other nations. Sometimes, of course, nations trade with other nations for non-economic reasons, for example, to develop international relations with other countries for strategic and political reasons, or perhaps even to help other nations develop their economies. The primary reasons for international trade, however, are essentially economic. Perhaps as we would expect then, it was the economists who first provided a rationale and a set of theories to explain the reasons for, and the patterns of, world trade. We shall begin by examining the

ABE

46

The World Trade Environment

economists earliest theories of trade before moving on to consider more recent theories, including the emergence of more market and competitor-based theories.

Theories of Advantage and Factors of Production


Perhaps the first recognised theory was that developed by Adam Smith based on the notion of absolute advantage. This theory was further refined in Ricardos theory of comparative advantage. Absolute advantage This states that if one country can produce, for the same costs, more products than another country, there is an advantage to be gained by specialising production in the higher-output country. In effect, the costs per unit are lower. Comparative advantage Attributed principally to David Ricardo, the important idea here is the economists concept of forgone opportunity. In producing, say, aeroplanes, the opportunity to produce consumer durable products will be missed. The ideal approach is to concentrate on those products and services that give the best relative position. To take an extreme example, country X might have an absolute advantage over country Y in every type of product and service. Country X should concentrate on those items that give the best returns i.e. those items in which it is able to add most value. It is probable that country X will concentrate on complicated manufacture requiring a talented and well educated and trained workforce. Country Y will produce more straightforward products and services. Country X will gain because it produces more high added value items. Country Y will gain because it will have access to the products produced by country X at lower prices than country Y could achieve. The major legacy that these early economists left was the justification, ever since, for the protagonists of free trade. Important and influential though these early theories were, they did have shortcomings, particularly as countries and international trade itself began to develop further. Changes in the patterns of international trade led to two further additions to the economists theories of international trade, in particular, the so-called productivity theories and the factor proportions theory. Productivity theories There are various explanations for trade flows that look in detail at the productivity of factors of production. Early theories concentrated on the productivity of labour. If one country had people who produced more products or services, their costs would be lower. Trade would flow from this country to the other less productive countries. The weakness with the labour productivity theory is that labour is not the only factor of production. In the 20th century, the full range of factor costs or factor output per time period is still important. However, this needs to be balanced by the different factor inputs. Some companies can compensate for high labour costs by applying capital to increase the use of machinery. In addition, those companies tend to specialise in advanced innovative products with high levels of service. Germany and Sweden, both high-cost labour countries, are examples of this approach. Factor proportions theory This theory assumes different factor proportions for different products. It also assumes that different countries will have different amounts of resources (i.e. factors of production). For example, if the UK wishes to gain more exports, it might wish to consider investing in education and training to develop a workforce capable of generating the kinds of added-value, knowledge-based products and services likely to be demanded in the future.

ABE

The World Trade Environment

47

The problems with these standard theories of factor comparative advantage are that they assumes: (i) (ii) (iii) (iv) (v) That there are no economies of scale. That technologies everywhere are identical. That products are undifferentiated. That the pool of national factors is fixed. That factors such as labour and capital do not move between nations whereas, for example, the Single European Market is designed to allow the free movement of factors of production across the national boundaries of the member countries of the EU. That all companies follow the same strategy.

(vi)

They also makes no allowance for the competitive forces that operate within industries. The explanations of the classical economists were much more appropriate for the 18th and 19th centuries. During this time, industries were more dependent upon local supplies of raw materials and production was more labour- and less skill-intensive. Most industries were fragmented and there was little concentration of power. Business acted in a way that was close to the economist's concept of the perfect market. Especially since the latter half of the 20th century, industries have become more knowledgebased, with higher levels of capital employed relative to labour. Industries are no longer forced to exist close to raw material supplies. Japanese industries rely on raw materials transported hundreds and thousands of miles. Industries are now, usually, composed of a few large companies along with many smaller companies. The concentration of power generally follows the Pareto principle of the 80:20 rule. In these situations, strategic decisions by the major companies (sometimes they are referred to as players) can change the industry shape, and can influence which countries export and which ones import the goods that they manufacture.

The Competitive Advantage of Nations Porter's "Diamond"


In order to explain some of the changes in the patterns of world trade which we have seen in recent years, a number of comparatively new theories of international trade have been developed which reflect the nature of competitive strategy as a basis for the nature and patterns of world trade. Michael Porter studied the factors which are associated with success in international markets. He identified four interlocking elements (referred to as "Porter's Diamond"), which underpinned the success of organisations from a particular country in international markets. Factor conditions those necessary inputs of resources, which the organisation needs in order to support its activities (in particular those which are due to natural resources). These include climate, an appropriate labour force and the relevant skills and knowledge that have been developed over time, for example in a location with a long history of engineering production. For example, India has a growing and potentially dynamic population under 35. This is further enhanced by the fact there are within this age group a large number of well-trained, industrious people who are paid at lower levels than in Europe and the United States. Home market demand conditions the demands of independent purchasers of the company's products that make it necessary for it to continually innovate and improve them. For example with regard to the IT market, In India there is a booming domestic market, which has attracted many multinational companies particularly around Bangalore where Indias own Silicon Valley is located.

ABE

48

The World Trade Environment

Other related local industries which support and collaborate with the company, thus enhancing its competitive potential. Local rivalry this develops strong competitive characteristics which are needed to tackle the home market, and can then be applied to worldwide markets.

In addition to these four major elements, Porter also identifies other significant factors, including: Governmental behaviour in the form of intervention to encourage growth and the creation of jobs in areas of high unemployment, for example by granting subsidies and investment in development areas, or even by non-intervention. Much of Chinas spectacular industrial growth has been underpinned by the creation of special economic areas by the government. The element of chance which applies to companies as much as to individuals, i.e. being in the right place at the right time. The development of expertise which enables the company to become competitive and thus to grow.

International Product Life Cycle


The standard product life-cycle (PLC) concept was applied in the 1960s by Raymond Vernon to international markets. The basic idea was that there is a trickle down of product availability from advanced countries to the less advanced countries. It assumes that advanced countries will innovate products and services. Over time, these new products will mature in their domestic markets and will, then, be introduced into the developing and the less-developed countries. In these countries, the PLC will start with the introduction phase, etc. Thus, products would be developed in, say, the US, but the PLC for that product would be straddled across the export of the product to less developed markets. Figure 3.1: The trickle or cascade approach Advanced Country (e.g. US)

Developing Countries

Less Developed Countries This approach has been much less likely to happen since the 1990s. Many companies now take a strategic approach to product development and product launch, with products often being launched, in a co-ordinated way, into several markets at once. This more modern approach has been referred to by Keegan as the shower approach.

ABE

The World Trade Environment

49

Figure 3.2: The shower approach Co-ordinated Launch Programme

Advanced Country (e.g. US)

Developing Countries

Less Developed Countries

In addition, the concept of the international PLC does not take account of other changes in the late 20th century: (i) (ii) New products and services are being developed in many different countries, not just advanced countries. There are fewer demand differences between countries. We have not moved to the global village, but there are considerable signs of convergence.

(Note that, despite these reservations about the international PLC, there is little doubt that the original concept of the product life cycle will operate for each product in each country market.)

E. THE COMPOSITION OF WORLD TRADE


The overall growth in world trade contains some significant changes in its composition. Some of the more important changes include the following. From primary to secondary products Shortly after the Second World War, trade in primary commodities accounted for a substantial proportion of world trade. So, for example, nations traded their raw materials with other nations, including, for example, wool, cotton, timber, basic food commodities such as wheat, rice and so on, and energy commodities such as coal and oil. Certainly commodities still represent a large proportion of world trade between countries, but since the Second World War, trade in manufactured products began to increase substantially as a proportion of world trade. This increase included trade in products for manufacturing, such as components and machinery etc., and also products intended for final consumers ranging from clothing through to electrical products, cars and so on. By the 1970s and 1980s trade in manufacturing products had become the major element of world trade. More recently, this trade has been increasingly accounted for and fuelled by trade in hitech products including, for example, computers and information technology, biochemical products, genetic engineering and so on. In short, world trade is increasingly being dominated in terms of manufacture of products by hi-tech industries. Service trade Alongside this growth in the trade of manufactured and hi-tech products has been the growth in the trade of services. As economies have become more advanced, so service industries within those economies have become more important, to the extent that in some highly industrialised countries, such as the United States and the United Kingdom, service industries are now economically more important than manufacturing industries.

ABE

50

The World Trade Environment

Corresponding to this growth in service industries has been a growth in international trade in services and service products. Admittedly, certain services have always been traded internationally for example, the United Kingdoms trade in financial and insurance services has long been a major part of its trade in world markets. Increasingly, however, international trade in services has expanded to include, for example, transport, tourism, telecommunication and consulting. A specific example is the relocation of call centres to lower cost and English speaking countries such as the Philippines and the Indian Sub Continent. Many service organisations now operate on a global basis and this growth in the marketing of services in world trade is set to continue and increase.

World Trade Shares


Linked to the changing patterns of trade in manufactured, commodity and service products are the changing patterns in the composition of world trade which have taken place in the last decades of the 20th century. Shares of world trade can be categorised and analysed in different ways, and we shall examine these by reference to three criteria country, geographic area and economic categories. Each of these provides some useful and interesting insights into the changing patterns of world trade. Share by country Shortly after the Second World War, and despite the devastation of the levels of trade with the rest of the world wreaked by this, the United Kingdom was still a major player in world markets. Since the 1950s, however, and needless to say, much to the concern of interested parties in the United Kingdom, its share of world trade has continuously fallen. In contrast, the shares of some countries that for long periods of history, and indeed up to the 1950s, had relatively small shares of world trade have continued to increase over this period. In fact, as UK shares have fallen, some of these other countries have been major beneficiaries. So, for example, firstly Japan and Germany increased their share as their industries were re-established after the war, followed by countries such as South Korea and Taiwan in the 1980s and 1990s, and most recently has seen the booming economies of China, India and Brazil becoming important. Admittedly, world trade continues to be dominated by the Big Three (or Triad as they are often referred to) of the United States, Western Europe and Japan, but other countries continue to make inroads into the world shares of the Big Three. Quite simply, over time, patterns of world trade, as measured by shares of volume and value, evolve and change. There are numerous and often complex reasons for these changing patterns of share by country. For example, not surprisingly, shares change as competitive advantages change between countries. Generally speaking, the more competitive a country is in the production and marketing of particular products and services, the more likely this country is to increase its world share in these products and services. Interestingly enough, changing patterns of world trade shares are linked to the area previously discussed of changing patterns of trade in commodities, manufactured products and services. Remember that the fastest growth in world trade in recent years has been in manufactured products, and in particular, hi-tech products, followed more recently by a growth in international services. Obviously, countries that have concentrated on and/or have an advantage in hi-tech or service industries have increased their shares of world trade at the expense of countries that have concentrated on commodity products. In part, this explains the success of Japan in gaining larger shares of world markets in the 1960s and of China in the 2000s.

ABE

The World Trade Environment

51

Share by economic category We noted earlier that we could classify countries by their stage of economic development, distinguishing between lesser-developed countries, newly industrialised countries and highly industrialised countries. Perhaps as one would expect given our discussion of the growth in trade accounted for hi-tech and service products, when considering the composition of world trade by economic category, once again the highly industrialised countries have in fact increased their share of world trade. Admittedly, there are some notable exceptions to this, particularly in the case of the newly industrialised countries as already mentioned. Taiwan and South Korea and more recently China and India, have increased their share of world trade substantially, but overall, these are indeed exceptions. The lesserdeveloped countries in particular have lost out with respect to their share of the rapid growth of world trade, needless to say, adding to their already often severe economic problems.

Share by region Regions can also, of course, classify the world. These regional groupings may be by geographical location, e.g. Western Europe, Africa, North America, Latin America, Asia, etc, or, for example, by political or economic groupings, such as the European Union (EU), NATO countries, and MERCOSUR. Changing patterns in the composition of world trade are more variable and harder to isolate in this way than when analysed by our previous two categories. So, for example, Asia as a geographical area has been a major player in the expansion of international markets and this is reflected in the increased share of world trade in this region. In comparison, Eastern Europe as a region has tended to lose out in shares of world trade. One thing we can say is that there is a close relationship between economic groupings of countries (particularly those which have formed trading bodies) and their share of world trade, so, for example, countries which belong to the European Union, the Asian Pacific Economic Co-operation, members of the Association of South East Asian Nations and so on have, because of the power and concerted planning associated with such trade bodies and groupings, tended to increase their share of world trade compared to those countries and regions which have not formed such bodies.

Trade Barriers
Many of the theories of world trade, and particularly those of Adam Smith and Ricardo, sought not only to explain the rationale of international trade, but also the benefits and therefore the importance of this trade being unrestricted or free. As we shall see shortly, this explains the commitment of many governments to developing free trade by removing restrictions and the formation of world trade bodies and institutions to promote and facilitate the growth of such free international trade. Notwithstanding this, however, and notwithstanding, as we shall also see later, concerted and continuing attempts to remove them, there exist a number of barriers to international trade which serve to make such trade more difficult and sometimes impossible between nations. Before we look at some of the world trade bodies that exist specifically to promote freer world trade, we need first to understand some of the main reasons and types of trade barrier, together with the notion of dumping in international trade.

ABE

52

The World Trade Environment

Reasons for Erecting Trade Barriers Countries, or rather governments, may erect trade barriers for a number of reasons. Some of the most frequent reasons are as follows: Protection of home markets/industries and employment. In some instances, barriers might legitimately allow an infant industry to establish itself before the full forces of competition can shake it, perhaps to breaking point. In other instances, the barriers might allow the domestic industry to become inefficient, resulting in domestic consumers paying higher prices and having less up-to-date products and, perhaps, lower levels of customer service. Strategic (military and key infrastructure) reasons. Retaliatory reasons based on aspects such as political and economic. As bargaining levers to secure desired objectives in international relations with other countries.

These, then, are some of the reasons (or rather justifications) for introducing and/or increasing trade barriers. The main categories and types found in international markets are outlined below. Tariffs Tariffs are taxes or duties that are placed on imports and their use is widespread around the world. The purposes of tariffs vary from a means of raising revenue for a government to creating barriers to entry into the domestic market. The main types of tariff are as follows. Ad valorem This is the adding of a surcharge as a percentage value of the goods say, for example, 9% to the landed price of the product at the port of entry. Luxury goods, such as prestige motorcars, are often highly taxed in this way in many countries. Specific duty This is a duty charged on the physical specifications of the product for example, two dollars per ton of steel. In this instance, the duty falls more heavily on lower priced, less-value-added variants of the same product type. A special steel might have a much higher market value than ordinary steel. With a specific duty, both would be charged at the same rate. Obviously the percentage increase in price is higher for the ordinary steel than it is for the special steel. Special and temporary tariffs In some instances, countries will apply surcharges to increase the price level for specific goods. This may be to protect particular domestic industries or, sometimes, may be applied as an anti-dumping measure.

In addition, compound or mixed duties, which are combinations of ad valorem and specific duty may be applied. Non-Tariff Barriers (NTBs) Whilst there has been a general reduction in the range and levels of tariffs, non-tariff barriers have tended to increase. For example, the Single European Market eliminated tariffs between the 27 member states, but is still wrestling with the need to harmonise NTBs. The main types of non-tariff barrier are as follows. Public procurement policies This is the selective and discriminatory buying policies on the part of governments and state-owned-industry. In many countries, there is either an explicit or implicit buy our own national products policy.

ABE

The World Trade Environment

53

In the EU, no favouritism can be shown to national or local suppliers. Goods and services have to be selected either at the lowest tendered price or by an agreed best value formula. Quotas Under this type of barrier, only specified amounts of particular goods are allowed to be imported during a time period (usually, over a year). Once this amount is filled, no more goods can be imported until the next time period. This restricts the potential market for exporters and makes it easier for domestic producers to gain market share. In addition, the exporter is faced with the uncertainty of not knowing whether the quota is full or not. If the quota amount has been reached, the exporter will have to wait until the next time period when the quota resumes. Technical standards Many countries have technical requirements applying to specific goods within the domestic market. Sometimes these can be used to make it easier for domestic suppliers than those seeking to gain entry. The domestic suppliers might understand the regulations better, perhaps continually changing the regulations to keep the balance of advantage on their side. Health and safety standards These can be used in much the same way as technical standards.

Dumping and Anti-Dumping Although generally speaking, barriers to trade are, in economic terms at least, largely indefensible, there are sometimes good reasons for imposing them, at least in the short term. One situation where barriers to trade might be justified is in the case of anti-dumping legislation that is enacted to protect a market from unfair competition. Dumping occurs when a product is sold in another country at a price below its actual costs. There may be some difficulty in establishing what the actual cost is it can be argued that it should include all costs (i.e. direct and indirect costs) although it is generally agreed that, in the short term, the price should cover the direct, attributable costs of producing a specific quantity of product. There are three main types of dumping: Sporadic This happens from time to time, usually as a result of surplus inventory or stocks. A company might prefer to find an export market to unload the surplus rather than risk unsettling the domestic market in which the company has a major interest. Predatory This is a type of competition strategy in which a company seeks to destabilise a market with the objective of gaining market share by selling at very low prices. Once the domestic producers are driven out of business, the company can increase prices and recover profit levels. Persistent This is the continued sale of products at very low prices. This was a particular problem with ex-COMECON countries where, in countries like Poland, Hungary and the USSR, central planners established prices and costs arbitrarily. Costs and prices showed no relationship to conventional western accounting practices.

Most countries have anti-dumping legislation. In the main, this revolves around particular commodities steel, coal and basic industrial chemicals, textiles and agricultural produce.

ABE

54

The World Trade Environment

F.

INTERNATIONAL INSTITUTIONS

At the end of the Second World War, many economies were totally crippled and some countries such as Germany and Japan were totally crushed. In an effort to help these countries, and thereby the world economy, a number of international bodies and institutions were formed, principally with the objective of helping this worldwide reconstruction, but underpinned very much by the philosophy of promoting the growth and return of free world trade. Since their establishment, some of these bodies and institutions have had a major influence and impact on world trade and continue to have an important impact still today. Of particular significance and importance are the General Agreement on Tariffs and Trade (GATT), more recently known as the World Trade Organisation (WTO), the International Bank for Reconstruction and Development (often referred to as The World Bank) and the International Monetary Fund (IMF). Each of these is discussed below.

The World Trade Organisation (WTO)


GATT was set up after World War II in an effort to avoid the difficulties of the 1920s and 1930s. During the inter-war years the world recession had been compounded by countries individual policies on importing and exporting that were aimed at ensuring their preferential position in the international market place. GATT aimed to create order and predictability in world trade with the objective of encouraging the development of this trade around the world. GATT as it stands today is not just one treaty agreed in 1948 but also a large cluster of around 180 that over the years have shaped its constitution and thus its direction, its membership and its mission. There have been seven negotiating rounds, each lasting an average of nine years, which clearly demonstrates the complexities of the issues that GATT tried to address in a fast changing world trading environment. Following the approval of the Final Act of the Uruguay Round of GATT in 1993, the World Trade Organisation (WTO), a permanent body with a status commensurate with that of the International Monetary Fund or the World Bank, effectively replaced GATT. It is the responsibility of the WTO to monitor agreements to reduce barriers to trade, such as tariffs, subsidies, quotas and regulations that discriminate against imported goods. The aim of the WTO is to create order and predictability in world trade. The principles that are embodied in the WTO are: Reciprocity The idea is that if one country reduces its tariffs against another countrys exports, then it can expect the other country to reduce the tariffs against its exports. Non-discrimination Under the terms of membership, nations agree to apply their most favourable tariff rate to other WTO signatories. It is, however, possible to have preferential rates that may be used to encourage trade with particular nations. For example, the UK may wish to use a preferential rate with Commonwealth countries, particularly those that are less developed. The highest degree of preferential status is the most favoured nation (MFN) status and is accorded on a bilateral basis. Fair trade This principle prohibits export subsidies on manufactured goods and limits their use on primary products.

Whilst the aim and principles of the WTO are relatively simple, the complexities surrounding their application and indeed their influence must not be underestimated. Since the establishment of GATT, more and more groups of countries have looked to become unified from an economic viewpoint, the European Union being perhaps the most successful to date. Increasingly, the dimensions of the Pacific trading markets are changing as a response to shifts in regional trade flows. Economic indicators are pointing to an increasing

ABE

The World Trade Environment

55

interdependence among these nations. At the same time, Europe continues to debate the strengthening and extension of its economic ties. The impact of the WTO can appear to be most significant at a national level. However, its potential impact at an organisational level is something that should not be overlooked. The WTO is not without its critics. Since the turn of the century, anti-globalisation protestors have held a series of demonstrations, often turning into riots, in the cities where the WTO was holding its next round of meetings. There were a number of reasons for these protests, but essentially, a number of critics feel that the WTO represents the interests of the highly industrialised countries, and particularly of the United States, at the expense of the lesserdeveloped countries. This, they suggest, continues to repress these developing countries, despite the WTOs commitment to raising the living standards for all the people of the world. There are also those who believe that the WTO represents the epitome of commercial greed and capitalism and hence are determined to destroy it. Yet others believe that world trade helps destroy the environment. These demonstrations have been so successful in attracting attention to the various causes they represent that a more socially responsible attitude will have to be taken into account in any future considerations by the WTO.

International Monetary Fund


The IMF is an organisation of 184 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty. It is responsible for ensuring the stability of the international monetary and financial system the system of international payments and exchange rates among national currencies that enables trade to take place between countries. The Fund seeks to promote economic stability and prevent crises; to help resolve crises when they do occur; and to promote growth and alleviate poverty. The idea for the IMF was developed at the Bretton Woods Conference in New Hampshire, in the United States, towards the end of World War II in 1944. The IMF was designed to provide a stable framework for international currencies. Members of the IMF subscribed to a quota based on expected trade patterns. One quarter of the quota was to be paid in gold or dollars and the rest in local currencies. The funds were to be used to provide support for currencies during fluctuations in exchange rates and thus provide stability in the foreign currency exchange rates that are so important to the development of world trade. The original intention of the IMF was to provide a support system for fixed exchange rates between countries. However, in 1971, the US abandoned the gold standard and devalued the dollar, the end result of which was the development of flexible or floating exchange rates instead of the fixed rate system. The structural problems of developing countries often pose grave difficulties for the IMF in finding acceptable ways to support the developing country whilst at the same time safeguarding the funds of the IMF. In the 1980s, the IMF had to cope with severe difficulties experienced by a number of lesser-developed and newly industrialised countries, for example, Mexico, as a result of their substantial accumulated debts that they were unable to pay. In the 1990s, the IMF had major new pressures resulting from the collapse of the USSR when many countries in Central and Eastern Europe needed economic and foreign currency support during their reconstruction. Further pressures have been put on the resources of the IMF by the fallout from the banking crisis of 2007-2008 and the debt positions of many European countries.

The World Bank


The World Bank, officially called the International Bank for Reconstruction and Development, was also founded in 1944. Its initial role was to assist the redevelopment of countries crippled economically by World War II. Since the completion of this role, the World Bank has

ABE

56

The World Trade Environment

played a major part in developing the economies of the poorer countries, particularly new countries emerging into independence from their former colonial status, such as Nigeria and India (from the UK) and Mozambique and Angola (from Portugal). The World Bank finances several hundred major projects each year. Loans must be repaid, with interest, and are subject to guarantee by the government of the borrowing country. The projects range from developments in agriculture, to telecommunications, to population planning, and there are international business opportunities to be gained from World Bank projects. The World Bank is also not without its critics. Again, the main criticism is that their large debt repayments and interest charges have effectively crippled many of the lesser-developed countries who have been recipients of World Bank funds in earlier years economically. In fact, some countries will never be able to repay the interest, let alone the capital and so their debts will simply accumulate. Recently, steps have been taken to address this problem. Some countries have had their debts reduced, and more recently, the United States and the United Kingdom have cancelled some of them completely.

International Telecommunication Union


The purposes of ITU are to maintain and extend international cooperation between all its Member States for the improvement and rational use of telecommunications of all kinds, to promote and enhance participation of entities and organizations in the activities of ITU, to offer technical assistance to developing countries in the field of telecommunications, to promote the development of technical facilities, the extension of the benefits of new telecommunication technologies and the adoption of a broader approach to the issues of telecommunications in the global information economy and society by cooperating with intergovernmental and non-governmental organizations .

International Maritime Organisation


The purposes of IMO are "to provide machinery for cooperation among Governments in the field of governmental regulation and practices relating to technical matters of all kinds affecting shipping engaged in international trade; to encourage and facilitate the general adoption of the highest practicable standards in matters concerning maritime safety, efficiency of navigation and prevention and control of marine pollution from ships". The organisation is also empowered to deal with administrative and legal matters related to these purposes.

The Commonwealth
The Commonwealth is a voluntary association of 54 independent sovereign states, comprised of a variety of faiths, races, languages and cultures. The Commonwealth's 2 billion people account for 30% of the world's population. Members have a common working language and similar systems of law, public administration and education. Mainly membership is based around colonies of the former British Empire, however there are members such as Mozambique and Rwanda, who were not former British colonies but feel that that being members can best serve their interests on the global stage. The Commonwealth aims to advance democracy, human rights and sustainable economic and social development both within its member countries and beyond. The Commonwealth's structure is based largely on unwritten and traditional procedures and not on a formal charter or constitution, being guided by a series of agreements on its principles and aims. These are Declarations or Statements, which have been issued by Commonwealth Heads of Government at various summits. Together, they constitute a foundation of Commonwealth values and a history of concern in global affairs.

ABE

The World Trade Environment

57

Every two years, the heads of government of Commonwealth member states convene at a meeting commonly referred to as the Commonwealth Heads of Government Meeting (CHOGM). Whilst the CHOGM is conducted in a more informal setting than other international summits, major strategic issues affecting the Commonwealth are discussed. CHOGM 2009, for example, was dominated by discussions on climate change many Commonwealth states are small, low lying islands, particularly vulnerable to the rising sea levels associated with climate change.

European Bank for Reconstruction and Development


The EBRD was established in 1991. It provides project financing for banks, industries and businesses, both new ventures and investments in existing companies. It also works with publicly owned companies, to support privatisation, restructuring state-owned firms and improvement of municipal services.

Organisation of Economic Co-operation and Development (OECD)


The OECD groups 30 member countries sharing a commitment to democratic government and the market economy. With active relationships with some 70 other countries, and Non Governmental Originations (NGOs) such as Oxfam and Medecin Sans Frontiers and civil society, it has a global reach. Best known for its publications and its statistics, its work covers economic and social issues from macroeconomics, to trade and education.

Organisation of Petroleum Exporting Countries


OPEC is an international Organization of eleven developing countries, which are heavily reliant on oil revenues as their main source of income. Membership is open to any country, which is a substantial net exporter of oil. OPEC's eleven members collectively supply about 40 per cent of the world's oil output, and possess more than three-quarters of the world's total proven crude oil reserves. OPEC's objective is to co-ordinate and unify petroleum policies among member countries, in order to secure fair and stable prices for petroleum producers; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry.

G. GLOBALISATION
Market expansion is concerned with extending the area in which a business operates, so that more potential customers are aware of the products or services being provided. As we have seen, exporting as a method of market expansion is usually the first step towards international trading. This is often followed by the business setting up locations in other countries, where its products are manufactured as well as marketed, in order to take advantage of the local availability of raw materials, or of cheap labour, thus reducing transport costs. Trade has expanded worldwide, so that we have now reached the stage of global industries. These have been defined by Porter as those in which "the strategic positions of competitors in major geographic or national markets are fundamentally affected by their overall global positions". A global firm is one that can secure major benefits in all areas of operation, with the ability to site production plants and distribution networks in whichever region of whichever country offers the best advantages. This has led to nation states actively competing to attract foreign investment, and global corporations such as Toyota and General Motors are acquiring an economic power to rival the countries in which they operate.

ABE

58

The World Trade Environment

Influences on Globalisation
There is no doubt that the trend towards globalisation has been one of the most significant developments in international business during the last decade. More and more companies have become, and many more would like to become, global in their operations. What then are the factors that have served to drive this growth and spread of globalisation? Some of the more important factors include the following: Deregulation of trade/Open markets We have seen earlier how increasingly world trade has become deregulated. As a result, more and more markets have opened up to the aspiring global business. Even markets that have traditionally been very difficult to move into, such as China and some of the former Communist Eastern Bloc countries, are now open. Japan, at one time highly protected against foreign companies, has opened up in recent years. Global competition Partly as a result of freer world trade, we have seen the growth of global competitors. Even companies that have traditionally been very insular in their outlook and approach to business have woken up to the recognition that increasingly their competitors operate in global markets. One approach to dealing with local competition is for companies to go global themselves. Risk spreading We have seen that the global business environment is much more dynamic and complex. In particular, financial and other global trading systems mean that markets can change overnight. For example, recently the Asian economies, from being strong growth economies, almost overnight began to experience major problems with falling share prices, company bankruptcies and so on. So sudden were these changes that some authors have referred to it as the Asian meltdown. A company can hedge against the risks caused by such market and economic fluctuations by operating in several markets/parts of the world. Global operations enable the business to spread the risks of sudden downturns and changes in economies and markets. Economies of scale/Experience curve effects Usually, global business involves increases in the scale of operations of an organisation. As such, it enables a company to achieve potentially large economies of scale and/or experience curve effects that would be restricted if only domestic markets or relatively few overseas markets were targeted. We noted earlier that new product development and the associated research and development costs for many products these days are substantial. Very often these substantial costs can only be recouped if the resulting products are marketed on a global basis. Supply chain management A further impetus to developing global strategies by organisations has been the desire to manage the supply chain more effectively, so, for example, some companies have been prompted to go global in order to secure access to low-cost labour or raw material supplies. Sometimes companies are prompted to go global in order to gain access to skills that are simply not available in domestic markets, such as research and development , design, IT and manufacturing skills. Global enabling technologies and skills These perhaps facilitate the growth of global business and strategies rather than prompt it. Increasingly, global business strategies may be developed through access to new technologies and skills. So, for example, developments in information technology and databases facilitate the growth of global strategies and positions. These databases enable the construction of detailed customer profiles across the

ABE

The World Trade Environment

59

globe by cross-matching this intelligence to other databases, such as economic data, socio-economic groupings, geodemographic data and so on. The business can identify global segments and their characteristics. The global village None of the above factors would be sufficient to encourage and facilitate the growth of global strategy if customers were not receptive to global strategies and companies. The growth of international business itself has in large measure been due to changing customer needs and wants, and in particular an increased receptiveness and desire for global products and services. We have only to turn on the television to see how the world has shrunk, a phenomenon that many refer to as the global village.. These, then, are some of the key factors that have helped drive the growth of global business strategies. You must always be aware, however, of some of the key factors tending to inhibit this growth or at least which are considerations before decisions about commitments to a global strategy are made. Cultural factors Although we have mentioned the growth of the global village, cultural differences still exist in different parts of the world with these differences often being substantial. Businesses cannot simply override these cultural differences. Customer tastes and needs Related to, and often underpinned by, cultural factors, the growth of global business is restricted by differences in customers tastes and needs in different parts of the world. Other environmental factors Finally, a global approach is restricted where there are differences in some of the key environmental forces and factors that we have already discussed. So, for example, legal, political and regulatory forces must be considered.

Arguments for and against Globalisation


Pursuing global strategies has a number of advantages for a company, which go beyond mere economies of scale, although this is itself, an important factor. There are other many benefits. Cost reduction Costs may be reduced through the economies of scale that arise due to the sheer volume of trade available on a worldwide scale. Sourcing and/or operating from lower-cost countries also allow costs to be reduced, as does a reduction in the duplication of development, production and marketing costs. Greater flexibility to exploit differences in factor costs between countries, or in exchange rates, is also available to global companies. Improvements in quality Exposure to a global market and the competition within it often has the effect of making a company improve its systems and procedures, and also the quality of its products, in order to compete. This can be achieved through concentrating materials and personnel resources so as to satisfy the higher-level demands often found in new markets and with international customers, as opposed to domestic markets and consumers, who have a much greater choice of suppliers.

ABE

60

The World Trade Environment

Improved customer satisfaction and enhanced company/brand image Marketing on a global scale leads ultimately to having brand names, which are themselves, recognised worldwide. This, in turn, added to the improved quality which accrues, as above, creates an enhanced company image. Success in the global marketplace, as in so many other areas, creates its own success. A company that has embarked upon a global strategy is able to use the same market mix in different countries. This then results in greater global recognition by customers, backed up by greater availability of both products and services, provided the company identifies "horses for courses" and takes account of cultural factors.

Increased competitive leverage Global strategies enable a company to enter new markets by means of low cost advantage, due to economies of scale, etc. as we have just seen. They also allow a company to compete where there is the greatest potential for increased sales and profits, for example in opening up new markets in countries such as China. Having a greater number of markets in which to operate increases a company's opportunities to attack its competitors, and also provides the option of moving out of a market which is saturated or is suffering from a depression and transferring attention to other markets which are currently more buoyant. In other words, it allows the company to have a portfolio of opportunity where a balance can be struck between different markets, rather as an investor in the stock market seeks to have a balanced portfolio of stocks and shares, so that falls in one company can be offset against rises in another.

In contrast there are arguments against globalisation particularly in the way it is seen as the blending of cultures and critics see that western influences, especially American, has pervaded over culture producing one big "McWorld". In certain societies this is seen as cultural assault. Economically it is felt that globalization does not give any benefit to many LDCs with the global brands creating sweat shop conditions. The power of the global manufacturers also inhibits the development of home industries within the LDC nations.

Emerging Issues Uncertainties and Turbulence within the Global Environment


The international environment is by virtue of its scope very complex with relationships that do not seem obvious. The following examples demonstrate this clearly. The Global Financial Crisis 2007- 2008 The bursting of the bubble in the US housing market built upon risky lending policies (so called NINJA mortgages) of the US Financial System quickly led to a global financial crisis. This was because the risky debt had been sold on in the form of financial instruments to many banks and financial institutions in the G8 nations. This crisis highlighted the globalisation that had taken place in financial markets and has led to governmental discussions within bodies such as the G20 aimed at the regulation of the global financial sectors. There have also been other related instances of weaknesses in the financial sector with regard to unregulated cross border activities, notably the savings crisis caused by the Icelandic Banks offering relatively high interest rates on savings compared to other countries. This attracted a huge inflow of personal savings, mostly from the United Kingdom and the Netherlands, and enabled dramatic increases in the standard of living for the 300,000 inhabitants of Iceland on the back of a growth in the Icelandic Banking sector of 900% in eight years. With their new found wealth, many Icelanders took out

ABE

The World Trade Environment

61

loans and invested in other countries based upon a strong currency and lower borrowing rates in other countries. The Icelandic Banks themselves invested in US banks and when one of them, Lehman Brothers, failed in 2008 they lost money. This led to a sudden devaluation of the Icelandic currency which meant that the foreign loans suddenly became more expensive to service both at a personal and a corporate level. The banks found their liquidity compromised and, being an inherently small country (unlike the UK), were unable to continue and failed, being taken into effective government control with debts equivalent to eight times the GDP of Iceland. In turn, this has led to friction between the Icelandic government and the governments of the UK and the Netherlands as the latter seek to recover the savings investments of their inhabitants which had totalled 3.9 billion Euro. The Emergence of China as a Major economic Force As the following article shows, the economic status of China is causing concerns. G20 to tackle US-China currency concerns At a meeting in Seoul in November 2010, leaders of the G20 group of major economies have agreed to avoid "competitive devaluation" of currencies. Agreement had been reached on "indicative guidelines" to tackle trade imbalances affecting world growth. Tensions had been high between some delegations over how to correct distortions in currency and trade. The agreement fell short of a US push to limit trade deficits. There are fears that the conflict, chiefly between China and the US, may threaten global growth. US President Barack Obama said there should be no controversy about fixing imbalances "that helped to contribute to the crisis that we just went through". "Exchange rates must reflect economic realities," he said. "Emerging economies need to allow for currencies that are market-driven." It is felt that China's currency, the Yuan, is artificially weak and gives Chinese exporters an unfair advantage as well as leading to Beijing amassing huge foreign reserves. However, Chinese officials argue that Beijing has an "unswerving" commitment to reform its currency regime, but that global economic stability is needed to achieve it. China is moving into a position of actually increasing domestic consumption, rebalancing its economy. However, the agreement to develop new guidelines to prevent so-called "currency wars" fell well short of the 4% limit on national trade deficits and surpluses proposed by the US, which had been blocked by China and Germany the world's two largest exporters. The G20 leaders also gave their backing to reforms designed to give emerging economies such as China a bigger say in the International Monetary Fund. In their communiqu, leaders said they were delivering "a modernised IMF that better reflects the changes in the world economy through greater representation of dynamic emerging markets and developing countries".

ABE

62

The World Trade Environment

The Impact of Information Communication and Computer Technology (ICCT) The pace of advance within this area continues to increase and to be a key force in globalisation. As the Acer case study (June 2010) clearly shows, governments are now taking major initiatives to stimulate the adoption of the new digital technologies. In the commercial sector, ICCT companies are seeing traditional markets changing as the blurring of technologies has led to integration of different uses and solutions onto a single platform. The latest mass technology is the so called Ultra Mobile Communication device as exemplified by the iPad from Apple and other similar devices from other global manufacturers. Manufacturers are looking to the establish mass markets for their products in emerging economies. Equally, the recent growth of social networks has greatly increased the interaction between individuals and groups, not only for social purposes, but also to exchange information and views notably about products and organisations. Companies such as Avon Cosmetics are using social networks to support their business activities, and many organisations are using the internet to develop two way communication channels with consumers over and above using it simply for advertising or selling.

PRACTICAL ACTIVITIES
You will find it useful to have a clear understanding of the role and work of the major institutions impacting on world trade. 1. 2. Research the last meetings of the G8 and identify the current concerns of the world's leading nations in respect of international trade. Research the latest position on the World Trade Organisation's attempts to develop the position of the world's poorer nations in world trade the Doha Development Agreement. To what extent do you agree or disagree with the anti-globalisation protesters that these institutions serve the interests of the rich nations at the expense of the poorer nations.

3.

ABE

63

Chapter Four Analysing the International Business Environment


Contents
Introduction

Page
65

A.

Political Factors

65

B.

Economic Factors Economic Resources Economic Indicators

66 66 67

C.

Social/Cultural Factors Defining Culture Culture and Business

69 69 71

D.

Technological Factors Availability of Information Technology Life Cycles and Development Costs The Internet

73 74 74 75

E.

Legal Factors The Law and Business

76 76

F.

Ethical and Green/Environmental Issues Nature of Ethical Issues Approaches to Ethical Issues Encouraging Ethical Behaviour Environmental Issues Pressure Groups

77 77 78 80 81 81

G.

The Three Cs Framework Country Currency Competitors

82 82 83 84

(Continued over)

ABE

64

Analysing the International Business Environment

H.

Using International Environment Analysis Techniques Example of PESTLE Analysis for Bombardier Aviation Example of 3 Cs Analysis Applied to the Acer Corporation

84 85 86

ABE

Analysing the International Business Environment

65

INTRODUCTION
We continue our examination of the environment of international business here by looking at the broad external environment. You should be completely familiar with the initial approach to this from your other studies the PEST or PESTLE analysis. We shall be using the latter here and considering the international environment in terms of: Political factors Economic factors Social (or social/cultural) factors Technological factors Legal factors Ecological / Ethical factors.

In addition to the PESTLE factors, there are a number of additional elements which we need to consider in respect of the international environment. These are characterised as the three "C" factors: Countries. Currencies. Competitors.

A. POLITICAL FACTORS
In an ideal world, organisations would like to have a political climate that does not change and is supportive to business interests. They would like to see policies that lead to: Low inflation rates. This is particularly important in developing markets where increase in the level of prices has huge impacts upon the poorer people in society. The Indian Government is very aware of this in setting its economic policy to ensure that economic growth is managed without significant increases in the level of prices caused by increases in consumer demand outstripping market supply. Steady market growth. Erratic market trends can have significant impacts upon investments decisions Low taxes on company profits. The level of taxes upon businesses particularly under foreign ownership can influence investment decisions, as was the case in the Irish Republic where relatively low rates of corporation taxes resulted in a significant increase in foreign direct investment by many MNCs. No restrictions on the ability to repatriate profits. No restrictions on local content. Support for a market economy with minimal government intervention, for example no controls on price / profit levels and no punitive import taxes

However, it is unlikely that this situation would persist in any country. From a business point of view, the major political problem is likely to be instability. Instability may arise through frequent changes in the ruling political party or elite, and/or through frequent changes of policy by a stable ruling political party. If the political situation is one in which the environment surrounding the company is predictable, companies can develop and implement international business plans with some confidence. If the government changes

ABE

66

Analysing the International Business Environment

direction frequently, medium- and long-term planning becomes very difficult and companies will feel forced to adopt short-term, highly pragmatic approaches. However even in politically stable countries, democratic elections which could change the ruling political party take place every five years or so. When a new party takes power, there is likely to be a measure of uncertainty whilst it settles into the job of running the country and the effect of new policies is awaited. Even if the same political party is in power for many years, there will be a variety of political and economic issues that will cause it to make changes in political and economic directions, and most governments pass laws that affect market opportunities from time to time. Stability, though, is not the only issue of interest to business. It is also concerned that governments take political and economic decisions that do not cause the economy to decline or become less profitable for companies. For example, many Latin American countries were not able to prevent runaway inflation in the 1980s, and other governments have acted in ways which conflict with business interests by such policies as increasing corporate taxation or using price controls to try and control inflation. There have been various attempts to identify the level of risk inherent in a country. One such approach is the Business Environment Risk Index (BERI), which was started in the US in 1972. In the BERI ratings, countries are evaluated on 15 economic, political and financial factors on a scale from zero to four. The factors that relate most strongly to political areas are political stability, attitudes to foreign investors, nationalisation, bureaucratic delays, and currency convertibility. Scores on the BERI scale are calculated out of 100 and a score of 80 or more indicates an acceptable level of risk. However, scores of 40 or less suggest that the level of risk is probably unacceptable and companies should think carefully before commencing business in countries with this sort of score.

B. ECONOMIC FACTORS
The economy of any country is the end result of the production and the distribution of wealth. Before we look at some of the indicators of the economic environment of a country, we should briefly note some of the underlying resources that influence it.

Economic Resources
The three factors of production labour, land and capital are the key resources which determine economic activity. We can interpret these factors here in a broader sense as they represent important considerations for business. Population Since the 18th century the world has undergone a population explosion that has impacted on all aspects of life. In economic terms, population is an important factor. The availability of labour is an essential resource in the manufacture of goods and services, whilst at the same time the population as a whole provides a market for the goods and services produced. However, it is not just the size of the population which is important but also its age, sex and geographic distribution. If, for example, as is the case in most advanced countries, there is an increasing proportion of dependent population i.e. the old, the young and the unemployed then resources will be channelled into supporting them and consequently economic growth will be slow. Conversely in many countries the reverse of dependency is the proportion of the population that is economically active, albeit at a low level of earning. Thus, India, for example, has a growing and potentially dynamic population under 35 lessening the dependence of an aged population.

ABE

Analysing the International Business Environment

67

Natural resources A countrys ability to generate wealth will be linked not only to its population, but also to its geography. This conditions not only the availability of natural resources land, water, minerals, etc. but also its ability to exploit them productively. Thus, the climate and terrain can be important in respect of the ability of a country to develop, for example, forestry as a productive industry and to develop effective transport systems (including port facilities).

Infrastructure The ability of a country to utilise its labour and natural resources will be influenced by its infrastructure. By this we mean the stage of development of its systems for housing, transport, communication, and energy. Many developing countries are now engaged in major infrastructure projects such as road building in order to provide the infrastructure to support economic development. This is of great benefit to western companies such as Bombardier Transportation (Case study June 2010) who have the expertise gained internationally to successfully undertake major projects.

Economic Indicators
These are factors that provide information about the economic situation of a country. Income When we consider the economic factors, the distribution of wealth is perhaps the key consideration in the selection of target markets. Countries can be considered in terms of their total income, or gross national product. Using such a league table, the US, Japan and Germany tend to occupy the top positions. Indeed, the concept of the importance of the Triad is based upon the large size of the GNPs of the US, Japan and Europe. From an individual company point of view, the total income figure for a country can be used as a rough guide to a specific market size. Thus, a country might already be in the maturity phase with its markets reliant upon low levels of replacement sales. In other less developed countries, with lower levels of GNP, the market might be growing rapidly with initial purchasing. For example, the electricity supply industry in the top GNP countries is well established, but in countries with lower levels of GNP but with high growth rates, the demand for electricity might be increasing rapidly, and this would create a strong growth in the market for electricity supply equipment and transmission in those countries. In most instances, though, companies are more concerned with market segment(s) rather than the total market in any one country. Because of this, companies will be more interested in the GNP per person or per capita than the grand total. Breaking down GNP per capita further, companies will be interested in the level of disposable income after various commitments of taxes, health and social security payments and other major payments have been made. This is usually a better indicator of available expenditure, in the majority of consumer markets, than GNP per capita. If this approach is used, significant market segments can be identified in countries that are often thought to be quite poor. For example, in India there is an affluent middle class with a considerable disposable income. The total size of this segment is larger than the populations of most other countries in the world and represents a huge consumer market opportunity. Over the next two decades, the countrys middle class will grow from about 8 percent of the population to more than 40 percent and create the worlds fifth-largest consumer market. Certain general relationships exist between income levels and expenditure patterns. For example, the amount of income spent on food, expressed as a percentage of

ABE

68

Analysing the International Business Environment

income, is higher in poor families and in poor countries than it is in richer countries. There are variations in the general rule. Thus, at the beginning of the 21st century in Japan, almost 20% of consumer spending is allocated to food, compared with 15% in the US, 13% in Germany and 11% in Britain. The explanation for the high spending on food in Japan is partially based upon the high prices of food there, caused by protectionist economic policies to support local agricultural products. In part, though, expenditure on food is influenced by culture food in Britain is given a comparatively low priority, whereas in Japan and France food is seen to be more important. This results in higher consumer expenditure on food. Inflation This is a major influence in most countries. In some countries, for example the UK, one of the main reasons explained by government for economic decisions is a desire to control inflation to a particular target level. In other countries, inflation rates are so high that pricing and other decisions have to take account of the constantly increasing price of goods and services. The Asian countries of China, India, South Korea and Taiwan have all achieved rapid growth during the past 5 years or so, with inflation rates usually below 10%. If an economy is expanding across all income groups this level of inflation is bearable, but where there are significant differences between the classes then this level of inflation particularly if it impacts strongly on basic commodities can cause extreme hardship for the poorest in society. This is certainly a key concern of the Indian government. Latin and South America is different. Some countries, for example Brazil that has sometimes experienced inflation rates in the order of 2,000%, have a long history of uncontrolled inflation. Argentina had very high inflation rates in the 1980s, but had brought the rate down to 11% by the year 2000. Mexico, whilst never as out of control as Argentina, has succeeded in bringing its inflation rate down from over 100% to under 10%. Inflation on this scale is particularly of concern to poorer classes as often it is the prices of staple goods such as food experience high inflation and governments must be mindful of this in setting overall economic policy. Capital investment This is directly associated with economic growth. It is defined as total business spending on fixed assets, such as factories, machinery, equipment, dwellings, and inventories of raw materials, which provide the basis for future production. It is measured gross of the depreciation of the assets i.e., it includes investment that merely replaces worn-out or scrapped capital. In 2008, according to the CIA Factbook, Singapore had the highest rate with 45%. The figures for China and India were 40.2% and 39% respectively. Developed countries typically have rates of less than 20%. Government policies Other economic influences that can be important are the level of government budget deficit or surplus. More recently, many western governments that had expanded their economies by government spending based upon large borrowings, experienced problems when the crises in the banking sector caused widespread recessions. Greece and the Irish Republic are among several countries that are now experiencing difficulties caused mainly by over expansion in government spending. The problems for both nations have been have been made worse by being members the Euro zone. The level of official reserves of foreign currencies and gold and special drawing rights in the International Monetary Fund shows a countrys ability to meet its external obligations. If reserves are going down rapidly, this will have an almost certain downward effect on the value of that countrys currency. Declining off icial reserves

ABE

Analysing the International Business Environment

69

shows a decline in confidence in the countrys economy. It could be linked to deteriorations in the countrys balance of trade and the balance of payments. Government decisions taken to influence economic performance by, for example, reducing inflation or to stabilise the foreign exchange rate, will affect the level of personal and corporate taxation. If taxation increases, other factors remaining constant, market sizes will decrease in the consumer and most business markets. On the other hand, government markets will increase to reflect the higher influence of the government in the total market place of that country.

C. SOCIAL/CULTURAL FACTORS
The social/cultural element is particularly important in that it plays a considerable part in determining how the legal, economic, political technological and ethical/ environmental elements work. It is important at the outset, though, to raise a word of caution in looking at these factors. There is sometimes a tendency to treat social and cultural differences in a rather superficial way by thinking about stereotypes for example, the British as being reserved, Americans as being loud, and Afro-Caribbeans as being colourful and gregarious. Stereotyping is a dangerous oversimplification and needs always to be avoided. We have linked social and cultural factors together because they are so inextricably connected. Social factors are reasonably straightforward to identify in terms of the concepts of reference groups, social roles and status: Reference groups are all those groups that have a direct or an indirect influence on a persons attitude or behaviour. These include family groups, friendship groups, workplace groups, religious groups and professional groups. The family probably represents the most important primary reference group that will influence a persons life. The role of the family varies from society to society. In each group to which a person belongs (and it is important that we remember that individuals will belong to a number of groups), his or her actions and influence in that group will be determined by the role and status of the position held. For example, a woman within a family may have a number of roles wife, mother, carer and daughter. If she also has paid employment, her role and position within the organisation in which she works is likely to be very different from that or those within the family.

But what influences these reference groups? Why do they behave the way they do? Thinking of the family, it is easy to see that this varies a great deal from country to country. The answer is culture.

Defining Culture
Terpstran (1987) has defined culture as follows: "The integrated sum total of learned behavioural traits that are manifest and shared by members of society". Culture is the shared values and beliefs of a society, its design for living. However, with such an all-embracing issue as this, precise definitions rarely give usable meanings. Thus, within the culture of most societies, there are almost always a variety of different subcultures for example youth culture, student culture and so on. Culture is learnt and the main force for transmission of whatever type of culture is the reference group to which individuals belong. In this way, therefore, culture may also be thought of as the way in which people interact with each other in a group that shares some common sense of belonging.

ABE

70

Analysing the International Business Environment

One of the reasons that culture is so difficult to define is because it has so many elements that interrelate and change over time. One way of analysing it is to seek categories of significant elements as in the following diagram: Language: Spoken Written Official Hierarchy International Mass media Colloquialisms Religion: Sacred objects Philosophical systems Beliefs and norms Prayer Taboos Holidays Rituals Values/Attitudes to: Time Achievement Work Wealth Change The scientific Risk-taking Possessions

Beauty Good taste Design Colour Music Architecture Brand names

CULTURE

Formal Vocational Primary Secondary Higher Literacy level Human resources Planning

Aesthetics

Education

Home country law Foreign law International law Regulation Political risk Ideologies National interests Law and Politics:

Transportation Energy systems Tools and objects Communications Urbanisation Science Invention Technology/Material:

Family structures Social institutions Interest groups Social mobility Social stratification Class systems Social Organisation:

You can probably add a number of other elements to each of these categories, or even as sub-divisions of individual elements themselves. To illustrate the complexities involved, consider language. This is often a first consideration in looking at an international market. However, not all countries are linguistically homogeneous India or Nigeria, for example, comprise many subcultures, each with its own language or dialect and who communicate only in a national context with a common language. In India, there are many dialects and English is seen as a common language as evidenced by the bank notes that have the15 most common languages listed with English being the main one that denominates the amount. In a business context, this situation creates further complexities as communication needs to be translated and, hence the communication becomes vulnerable to distortion.

ABE

Analysing the International Business Environment

71

Culture and Business


Comparisons of culture by identification of the differences and similarities in these elements are the most effective way of utilising such a broad range of variables. For businesses considering international markets it is essential to be aware of these cultural differences. The relevant issues to consider include the following. Self-reference criterion (SRC) It is very easy to use ones own cultural experience and values when viewing other people and cultures. In fact, it is almost impossible not to. In international business, though, the ability to think about other cultures from a culturally neutral standpoint can be very useful. It is the key to being able to identify differences in behaviour, markets and systems resulting from differences in culture and thus understanding the requirements of trading with and within another culture. In 1966, Lee ("Cultural Analysis in Overseas Operations) used the term self-reference criterion (SRC) as describing the approach of judging other cultural values and practices based upon one's own cultural standpoint. He went on to suggest a four-step approach to avoid it. The steps are: (i) (ii) (iii) (iv) Define the situation, problem or goal in terms of the home country cultural traits, habits and norms. Define the situation, problem or goal in terms of the foreign culture traits, habits and norms. Isolate the SRC influences in the definitions and examine them carefully to see how they complicate consideration of the issue. Redefine the situation, problem or goal without the SRC influence and derive a specification or solution that is appropriate for the foreign market.

Lees approach is a logical way to reduce cultural difficulties. However, in practice it is quite difficult to be sure that step (ii) is carried out accurately. Accurate definition of problems in terms of a foreign culture needs a good knowledge of that culture. Without this, it will be far too SRC biased and may result in inappropriate actions for example, offensive or misleading brand names being used and irrelevant product features being promoted. High and low context cultures In communication, some information is transmitted by spoken and written language and some by the context or setting within which the language is used. The relative importance of these two means of transmission within a culture can have important consequences for business communications. Using this criterion, it is possible to classify cultures into: (i) (ii) Low context cultures those where most information results from the language itself; and High context cultures those where much information is communicated by the context within which the communication takes places.

We can place societies into these two broad categories as a guide to the use of communication, for example:

ABE

72

Analysing the International Business Environment

Table 4.2. High/Low Context Cultures. High Context Cultures Japanese Mediterranean Asian Arab Low Context Cultures German English Scandinavian American

The importance of this distinction can be seen if we consider some of the facets of business communications and processes outside of the purely written or spoken word: (i) Body language This is a key element of oral communication and may serve to confirm or refute the message conveyed as well as giving information about the understanding and attitudes of the participants. Its importance can be magnified when communicating in a different culture from ones own, when the role and significance of the messages conveyed by body language may be also be different. In high context cultures, adherence to particular norms of behaviour and appearance considered appropriate to the setting within which personal interactions take place can be much more important than in low context cultures. Time Consider the following questions: What is the importance of punctuality for meetings? Is late arrival deemed to be discourteous? Are meetings well planned and do they run to schedule?

(ii)

In a high context culture, establishing mutual understanding and developing friendship are seen as highly important. Time constraints will not necessarily take precedence over this and, therefore, it may be quite normal for meetings to overrun or to start late, or for individual punctuality not to be considered particularly important. In contrast, these norms of behaviour are likely to be a sign of inefficiency by participants from a low context culture. (iii) Space Space should be looked at in two ways: physical space and personal space. For example, does physical space confer status (in, say, office size) and how close is it acceptable to get to people? Again, these elements are culturally conditioned. In high context cultures, it is more normal for people to feel comfortable close together and distance between participants may be a sign of coldness. Friendship In high context cultures, deals often relate more to the people that you know and, therefore, social interaction and developing friendships is a key aspect to business. In low context cultures, the UK and US are good examples, friendship may be useful, but it is the contractual quality of the deal that is allimportant. Contracts The way in which contracts are negotiated differs. Lengthy haggling is normal in high context cultures and various inducements to purchase, which could be thought of as bribes in the US and UK, may not only be acceptable but also expected.

(iv)

(v)

ABE

Analysing the International Business Environment

73

The way in which contracts are interpreted and delivery monitored also varies. In high context cultures, it is expected that friends will help each other out. In low context cultures it is more likely that lawyers will be brought in to argue interpretation and resolve difficulties. These issues highlight the need for the international business manager to be aware of the dissimilarities in an international market. We must remember, however, that it is as important to identify the similarities and to ensure that best advantage can be gained from them. The cultural sensitivity of products and services The products and services offered for sale in a particular society, and the way in which they are offered for sale, have to be acceptable to that society. In the main, consumer products are more culturally sensitive than business-to-business products, and those that are closest to the core beliefs of culture are the most sensitive of all. Often these relate to family and religion gatherings. Food is particularly culturally sensitive because it has strong symbolic values that have been reinforced from our youngest days within a family. For example, in the UK, although the traditional Sunday lunch is much less usual nowadays, it still conjures up for British people a set of images that will cover the food served, the time it is served, the formality of the proceedings. Likewise the food tradition associated with Thanksgiving Day in the United States is very significant culturally. In contrast, a comparable meal in say France, a country quite close geographically to the UK, will have significant differences in terms of the time, the food, the drink, the length of time it takes to finish the meal and the acceptable behaviour of children. Beef is an example of a food product that carries strong significance for Hindus for whom the cow is sacred and has meant that, for example, McDonalds have had to change their offering to concentrate on poultry and vegetarian dishes. Other religions also specify acceptable and non-acceptable foods. Thus, when we look at products for an international market we must try to estimate how different cultures will view them. Note, though, that newer products to the market, such as consumer durables, are invariably less culturally sensitive.

D. TECHNOLOGICAL FACTORS
There has been a rapid growth in the speed of technological advancement over the recent decades. One of the remarkable features of this has been the way in which access to advanced technology has spread from the developed countries to other lesser-developed countries around the world. It is now not unusual to see people, without what many cultures would perhaps consider the essentials for existence, using computers in offices and shops, communicating by mobile telephone and watching television programmes via satellite. Wide variations in technology between countries are less a feature of the international environment than is the case with legal, economic and political factors. This has partly been the result of the development of multinational and transnational companies and partly the result of government intervention. The practice of multinational companies basing their operations in those countries around the world that provide the best returns has increasingly meant that countries with low costs for labour and for factory and office sites are being used to produce components and sometimes the final assembled product. As part of this process, a great deal of technology transfer takes place. Many Newly Industrialising Countries (NICs) and Lesser Developed Countries (LDCs) have benefited greatly from the acquisition of technological and production-process know-how.

ABE

74

Analysing the International Business Environment

In addition, governments in many countries have encouraged the development of hightech industries and investment in education and training to ensure a competent, skilled workforce as a means of accelerating economic growth and to reduce levels of unemployment.

The availability of technology is, therefore, less based on a few countries; although it would be true to say that some countries have a much wider range of advanced technology than others. There are a number of issues in respect of this spread that have important consequences for international business.

Availability of Information
The developments in communications, and by that we mean personal communications, transport and the media, mean that we live in a shrinking world. Information about events almost anywhere in the world can be obtained almost immediately by anyone anywhere. The advances in mobile communications have meant that poorer nations do not have to invest in costly traditional phone networks to enjoy modern communications. Satellite television with its many 24 hour news channels such as CNN and the BBC World Service, means that events such as the oil spill in the Mexican Gulf or the trapped Chilean miners, both in 2010, were communicated in real time across the globe. Consumers can access information now at the touch of a button making it much easier to, say, compare prices. This puts a premium on information, and particularly on its access, control and analysis. A number of developments arise from this: Satellite, cable television and the Internet has opened up the number of ways in which people across the world can receive information, and particularly advertising, with minimal control over content by individual states. Companies need to pay particular attention to the need to get their own interpretations across to the public in the face of competing analyses, and this has given rise to the phenomenon of spin doctors attempting to manage the way in which events are reported and perceived. Businesses need to exploit a wide range of technologies in communicating and conducting operations.

Technology Life Cycles and Development Costs


New technologies and products can be extremely expensive to develop for example, a new pharmaceutical product will cost millions of dollars to bring to the market, and a new model of car for mass production will entail a huge amount of investment. On the other hand, the speed of technological and market change means that technologies and the products they underpin have ever shorter product lifecycles before the next generation of technology and products is developed. The high cost of research and development to produce the next generation of products coupled with shorter technology life cycles has given an impetus to two developments: The need to market products to more and more country markets in an attempt to justify and recoup the high costs of research, development and product launch. In many products, the market in any one country is less and less likely to be sufficiently large to achieve a break-even position. This has resulted in regio-centric and geocentric planning becoming more relevant. The use of alliances, of various types, in an attempt to share some of the costs of product development. Often, businesses are not able to recoup the high costs of

ABE

Analysing the International Business Environment

75

investment in new products and technologies before they are made obsolete. As a result, we are increasingly seeing the joint development of technologies and new products between different companies throughout the world so that investment costs and risks can be shared. So, for example, Sony and Ericsson combined to develop a range of mobile phones. Note, though, that the actual prices of computers have fallen in line with the prediction of Gordon Moore, the co-founder of Intel. He predicted that as the market expands the price of processing chips will fall and at the same time the processing power of computers will significantly increase.

The Internet
The Internet is destined to change virtually every facet of our lives, including the whole nature and operation of business. Its major impact in respect of international business is that it enables the process of buying and selling across international boundaries without any reference to the traditional methods of conducting such transactions, such as face-to-face contact, use of agents and intermediaries, offices and facilities abroad. The characteristics of the Internet are such that: It facilitates global marketing for the smaller companies that in the past perhaps have faced major disadvantages compared to their larger counterparts. It enables customers to compare and contrast competitor offerings much easier and on a much wider basis than before. It is a cost-effective and convenient way of purchasing products and services for both consumers and business-to-business customers.

Of course, none of this will happen if customers do not have access to the Internet, but increasingly they will. The costs of computers and access to the Net are dropping significantly. Further, technological developments mean that access is now available through other means, such as conventional digital TVs, smart mobile phones and ultra mobile personal computers (UMPCs) such as tablet devices. In addition, initiatives such as computers for all and the adoption by many organisations to incorporate free WIFI access for their customers in their outlets, have further increased the access of more and more customers to the Internet. The use of the Internet by businesses is growing rapidly, both for advertising their products and services and for actually selling them. Virtually all the large multinational companies have now developed web sites, but interestingly enough, it is the smaller, newer companies who have been the quickest to realise the potential of the Internet for commercial purposes. Companies like Amazon, an Internet book sales company, has grown in less than a decade from nothing to being one of the largest in the market, all through Web-based sales. There is no doubt then that the Internet will give rise to some of the major opportunities and threats for international business in the future. It is also likely to impact on the whole nature of marketing operations ranging from access to, and the use of, data through to the concepts of market segmentation and targeting, and the way in which elements of the marketing mix are applied.

ABE

76

Analysing the International Business Environment

E. LEGAL FACTORS
The legal environment within which international business operates comprises three elements: Home country law this defines what is considered by the home culture to be acceptable behaviour both at home and in dealings with a foreign country. Host country law this defines acceptable behaviour within the country in which you wish to trade. International law there is no international legislative body, but there are a series of conventions, agreements and treaties, the enforcement of which relies on national sovereignties.

In light of this the international business must be aware of which jurisdiction will apply. Inevitable conflicts will emerge which may give rise to not only practical problems, but also moral issues as the legal environment in a foreign market conflicts with the cultural values of the home country. There are also three main types of legal system operating in the world: Common law This system of law, used in the UK, the United States and Canada, is based upon tradition and on legal precedents. Laws are passed by government, but are then interpreted by the courts. The interpretation of the law then becomes the legal precedent for similar cases in the future. Civil or code law Civil or code law is based upon laws that are written down. It is usual for there to be three different written types of law commercial, civil and criminal. The aim in code law is to develop an inclusive set of written codes that will cover all possible situations. Sharia law This type of law, based upon the Koran, incorporates social and religious obligations in addition to legal duties. An important element in Islamic law is the achievement of social justice. A feature of Sharia law is that it is unlawful to charge interest on loans, and this obviously has an impact upon the operations of international banking groups.

The Law and Business


Legal factors provide the regulatory framework within which international business must operate and the legal system applying to business in a particular country has an important influence on many aspects of international trade, for example: Regulation of contracts This involves: (i) (ii) (iii) The establishment of the legal rights of the buyer and of the seller. The establishment of the terms and conditions between agent and principals. The mechanisms for the resolution of disputes regarding both the appropriateness of the quality of the merchandise (and so on) in respect of exported goods and the responsibilities of agents.

Regulation of the business environment Legislation can condition what companies can and cannot do, (i) (ii) (iii) (iv) Export/import controls, tariff/non-tariff barriers and competition controls. Pricing controls, for example, resale price maintenance and price increases. The registration and enforcement of trademarks, brand names and patents. Product liability and product safety.

ABE

Analysing the International Business Environment

77

(v) (vi)

Advertising and sales promotions what can be promoted and how it can be promoted. Labelling.

(vii) Environmental issues for example, Germany has strong laws regarding excess packaging that makes manufacturers responsible for the responsible disposal of extra packaging materials. It goes without saying that businesses must be careful to operate within the laws and regulations of the countries in which they are trading. This is particularly important when the business is trying to establish a global approach and, therefore, wishes to standardise operations and marketing as much as possible. So, for example, in some countries certain types of advertising may be illegal and the business cannot apply an approach used elsewhere in the world. Countries often differ considerably with regard to, for example, competition policy and price legislation. In the same way, there is considerable difference throughout the world with respect to what is legally an acceptable incentive.

F.

ETHICAL AND GREEN/ENVIRONMENTAL ISSUES

In recent years there has been a marked growth in importance of ethical/social and green (environmental) issues. Related to these, and indeed partly responsible for their growth in importance, has been the emergence of often very highly organised and vociferous pressure groups who have embraced the new communications technologies and channels to publicise issues globally. Concern with social and ethical aspects of international business has grown as customers have become more aware of their possible harmful social implications and the, admittedly and thankfully relatively small, amount of unethical practices by some businesses. Of particular concern is the exploitation of developing countries by multinational companies through the depletion of their natural resources for little return, the degradation of their environment and the payment of low wages for the production of products that sell in developed countries for very high prices. The global tobacco companies have been criticised for switching their marketing efforts from the developed countries, where cigarette sales have been falling, to the newly emerging industrialised countries that have been persuaded to increase their purchases of cigarettes. The size and power of the multinationals has, in the past, enabled unscrupulous companies to get away with socially unacceptable and unethical practices. However, this is changing partly as a result of legislation by both home and host countries, partly as a recognition of the public relations problem that such practices can pose to companies, but most importantly because of changing social values, with customers throughout the world now demanding that companies operate socially and ethically acceptable business policies and programs. Hill (2007) notes that in the international business setting, corruption is among the most common ethical issue, but others of significance involve employment practices, human rights, environmental regulations, and the moral obligation of multinational corporations.

Nature of Ethical Issues


In recent years, the subject of corporate social responsibility has widened into what is generally referred to as business ethics. First of all, let us define what we mean by "ethics". A dictionary definition describes ethics as "a moral philosophy which teaches people their duty, and the reasons for it". Therefore, we might say that ethics are principles concerned with interpersonal behaviour. If they are such principles, then:

ABE

78

Analysing the International Business Environment

They should be universally applicable. They should provide the standards by means of which the conduct of people can be compared. They can be taught, and thus help to establish generally acceptable standards of conduct.

Many business and professional groups, for example in the legal and medical fields, have adopted codes of conduct for their membership which help to establish a standard of acceptable behaviour, and these in turn help to further ethical practices. The way in which organisations perform their activities within society has an effect both on society in general and on individuals and their values. This raises questions about the role of managers in the area of strategic management in terms of ethical practices, and the way they treat people. The range of ethical issues that potentially face the manager is enormous. Below are some of the more important. (a) Keeping to laws and regulations Often managers must decide whether or not to break laws or ignore regulations pertaining to their and their companies' activities. (b) Telling the truth Managers must also often decide when to tell the truth or at least how much information to provide. (c) Showing respect for people The business manager can face dilemmas with regard to standards of ethical behaviour relating to how people, and specifically staff and employees, are treated. (d) Doing no harm For many, this first rule of medical ethics is considered to be the most important ethical consideration for any business manager. There is no doubt that managers do face dilemmas with regard to this principle. In this case, harm could mean harm to particular people or perhaps the wider environment and society. These then are some of the key types of ethical issue managers face. Within these broad categories, managers are faced with specific issues such as, for example, product safety, misleading advertising, unethical employment practices, etc. Johnson and Scholes suggest that these ethical issues, which concern both businesses and public-sector organisations, operate at three different levels: The macro level, which concerns their role at the national and international level of the organisation of society. The corporate level, which focuses on the ethical issues concerning individual corporate entities, both in the private and the public sectors, when selecting and implementing strategies. The individual level, which concerns the behaviour of individuals within organisations

Approaches to Ethical Issues


In considering the position taken up by organisations in terms of ethical conduct we can identify four broad categories which between them form a spectrum, from minimal concern with ethics to making ethics central to the organisation's purpose.

ABE

Analysing the International Business Environment

79

In the first category, the role of the organisation is seen to be focused solely on its business performance in terms of making a profit. As Milton Friedman put it, "the business of business is business", and "the only social responsibility of business is to increase its profit". This type of business regards social issues (for which we can read ethical issues) as none of their concern, and that these are best left to society to decide for itself by legislation what is acceptable and what is not. In the second category come those organisations which look beyond making a profit for shareholders to consideration of the wider group of stakeholders. Here a limited amount of sponsorship or involvement in "worthy causes" is seen as being of economic value in improving the public image of the organisation. The third category embraces the interests of stakeholders to a greater extent and sees its role as going beyond just the obvious business targets of employing people and providing profits, to "looking after their people". Paternalist companies, such as the chocolate manufacturer Cadburys, saw their role as providing decent working conditions and improving the environment as well as creating profit. The final category, which includes many charitable bodies, comprises organisations whose raison d'tre is to meet society's needs. For these organisations, finance is less important than the provision of an acceptable level of service. Unfortunately, without some source of income, whether by sponsorship or taxation, they cannot exist and so they face the problem of trying to reconcile these two.

There are a number of high profile examples where the ethical face of business has become a public issue. Shell in Nigeria was accused of human rights abuses in the 1990s which concluded in 2009 with the corporation settling a lawsuit which acknowledges their unethical behaviour in the exploiting of oil reserves in southern Nigeria. The court case was heard in New York. The behaviour of Union Carbide in delaying settlements following the disaster at Bhopal in India is also well documented. There are increasing numbers of "ethical investors", who put money only into companies whose objectives and methods they approve. Of particular significance, there has also been a rapid expansion in the demand for "fair trade" products companies selling these guarantee a "fair" price to producers in Third World countries, and/or return a proportion of their profits to social investment in those countries. From being a small scale operation involving just smaller companies it has now grown to include large global organisations such as Cadbury and Nestle. Perhaps the best known example of an ethical company is that of the Body Shop, set up by the late Anita Roddick with her husband Gordon and based on what she referred to as its DNA: its very strong social, ethical and environmental stance. She said she would like "to be judged by our actions in the larger world, by the positive difference we make". From the above we may summarise the following four alternative ethical positions which a company may adopt: (a) Short-term shareholder interests This is the "business is business" stance as described by Milton Friedman, in which the primary objective is to satisfy the short-term interests of shareholders through the strategies and policies which the company pursues. This type of company concentrates on short-term profit which will increase shareholder value and returns. Other, wider, ethical issues with respect to other stakeholder groups, or to the community in general, are regarded as not its responsibility. (b) Longer-term shareholder interests This position is also largely concerned with shareholder interests, but takes account of the premise that the longer-term interests of shareholders may well benefit from

ABE

80

Analysing the International Business Environment

developing good relationships with other stakeholders. Thus, being concerned with the wider issues will, in the long term, result in higher profits and returns for the company's shareholders. (c) Multiple stakeholder obligations Here the interests of the wider group of stakeholders are taken into account. These include employees, customers, suppliers, distributors and the community at large. Unlike those companies, which meet only the minimum statutory obligations, these companies go beyond minimum requirements in order to achieve a balance between the interests and expectations of their shareholders and those of other groups of stakeholders. Problems can arise for companies in this category in terms of conflict between social responsibility and company survival, or between social responsibility and shareholder expectations. Many public-sector organisations fit into this category. (d) Shaper of society This category contains those organisations whose raison d'tre is primarily to effect changes in society in accordance with the needs of the community. Financial and shareholder interests are regarded as being of only secondary importance. The dilemma faced by such organisations is how commercial they are prepared to be in order to carry out their social role. The answer will depend to some extent on circumstances, and also on the structure of the organisation. For example, a company without shareholders, such as a private family company, or a public service organisation, would find it easier to adopt this stance. The larger charities, such as Oxfam, are in a similar position, where they are accused by some of being too commercial and of spending too high a proportion of their income in internal administration. In considering these alternative ethical positions it is important to remember that they will have a major impact on the organisation's operations, including its strategies.

Encouraging Ethical Behaviour


There are a number of steps that a company can take to encourage ethical behaviour on the part of its staff. Some of the main ones are as follows: Ensure top management commitment to ethical issues in the organisation. Establish clear corporate guidelines and policies with regard to ethical issues and practices. This is embodied in the creation of a policy of Corporate Social responsibility (CSR) at the highest level in the organisation. Communicate ethical guidelines and policies to all staff, preferably through a written code of ethics. Encourage staff to be open about ethical problems and dilemmas they face. Establish "ethics hotlines" which allow employees to bypass normal chains of command. Conduct ethics audits on a regular basis to identify any serious breaches of ethical policies. Conduct ethics training on a regular basis. Devise systems of motivation and remuneration/reward which encourage conformance to ethical practices and standards.

ABE

Analysing the International Business Environment

81

In conclusion, ethical issues are now a major factor for the corporate planner. The corporate planner must understand the range of ethical issues for the modern business and how to resolve the potential dilemmas to which these give rise. The planner can take several steps to encourage more ethical behaviour and practices in the organisation.

Environmental Issues
Some of the areas causing concern today include deforestation, global warning, decline in fossil fuel supplies and "fishing out" of the oceans. How do these affect strategic planning? (a) Deforestation With many people showing concern for the disappearance of forests, these companies which use wood and wood products in their business have had to look either to alternative materials or to sustainable sources in order to maintain their client/customer base. One of the ways this can be achieved is by recycling wood and paper products. Thus the pen I am using to write these original draft notes has its carcass made from recycled paper, and was supplied by Friends of the Earth. (b) Global warming Though there is still some debate, it is now generally accepted that we need to reduce carbon dioxide emissions worldwide, with particular implications for certain businesses such as car manufacture and those factory sites which give off carbon dioxide. This has resulted in a number of strategic decisions having to be made, such as the use of catalytic converters, and gas filtration systems. (c) Decline in world stocks of fossil fuels This has led to such changes as legislation in the UK on engine size for cars, with reductions in road fund licences for smaller sizes, and to investment in sustainable energy sources, such as wind farms. (d) Disappearance of fish stocks This has resulted in fishing quotas being cut for European fishermen, resulting in a large decrease in the English fishing fleets operating out of Devon and Cornwall. At the same time it has encouraged the setting up of fish farms, particularly for salmon in Scotland. Globally the wasteful fishing practices for species such as tuna has come under scrutiny for its impact on other endangered species literally caught up in some fishing nets.

Pressure Groups
There is no doubt that pressure groups of one sort or another have been important and influential in encouraging companies to be more socially/ethically and environmentally responsible. For example, Shell recently proposed to sink a disused oil drilling platform in the North Sea leading, it was suggested, to potential significant levels of pollution. Only after concerted efforts by pressure groups, and in particular Greenpeace, were these proposals by Shell withdrawn. Furthermore, these pressure groups are increasingly organising on an international/global basis so as to match the power of the global companies. We saw in an earlier study unit, for example, that the recent world trade discussions were effectively destroyed by the activities of a number of pressure groups who organised demonstrations to disrupt the talks. Moreover, these pressure groups organise themselves internationally through the use of the Internet. It is likely that pressure groups will continue to grow in importance with regard to

ABE

82

Analysing the International Business Environment

the operation of international business, and that access to and use of communications technology will enable these groups to act quickly and powerfully to make their feelings Green issues, too, have become an important concern for customers throughout the world. We have already referred to the depletion of the worlds resources through the worst excesses of some of the multinationals, particularly in industries such as mining, forestry and oil extraction, but governments are increasingly requiring that companies operate and implement policies that do not harm the environment. Similarly, customers are increasingly demanding green products, produced with green credentials. For the company unable, or unwilling, to respond to this increased awareness of social, ethical and green issues, consumer demands for socially responsibility represents a distinct threat. However, the more astute companies have recognised that, in fact, this represents a marketing opportunity. Such companies have responded to this growth in awareness and the emergence of pressure groups by introducing business policies and strategies which are more socially and ethically sensitive and products and services which are distinctly green in their credentials. So, for example, increasingly timber companies operate environmentally friendly policies of only producing and marketing timber from managed forests.

G. THE THREE Cs FRAMEWORK


In addition to the PESTLE analysis, when dealing with the international environment it is very useful to consider certain additional factors which we can characterise as the three Cs.

Country
The concept of the country is significant in international business. This might seem rather self evident, but it is important to understand how the concept is used and what its limitations are. Companies often use countries both as a unit of analysis and as a basis for their organisational structure. In terms of analysis, in many ways the boundary between one country and the next country changes markets. We often find that the laws change, the types of retail outlet are different, the types of tax paid on income and on expenditure are different, and newspapers, radio and television are different. In addition, the spoken language may well be different, although in the border areas it is not uncommon for people to speak both the languages of the neighbouring countries. Thus, it is very often the case that there are many differences in the business environment caused by the different rules, regulations and customs that relate to one country and not to the next. It is important, however, not to fall into the trap of assuming that a country constitutes a homogeneous market. We have already used the example of India, where there are many different languages, considerable divisions in the society caused by the caste system and a large proportion of wealth is owned by approximately 5% of the population. Consider also the United States of America. They may be united, but many states have their own laws and very different cultural values, consider the difference between those living in multicultural New York State and those living in the Deep South. Additionally, in some parts of the world, the development of trading blocs has started to mean that companies need to consider trading blocs or world regions as another basis for their analysis. For example, Japanese and US companies might need to develop analyses based upon the European Union as well as the individual countries within the EU. In addition, companies might change their organisational structures to allow a pan-European organisation and culture to develop. A European head office might be started in Paris, Brussels or perhaps London. Bombardier chose to relocate its head office from Montreal, Canada to Berlin, Germany to be closer to the key European rail market and to benefit from local engineering talent.

ABE

Analysing the International Business Environment

83

Finally, in some ways, countries and country boundaries may increasingly not be the best way of thinking about market boundaries and target markets for the international business. As we shall see in later study units, it may be more useful to look for similarities and differences with respect to, for example, customer needs and wants, in order to group customers and markets rather than grouping them by country.

Currency
One of the major differences between countries, and one that keeps the concept of the country strong in business terms, is that each country usually has its own currency. Thus, neighbouring countries, which may be similar in many other respects, will have different currencies. This is a significant issue for international business. At its lowest level, the problem is simply the need to change one currency into another in order to effect payment for international transactions thus, if you export products to a company in Argentina, your customer will normally only have pesos to pay your invoice and either you or your customer will have to exchange currency so that both parties end up with currencies that are acceptable to themselves. The other, more significant, problem is that currencies change values. For example, over the past ten years or so, the pound has exchanged at rates varying from approximately 1 to $1 to 1 to $2, which is an effective change in value of 50% from the strong sterling position of gaining two dollars for every one pound sterling. Variations in exchange rates cause considerable problems for business. In terms of the financial implications, companies need to take steps to manage the risk that variations in the exchange rate will cause the value of payments due in a different currency to fall in terms of their own domestic currency. There are number of measures that can be taken for example, buying foreign currency forward at a fixed rate, in order to remove the risk and obtain certainty about future income and profit levels. We shall return to this when we consider international finance later in the course. Large international companies often try to develop their international operations to avoid the need to exchange currencies. If they can exchange products and services between different subsidiaries in different countries, they can minimise the amount of currency that needs to be exchanged. Most of the exchange can be handled internally within the company accounting system. Changes in foreign currency exchange rates can also influence pricing decisions. Over minor exchange rate fluctuations, the company can invariably adjust its profit margins in order to maintain a constant price to the customer. However, if the fluctuations are considerable, the company might need to change its business strategy radically. The problems arise when its own currency is appreciating, therefore making its products more expensive in other currencies and, hence, less competitive with other producers, principally local ones that are not affected by exchange rates. One solution would be to drive down costs in order to avoid increasing prices for example, embarking on substantial cost reduction programmes in its home production or finding different distribution channel arrangements with lower distributor margins. Alternatively, it might attempt to develop a more expensive image and positioning to help to justify the higher price. As we saw in Chapter 3, regional trading blocs may attempt to minimise some of the problems caused by different currencies by adopting common rules for, say, fixing exchange values between member countries. In the case of the European Union, we have seen the introduction of a common currency, the Euro, in certain member countries in order to reduce some of the problems caused by volatile currencies and exchange rates.

ABE

84

Analysing the International Business Environment

Competitors
In international markets, competition is often more difficult to manage than in the home domestic market. The reasons for this include: In international markets, the company often has a lower market share, sometimes very much lower, than in the domestic market. This results in a less powerful position. It also results in costs that are relatively higher, because of the lower scale of operations; activities such as marketing research or advertising are more expensive per unit of product sold. The development of more international companies means that, in any one market, the number of companies looking for a share of that market is increasing. As business looks beyond its domestic markets, companies from all around the world are becoming more world regional and global in their business strategies and in the co-ordination of their strategies towards competition. Companies in the NICs are becoming more and more successful in their own markets, developing products and services that can compete with foreign multinationals on most terms and often undercutting them on price. The more successful such companies become, the more difficult it is for international companies to retain their share of the market. Further, many of these companies are themselves looking to international markets for growth, for example, the Hyundai car from South Korea.

When added to the difficulties of obtaining high quality information and the barriers resulting from cultural differences, these factors make it increasingly difficult to compete successfully with competitors in non-domestic markets. Furthermore, some competitors will have advantages resulting from lower operating costs and/or from currencies that are depreciating.

H. USING INTERNATIONAL ENVIRONMENT ANALYSIS TECHNIQUES


When assessing your case study, it is important that you work through all the elements of the analytical techniques we have examined here and apply them to the scenario given in respect of the general industry/sector and the specifics of the organisation concerned. Here, we outline the way in which this may be done in respect of Bombardier Aviation (from the June 2010 examination) and Acer (from December 2010).

ABE

Analysing the International Business Environment

85

Example of PESTLE Analysis for Bombardier Aviation Element Trend Importance (110) 8 6 Comments

Political

Recession New states

Less government support for airline industry Establishment of new state backed airlines increased demand for aircraft Increased globalisation of airline industry Impacts on foreign working and may limit availability of skilled aviation workers in certain countries. Can inhibit air travel and ultimately increase cost of air tickets and impact on demand for aircraft, More disposable income more leisure travel. More aircraft demanded Major cost factor in air travel demand for energy saving aircraft Less business travel fall in sales of executive jets Less lending to BA and customers More leisure time Growth in holiday industry Changes in shopping trends/habits Weekend flights to shop in New York Last longer, but improve image Threat of less air travel particularly in business travel Better economy of operation ECO4 & MIRAG technologies

Open skies treaties (deregulation) Immigration policies

6 5

Terrorism

6-8

Economic

More employment

Oil Prices

10

Recession Banking Crisis Social Leisure industry Shopping later/longer/globally Quality products Technological Internet VOIP Aircraft design

6 10 10 10

8 9 10

ABE

86

Analysing the International Business Environment

Element

Trend

Importance (110) 10

Comments

Legal/ Regulatory

Product air safety regulations Anti-competition laws

All products must confirm to safety standards can inhibit NPD May impact on the growing low cost air travel market sector Air travel seen as high impact on environment.

Environmental

Global warming

Example of 3 Cs Analysis Applied to the Acer Corporation


Country The demand for Acers products is affected by country factors based upon the levels of economic development. In some countries, the price of a computer is the average weekly wage, whereas in others it depends upon the distribution of wealth. The levels of literacy will also affect sales. There may also be a need to adapt the product due to language difficulties. There have also been reports of resistance to the adoption of modern technologies. For example, in Uruguay where there is a government programme aimed at using information technologies to bring about rapid economic expansion, opponents of the programme feel that this will lead to fundamental changes in society to the detriment of existing culture. Acer being a Taiwanese company has built up a strong market presence in the ASEAN economic area, particular in Australia. There is also a significant presence in the United States which was recently further increased by the acquisition of Gateway. Currency Acer and most other ICT manufacturers/suppliers are affected by currency issues. Acer, with its base in Taiwan, is particularly affected by the value of the Taiwanese currency against other currencies especially the US Dollar and the Euro. Acer uses subcontractors to manufacture its products, so it can, within certain constraints, adapt its supply chain to reduce the impact of currency fluctuations. However, with the economic weakness of some Eurozone countries causing a general fall in the value of the Euro, there have been subsequent increases in retail prices across the whole Eurozone.

ABE

Analysing the International Business Environment

87

Competition

The nature of the competition in this market is mostly based upon major global players such as Sony, Samsung and Dell. There is also some major involvement from governments. The Indian government has active plans to develop low priced computers and the Chinese Government have a significant share in the Lenova Corporation which was previously owned by IBM. At the moment, the market is showing exceptional growth and whilst there is some competition within the market, there is a significant investment in developing and innovating new technologies to gain market leadership.

PRACTICAL ACTIVITIES
1. The Delta Airlines case study in chapter 1 is based on the global airline industry and its environment in 2009. Carry out a PESTLE analysis on the airline, and try to update it by reference to changes that have taken place since that date. Conduct an analysis based upon the 3Cs framework for the global car industry with information from the Toyota case study (June 2009). Compare and contrast the social/cultural environment that exists in two countries at different stages of economic development.

2. 3.

ABE

88

Analysing the International Business Environment

ABE

89

Chapter Five The Micro and Internal Environment


Contents
Introduction

Page
90

A.

Internal (Situational) Analysis Strengths, Weaknesses Opportunities and Weaknesses (SWOT) The TOWS Matrix Product Life Cycle (PLC) Analysis Rogers Adoption Theory The Value Chain Financial Analysis

90 90 91 91 92 93 95

B.

Analysis of Competitive Market Structure Porter's Five Forces Model Directional Policy Matrices Competitor Intelligence Positioning/Perceptual Maps

96 96 98 104 105

ABE

90

The Micro and Internal Environment

INTRODUCTION
The last part of the environmental analysis is to consider the organisation itself. Here, we shall examine this in terms of its capabilities and competences for responding to key aspects of the external environment and the markets in which it operates. The frameworks for analysis examined should all be very useful when you come to evaluate the situation of the organisation featured in your examination case study.

A. INTERNAL (SITUATIONAL) ANALYSIS


Strengths, Weaknesses Opportunities and Weaknesses (SWOT)
A SWOT analysis is a good and well-tested technique for defining the microenvironment of an organisation. It bridges the external and internal environments in assessing the position of a business considering the external environment in terms of the opportunities and threats it presents, and the internal environment in terms of the organisation's strengths and weaknesses in responding. A strength is defined as an internal characteristic with the potential to improve the organisation's competitive position, such as a high level of competency among staff. A weakness is an internal characteristic that may disadvantage an organisation in relation to competitors, such as ageing equipment or manufacturing facilities. An opportunity is an external factor that offers the possibility of securing competitive advantage, such as changing consumer tastes. A threat is an external factor that may undermine competitive advantage, such as the entry of new firms to the industry. Figure 5.1: Outline SWOT Analysis Strengths High level of staff competence Experienced management Positive public image Good customer service Strong research function Well-developed financial control systems Opportunities Rising consumer prosperity Expanding markets worldwide Diversify into other products Weaknesses High wage levels Old buildings and equipment Poor record in implementing change Strong trade unions Slow decision-making

Threats Low-cost competitors Demographic changes Changing consumer tastes New legislative requirements

Note, though, that whilst we have simply listed a number of items here, when carrying out a SWOT analysis, it is important to detail them with a description, explanation or evaluation of their importance.

ABE

The Micro and Internal Environment

91

The TOWS Matrix


A SWOT analysis is key to defining the current situation. However, it does not offer any plan for addressing the issues identified. The next stage, then, is to determine the strategic choices that an organisation faces as a result of the initial analysis. This may be provided by the TOWS matrix. TOWS which stands for the same terms as SWOT, but reversed looks at matching the external opportunities and threats with the internal strengths and weaknesses. It then leads to the consideration of the options that are available. Figure 5.2: TOWS Strategic Alternatives Matrix External Opportunities SO: Internal Strengths Maxi-Maxi Option Strengths will maximise opportunities WO: Internal Weaknesses Mini-Maxi Option Weaknesses are minimised by taking advantage of opportunities External Threats ST: Maxi-Mini Option Strengths will minimise threats WT: Mini-Mini Option Minimise threats by taking avoidance action

After the external environment has been audited, the results of existing strategies can be forecast in the light of the organisation's internal strengths and weaknesses. Then strategic decisions can be taken about continuance and change, depending on the convergence of forecast and required outcomes. As with all management decision-making, the key stages are identification of alternatives, evaluation and selection. In evaluating an opportunity, careful consideration needs to be given to its relationship with the organisation's strengths and weaknesses. Opportunities should be sought which are most congruent with the organisation's identified strengths and where any weaknesses in strategic factors can be subject to corrective action. Decisions also need to be made on the aspects of the business which appear most vulnerable to external threats, indicating it may be necessary to withdraw from a particular product or market, or divestment of a particular business unit.

Product Life Cycle (PLC) Analysis


It is possible to plot the progress of a product in terms of sales volume against time. This gives rise to the theory of a product life cycle. If we plot sales against time, we typically obtain a S-shape curve, as shown in Figure 5.3. Given that this shape curve is expected, a manager can say, "When I look back, at which point on the curve will I discover we have been at this time?". During this life cycle a continuous process of external change takes place, from the entry of competitors to consumer attitudes. Understanding this enables the business to anticipate these changes and to plan accordingly. However, you must remember that any change in the environment, both external and internal, can affect the curve, not just a change in the product. Thus, the PLC is a variable, not a determinant.

ABE

92

The Micro and Internal Environment

Figure 5.3: Product Life Cycle Sales/ Profits in Introduction Growth Maturity Decline

Sales

Profits + Time (months or years, depending on the product)

Development

Rogers Adoption Theory


The success of a product or service will depend upon how customers and consumers accept and adopt the product. Rogers' adopter categories are the definitive model of the adoption process, as shown in Figure 5.4 and, in essence, reflect the product life cycle. Figure 5.4: Adopter Categories Based on Relative Time of Adoption of Innovation Early majority Early adopters Innovators Laggards Late majority

34% 2.5% 13.5% Time

34% 16%

Rogers' categories are as follows: Innovators (2.5%) those who get satisfaction from being ahead of fashion. Early adopters (13.5%) opinion leaders; those keen to try new things. Early majority (34%) those willing to try new things, but who are not "pioneers".

ABE

The Micro and Internal Environment

93

Later majority (34%) the followers of fashion, who perhaps wait for the product to become a perceived necessity. They are not being prepared to take risks with a new idea. Laggards: (16%) the latecomers.

Rogers' theory neatly forms a normal distribution curve. In practical terms, it is for each organisation to forecast the pattern of adoption for individual products. This will have the strongest implications for forecasting the duration of the introductory and growth stages of the product and can vary according by country/culture. A product opening up a market will be distinctive, i.e. innovative. But with success comes competition in the form of copying, perhaps from products with distinct advantages of their own. As time passes the "innovative" product loses this distinction and then has to be updated in order to sell it on differential terms, i.e. it is different, not distinct. A good example of this is laptop market where in a relatively new market there are many companies competing for market leadership. In international terms, the rate of adoption may vary according to many factors particularly economic conditions and those involving the many cultural dimensions of the market.

The Value Chain


A technique that is useful in analysing the key activities and processes within a business is to look at the various steps by which value is added. The identification of the value chain for an organisation helps in the understanding of those activities that are of importance from a strategic viewpoint. Value chain analysis shows that an organisation is not made up just of a collection of different resources, such as machines, money and personnel, but that it is the way in which these resources are deployed through the organisation's systems of operation which make the products or services valued by the customer or client. It is through these value activities and the linkages between them that competitive advantage is gained by an organisation. Porter categorises the value activities as: Primary those activities which create the product or service, deliver it and market it, and provide after-sales support, and Support those activities which provide the input and resources that allow the primary activities to take place, i.e. company infrastructure, human resource management, technology development and procurement.

ABE

94

The Micro and Internal Environment

Figure 5.4: The value chain Support activities Company infrastructure Human resource management Technology development Procurement Margin Primary activities

Inbound logistics

Operations

Outbound logistics

Marketing & Sales

Service

Competitive advantage comes from the way in which businesses organise and carry out the separate activities within the value chain. It may be the case that, as it evolves, a business may rationalise its direct primary activities to concentrate on those in which it has a distinctive expertise and its competence can deliver higher added value. This is particularly true in an international setting where companies such as IBM and Acer have changed the focuses of their business. In the case of IBM, they no longer manufacture hardware but are extremely successful in providing IT support. Similarly, the focus of Acer is in marketing, including product development of personal computers, rather than the actual manufacture of the products that they sell. The advantage of this approach is that it considers support activities and the way in which these interact with primary activities in achieving business objectives. It can be used to identify where problems exist and where new processes are required for example, by looking at existing activities in order to identify bottlenecks and waste. This is based on a technique known as "value engineering", which is used in the engineering industry and which looks at every component of a machine to see how it could be produced at a lower cost. In each of the categories it is the way that resources are deployed which leads to the creation of value, and thus to competitive advantage. Johnson and Scholes suggest that resource utilisation can be achieved in three stages: by identifying value activities assigning costs and added value, and identifying which are the critical activities by identifying cost or value drivers those factors which determine cost or value of each activity by identifying linkages which either reduce cost or add value, and which discourage imitation.

Management's role is to examine the costs and performance in each value-creating activity and to look for ways to improve, preferably through ones which will add positive synergy to the whole. Competitors' costs and activities should also be looked at and their performance used as a benchmark for performance appraisal.

ABE

The Micro and Internal Environment

95

It is essential to look for competitive advantage beyond the organisation's own value chain, by considering those of its suppliers and the members of its distribution channel, since these also have a part to play in the consumers' perception of quality. Resources of finance, personnel, production capacity, etc. all have to be allocated to achieve competitive advantage. One of the difficulties of resource allocation at the corporate level, especially, in large organisations, is the extent to which overlap, sharing or duplication of resources occurs between various parts of the organisation. This can apply across the board, from relatively minor considerations such as the sharing of photocopying services between departments, to major considerations such as two divisions sharing their transport and distribution services. It is issues such as these which affect the centralisation or decentralisation of control over resource allocation. Central control over resource allocation is required where the strategies involved are dependent upon high levels of co-ordination or co-operation between different departments and/or divisions. Where divisions or SBUs are to a large extent independent, then control by the centre is less important.

Financial Analysis
It is important to analyse the financial performance of an organisation especially within a dynamic international environment where strong financial results are essential to ensure that all other activities of an organisation can be successful. There are many indicators of an organisations financial performance and the important ones are as follows Profit Shareholders expect a return on their investment and it is estimated that up to 70% of new capital investment comes from retained profits. Thus, it is an absolute requirement that organisations need to be profitable. The profit margin should be in line with what is expected within the particular business/industry sector. The trend in the level of profit should show that an organisation could operate successfully given any changes in its markets. The difference between profit at the gross level and at the net (after expenses) can also show how efficient an organisation is. Investment An important comparative measure is the amount of return that profit represents as a percentage of the capital that is invested (tied-up) in the business. New investment will be easier to attract if an organisation can show a good record of returns, which clearly shows it to be a well run and profitable business. Failure to generate sufficient sales against large investments can put pressure upon the whole organisation. Liquidity This assesses the ability of an organisation to meet its financial commitments as they become due. Organisations need to have sufficient cash and near-cash resources, and this means managing their cash flow to ensure that they can continue to operate successfully. International business can be particularly risky in this regard. The traditional method of gauging liquidity that of comparing current liabilities with current assets needs to take into account the nature of the business. For example, many retailers such as Tesco would be considered to have poor liquidity, but this is mainly because they are ultra efficient in ensuring both that their levels of stock are kept low and they are effective in obtaining good settlement terms with their suppliers (Trade Creditors).

ABE

96

The Micro and Internal Environment

There are many other financially based measures of performance and you need to consider the range of possible factors appropriate to the particular situation. For example, in retail operations, there are measures such as the rate of stock turnover, the value of sales per square metre of store space, and the average spend per customer. For an manufacturer involved in large engineering projects such as Bombardier (case study examination, June 2010), the value of future orders (the order book) is an important measure.

B. ANALYSIS OF COMPETITIVE MARKET STRUCTURE


Porter's Five Forces Model
Porter states that there are five forces that determine competition in an industry, as follows. The threat of new entrants New entrants to an industry bring additional capacity and the desire to gain market share. The seriousness of the threat of entry depends on the extent to which there are barriers present within the market that deter potential new competitors, and on the reaction from existing competitors which the new entrant can expect. The bargaining power of suppliers Powerful suppliers can exert bargaining power over participants in an industry by raising prices or reducing the quality of purchases. A supplier is powerful if: (i) (ii) (iii) (iv) (v) the industry is dominated by a few companies either its product is differentiated or there would be significant costs involved in changing to another supplier it does not compete with other products it poses the threat of integrating forward into the organisation's own business sphere the organisation is not an important customer of the supplier.

The bargaining power of buyers A buyer is powerful if: (i) (ii) (iii) (iv) (v) (vi) it purchases in large volumes the products it buys from the organisation are standard or undifferentiated the products it buys form a component of its own product and represent a significant fraction of the cost, so it are more likely to shop for a favourable price it earns low profits, creating an incentive to reduce purchasing costs the organisation's product is unimportant to the quality of the buyer's own product (where it is, the buyer is much less likely to be price-sensitive) the organisation's product does not save the buyer money (if it does, then the buyer is rarely price-sensitive)

(vii) the buyer poses a threat of integrating backwards into the organisation's own business sphere. Substitute products or services The availability of suitable, viable substitute products or services limits the potential for earnings and growth from existing products or services, since these have to be priced so as to be more attractive than the substitutes.

ABE

The Micro and Internal Environment

97

Rivalry among existing competitors Rivalry among existing competitors takes the form of seeking to increase market share by cutting prices, introducing new products and promotional advertising. Intense rivalry is related to the presence of: (i) (ii) (iii) (iv) (v) (vi) numerous competitors, roughly equal in size slow industry growth lack of product differentiation, or of significant costs of changing high fixed costs or the product being perishable, resulting in significant pricecutting to stimulate sales capacity which is normally increased in large increments, leading to periods of over-capacity and price-cutting high exit barriers, such as the difficulty of disposing of very specialised assets.

Once top management have assessed the forces affecting competition in the industry and their underlying causes, the organisation's strengths and weaknesses can be identified. The crucial strengths and weaknesses are those which relate to the underlying causes of each force. Within a market there will often be strategic groups which comprise of organisations with similar market aims and capabilities for example, in the airline industry there are the international carriers, regional/ domestic airlines and low cost airlines. A simple example of the five forces in action can be seen from looking at the Bombardier case study: This shown diagrammatically in the following figure.

ABE

98

The Micro and Internal Environment

Figure 5.5: Five forces analysis Bombardier Threat of New Entrants HIGH Low barriers in China and Russia

Rivalry Power of Suppliers LOW Engine manufacturers some choice driven by technology INTENSE Direct: Embraer and BAE Indirect: Airbus and Boeing

Power of Customers VARIABLE Low in short term High in medium term new low cost airlines

Threat of Substitutes VARIABLE NICs lack road and rail infrastructure Developed countries have high speed rail links

Directional Policy Matrices


There are a number of models that look at a business's position in relation to the nature of the market or markets in which they operate, and use this as the basis of determining strategic direction. We shall consider three such models here, all of which use matrices to position the company against the competition in the market. (a) The GE Matrix This model was developed at a time when the General Electric company was going through a very expansive time in its history. The model takes account the nature of the market and the capability of the companies within it, and assesses a business's products and/or its organisation in terms of the "attractiveness of the industry" to the business and the "business strength" of the company itself. Planners take account of factors such as the following in order to assess a company as "high", "medium" or "low" with a view to placing them on a grid. Often these factors are "weighted" by the planner.

ABE

The Micro and Internal Environment

99

Industry attractiveness Market size (numbers/value) Market diversity Growth rate (total/segment) Profitability (total/unit) Competitors Social/legal environment

Business strength Differential advantages Share (number/value) Sales (volume/growth) Breadth of product line Mix effectiveness Innovativeness

Figure 5.5 shows the characteristics of products in a company's portfolio. On the grid, the circles represent overall market sales, and the share held by the particular company is then shown as a proportion of the circle. Figure 5.6 General Electric Business Matrix Industry Attractiveness High (1) High (2) Business Strength Medium Low

Medium

Low (3)

We can see from this that the company has major shares in three markets: (1) (2) (3) A highly attractive market with large overall potential revenue, where the company has high business strengths. A mid-value market, but again one in which the company has high business strengths. The overall market income is not high, but there is future potential. A market which is not highly attractive and where the company strength is low. The high share of the market may be because competitors have withdrawn. This market may be potentially lucrative in earnings, but small in size. Planners may decide therefore to stay and keep out competitors.

(b)

Boston Consulting Group (BCG) Matrix In this model, an organisations products and/or its strategic business units (SBUs) are related to the market growth of the market in which they operate and also to the relative market share they have. Planners can then classify products/SBUs into four categories according to their position on the matrix, allowing them to understand the nature of

ABE

100

The Micro and Internal Environment

those products/SBUs in the market i.e. whether they are "cash providers" or "cash users". This analysis then serves as the basis of strategy determination for taking the product/business unit forward. Figure 5.7 shows a range of products produced by a company in relation to the two characteristics of the markets in which they compete. The direction arrows indicate the normal way in which products can be assumed to move between the positions on the grid. Figure 5.7: Product Classification in the BCG Matrix High 20 Stars Question marks

Market Growth

10 Cash Cows Dogs

Low

0 10x 1x Relative Market Share 0.1x

The four classifications are defined as follows. Question Mark (sometimes referred to as Problem Children or Wildcats) Question Marks are products/SBUs, which have low relative market, share and are in high growth markets. The product/SBU has not yet reached a dominant position in the market. Although it may be generating funds, it still requires a lot of investment for development and the company must decide if they want to keep investing. In Figure 5.7 the company has two Question Marks. Planners may decide that it would be better to concentrate all their efforts on one of these, in order to make it successful, and keep all the others just ticking along until they have secured the most favourable position for this one. The product, which is producing a greater proportion of revenue for the company (the one with the largest circle) may be chosen for additional effort as it obviously has good earning potential. A greater market share should be gained as soon as possible. Decisions of this type would be based on a variety of factors relating to the product(s) and the competitive environment. Star If Question Marks succeed they become Stars leaders in high growth markets. Stars are the "providers of tomorrow" and a company with no Stars should worry.

ABE

The Micro and Internal Environment

101

The company depicted in Figure 5.7 has two Star products one which has the leading share in its market and one which has only slightly more share than its leading competitor. Efforts should be made to increase the share of the second product in order to secure its future profitability, particularly as the market has a very high growth rate this could be where future earnings lie. This, of course, means investment, which can be a cash drain on the organisation. Even Stars with high market share may involve investment in promotion or distribution, etc. if the competition is attacking. Stars can therefore both produce revenue and use resources which can mean just "breaking even". Investment decisions must be based on the future potential of the product and its market. Companies want to retain the share that Stars hold, but they also want the market to stabilise as stable markets are much easier to cope with than high growth markets which can mean difficulties in production and distribution. The Star with the leading share is moving down the spectrum which indicates that growth in that market is slowing or stabilising and, providing no share is lost, the Star should become a Cash Cow. Cash Cow When market growth reaches a stable level (10% is used in our diagrams as an example but this will vary according to the particular market) Stars become Cash Cows providing they hold a leading share of the market. If they lose any market share to the competition they will "slip" into either being a marginal Question Mark or, at very worst, a Dog. Cash Cows produce good revenue, do not require high investment and often mean that economies of scale can be gained. The money earned from Cash Cows should be used to invest in other products/SBUs which are placed in the other classifications on the BCG matrix. Figure 5.7 shows that the company has only one Cash Cow, so is vulnerable. A loss in market share could mean trouble, even more so if there is no Star to come in and take the place of the Cash Cow. In this situation, a company would have to pump in finance to support its Cash Cow, thereby deflecting support from the other categories. If the company continued to support other categories and neglected its Cash Cow, the Cash Cow could eventually become a dog. In our example, it would be very dangerous if the Cash Cow slipped to being a Dog, as the Star which could come into the Cash Cow category is not making as much money for the company as the current Cash Cow. Given these circumstances it is likely that the company would invest in its current Cash Cow to retain market share. Sometimes Cash Cows that are losing their share can be turned into Question Marks, which is preferable to becoming Dogs, but this situation will only really occur if something happens to revitalise the market perhaps a new use for a particular product may be found and the market will begin to grow again. Dog Dogs have weak market share in low growth or stable markets. These products can often take up more time than they are worth. They usually produce low profits and very often incur losses. They will always consume cash, even if it is just in the time taken to manage them. Given the fact that Dogs consume cash, many are often dropped by companies, but it is not always wise to do that immediately as they may still be making money.

ABE

102

The Micro and Internal Environment

In Figure 5.7 you can see that the proportion of the company's revenue for one of its Dog products is actually higher than the proportion of revenue gained by one of its Star products. If the company were to drop the Dog, they would have less cash coming in, which could have serious repercussions. The competition must also be considered, as well as the effects on customers. Dropping a product from a range can upset buyers who will then look for alternative sources for that product. The alternative sources may also be able to offer other products which the buyers want and they may place their future orders with the new suppliers resulting in the loss of even more sales overall. Decisions on product deletion must therefore not be taken lightly or without full investigation. Dogs that are retained tend to be kept because they are recognised as being a product with "other" benefits. For example, the customer will have to come back to the company to buy consumable supplies which are actually highly profitable for the company, or perhaps the product has such a high image and reputation in the market that the company prefers to maintain it. There is also danger in keeping on a Dog if it is proving to be useless as this just wastes resources that could be better employed elsewhere. Decisions to retain Dogs past their useful life are usually based on someone's great belief in, or favour for, that product they become "Pets". For example, the owner of a company may wish to maintain a product, which was the foundation of the company's current product range despite the fact that the market has changed and technology has bypassed the original product. Sentimentality, and the power of the owner, will ensure that the product is retained and money will be wasted. We should also not overlook the case of products which have just been launched and the market has not really taken off. Such products could be classified as Dogs but, given more investment, the market might be stimulated into a faster growth rate and the Dog could actually gain more share. Sometimes the faith of one manager in a product can turn a company's portfolio around completely. As we noted earlier product deletion decisions can be risky. They should always be calculated for effects. BCG Matrix: Cash Position for Products We have seen, the various types of products or SBUs each have different characteristics as far as revenue generated and money for investment are concerned. Figure 5.8 indicates the likely cash position for products, etc. placed on a BCG matrix, and this can prove helpful for assessing the contribution that each may make to the business as a whole, and the extent to which they each use resources which may well be applied elsewhere.

ABE

The Micro and Internal Environment

103

Figure 5.8: Cash position on the BCG Matrix High 20 Stars


Revenue Investment +++ 0

Question marks
Revenue Investment ++

Market Growth

10 Cash Cows
Revenue Investment +++ ++

Dogs
Revenue Investment + 0

Low

0 10x 1x Market Share 0.1x

Weaknesses of the BCG matrix After being used extensively for many years, today the BCH matrix has become somewhat discredited as managers have become more aware of its assumptions and limitations. The major weaknesses are: Market growth and market share are considered by many as inadequate indicators of overall attractiveness and competitive strength. It is difficult to plot information accurately. The sizes of circles, unless done by computer modelling, can only ever be estimated. It is not fair to expect all SBUs to have the same rate of return or market share, etc. The whole point of this method is to assess the position of each product, or SBU, and different markets will have different growth rates. It is therefore really better to plot only one product or SBU onto a BCG matrix. If the model is used as a predictor of cash usage, valuable products may be left to stagnate and die owing to lack of investment. It is not particularly helpful for many Small Medium Enterprises (SMEs) who may have a small market share but are highly profitable. The model ignores environmental factors which may have an impact on performance. Positioning can encourage planners to develop bad habits for example, not allowing enough funds to maintain the Cash Cows so that they grow weak. Planners can also sometimes allocate them too many funds and fail to invest in other categories.

(c)

Arthur D Little Strategic Condition Matrix This is a more detailed model, having twenty cells to identify various business units. The variables used with this model are "competitive position", which denotes the nature of the position held by the company in the market (and whether or not it can maintain

ABE

104

The Micro and Internal Environment

it), and the "stage of industry maturity", which is similar to describing the life cycle of the industry. It is illustrated in Figure 5.9 below. Figure 5.9: Arthur D Little Strategic Condition Matrix STAGE OF INDUSTRY MATURITY Embryonic Grow fast Dominant Build barriers Act offensively Growth Grow fast Aim for cost leadership Defend position Act offensively Grow fast Strong COMPETITIVE POSITION Differentiate Lower cost Differentiate Attack small firms Grow fast Differentiate Focus Differentiate Defend Grow with the industry Focus Hold-on or withdraw Niche Aim for growth Weak Search for a niche Attempt to catch others Niche or withdraw Withdraw Withdraw Mature Defend position Increase the importance of cost Act offensively Lower costs Differentiate Focus Harvest Ageing Defend position Focus Consider withdrawal

Favourable

Focus Differentiate Hit smaller firms Hold-on or withdraw Niche

Harvest

What is not shown in this model is the "non-variable" position, when the company's capabilities are really limited and the market offers no indication of improvement. In such a situation, it may have to be accepted that the business should withdraw from the market in a way that minimises the cost and does minimal disruption to the company's overall portfolio.

Competitor Intelligence
Competitor Intelligence (CI) is a system that assists managers to assess their competitors in order to be able to make better decisions and plans. It is a key part of the market intelligence system along with environmental scanning. CI means that organisations have less surprises and can be a source of competitive advantage. Among other aspects CI allows management to be able to predict changes in business relationships, identify marketplace opportunities, guard against threats, forecast competitors strategies, discover new or potential competition, learn from the success or failure of others, keep abreast of new technologies and learn about the impact of regulations.

Tenable

Withdraw

ABE

The Micro and Internal Environment

105

The Internet has made the process of CI much easier, especially with regard to technical information and there are many forums for consumer feedback on products and services. Traditional methods such as the trade press and trade shows/exhibitions are still good sources, and having good relationships with distributors and feedback gathered by the sales force can also be extremely useful. The key to successful CI is to have a methodical system that forms part of the strategic decision making system in order to maximise the benefit from the intelligence gathering.

Positioning/Perceptual Maps
Perceptual mapping is a useful technique for charting the relative positions of many different issues in international business. For example, it can be used to evaluate the customers perception of different countries as figure 5.10 shows. Figure 5.10: Perceptual/positioning map Positive Country of Origin Effect Germany USA Low Product Quality Japan High Product Quality

India Taiwan

Korea

Negative Country of Origin Effect It is interesting to note that the Bombardier Organisation chose to relocate its head office to Germany from Canada and not to its closest neighbour the USA the above perceptual map would suggest it was a good decision, The use of positioning maps is also a way of analysing how an organisation performs against its competitors on a range of measures. For example, an airline can analyse its comparative market performance by seeing how customers rate it on a number of qualities such as punctuality, friendliness of staff, value for money, and ease of booking. By comparing its actual performance with its intended position and with the rest of the competitors (particularly the leaders) it can monitor the success of its strategy and decide upon revisions as necessary.

ABE

106

The Micro and Internal Environment

PRACTICAL ACTIVITIES
1. 2. 3. Perform a TOWS analysis based upon the data in the Delta Airlines case study in chapter 1. Construct a Porters Five Force Analysis for the Acer Corporation (November 2010). Use the Boston Consulting Group Matrix to assess the relative positions of the SBUs of Bombardier Aviation (June 2010).

ABE

107

Chapter Six Defining Overarching Intent: Mission, Goals and Policies


Contents
Introduction

Page
108

A.

The Concept of Mission Mission Statements Producing the Corporate Mission

108 108 111

B.

Goals and Policies Goals Policies

111 111 112

C.

Mission and Strategy Development The Planning Gap

113 113

ABE

108

Defining Overarching Intent: Mission, Goals and Policies

INTRODUCTION
All the stakeholders in an organisation need an understanding of what that organisation intends to achieve. For the most part, many stakeholders do not need or want to know the detail of objectives and plans the specification of how it intends to achieve its goals but rather want an overall vision of what they are a part of. This short chapter considers the important concept of an organisation's mission. This is very important for all businesses, as it underlies the whole strategic planning process.

A. THE CONCEPT OF MISSION


An organisations mission has been said to answer the question: 'What business are we in?'. The mission of an organisation incorporates not just an identification of the products and services the organisation offers, but also sets the philosophy and culture behind the basic organisational functions. It is concerned with its overall purpose, its scope and its boundaries, and attempts to describe the nature of the organisation and the reason why it exists. It is also long-term, in that it is not concerned with a set of relatively short-term achievable targets, but rather a definition of the parameters of the organisation's activities. Summarising these various points, we can say that a clear mission will define the philosophy and purpose of the organisation, and signpost the direction which the selection of strategic plans and control systems will take in the future.

It has, therefore, an important role to play in the planning process. Within the terms of the mission, managers can identify, evaluate and select appropriate corporate objectives and strategies which will enable the organisation to achieve its intentions. As such, then, it is the essential starting point for corporate planning, and thus for all planning within an organisation and, ultimately, for all the activities that the organisation carries out. The mission can also make a very real difference to the way in which an organisation operates and develops. For example, it can have a direct influence on culture by stressing the importance of customers or product quality as the driving force behind the business.

Mission Statements
As we noted above, stakeholders need to be aware of the organisation's mission in order that they can assess the commitment they may make and their level of involvement. Clearly this is easier in a small organisation, but in a large one, the vision and organisational goals need also to be formalised and communicated to all stakeholders. This is through the organisation's mission statement. Many businesses take mission very seriously and studies have shown that over 80% of companies have a formal mission statement and believe that it contributes to the organisation's effectiveness. Once established, many organisations publish their mission statement in order to communicate widely the essence of the organisation that it displays. The mission statement encapsulates the vision of what the organisation is, or intends to become. It does not need to be long (famously the car rental firm AVIS encapsulated its mission in the three words We try harder), nor is there any standard format. The important point is that it should be: Easy to understand and remembered, particularly in the global context It should make the organisation seem different from the rest

ABE

Defining Overarching Intent: Mission, Goals and Policies

109

It should be flexible enough to accommodate change, although mission statements rarely change frequently.

Content and Meaning Johnson and Scholes consider that the mission statement should be visionary: that is, it should be regarded as a general, long-term statement about the organisation, which may be subject to changes in detailed objectives over time without losing its overall direction. Thus, Avis states its overall objective as 'To become the fastest-growing company with the highest profit margins in the business of renting and leasing vehicles without drivers'. The details of how it plans to do this do not appear in the mission statement. Johnson and Scholes go on to identify the following three key elements which should be addressed in a comprehensive mission statement. It should clarify the main purpose of the organisation, answering the question 'Why does the organisation exist?' This may be to make profits for shareholders, or perhaps the furtherance of a philanthropic aim. It should describe the organisation's main activities and the position it wishes to attain in its industry. This clarifies the nature of the business the organisation is in and the way in which it intends to compete. It should state the key values of the organisation: particularly regarding attitudes towards and commitment to stakeholder groups customers, employees, suppliers and the environment.

Following from this, Johnson and Scholes also point out that the organisation should have the intention and capability to live up to its mission statement. Having established, and declared publicly, its strategic intent, the organisation must be able to follow it through with the necessary course of action. Often, general policies and the standards of behaviour it intends to follow are included in aspects of the statement. Consider the following three examples of mission statements and assess how far they meet these three elements: (a) Acer Computing The mission statement for Acer Computing is "Fresh Technology Enjoyed by Everyone, Everywhere." Fresh here does not imply new, but the best namely, proven highvalue, low-risk technology that is affordable to everyone, and has a long lifespan. Fresh also refers to innovation based on mature technology that is user-friendly, reasonably priced, and enjoyed by everyone, everywhere. (b) Tesco Tesco include in their mission statement: 'Our core purpose is to create value for customers to earn their lifetime loyalty'. The company goes on to state their corporate objectives, which include: Offering customers the best value for money at the most competitive prices. Providing shareholders with progressive returns on their investment. Developing the talents of people through sound management and training practices while rewarding them fairly, with equal opportunities for all. Working closely with suppliers to build long-term business relationships based on strict quality and price criteria. Supporting the well-being of the community and the protection of the environment.

ABE

110

Defining Overarching Intent: Mission, Goals and Policies

(c)

Marks and Spencer Marks and Spencer's mission specifically addresses stakeholders as follows: To offer our customers a selective range of high-quality, well-designed and attractive merchandise at reasonable prices. To encourage our suppliers to use the most modern and efficient techniques of production and quality control dictated by the latest discoveries in science and technology. With the co-operation of our suppliers, to ensure the highest standards of quality control. To plan the expansion of our stores for the better display of a widening range of goods (and) for the convenience of our customers. To simplify operating procedures so that our business is carried on in the most efficient manner. To foster good human relations with customers, suppliers and staff.

You can see that, in all these cases, basic corporate values have been identified and expressed, and that policy formulation is considerably simplified. Value The mission statement provides an overarching guide for planning purposes, because it states the direction in which the organisation is going. Strategic and operational plans will then be drawn up to identify how the mission is to be achieved. In addition, both the broad and specific objectives of those plans will be set within the values, norms and beliefs of the organisation as defined by the mission statement. This is likely to include, at least implicitly, the ethical standards within which objectives have to be achieved. As such, it is important that all levels of management have "bought into" the mission and accept it as the basis for planning and operations. This may be relatively straightforward at board level where commitment should be total (at least on the face of things), but may be less clear at lower management levels involved in the formulation of the business plans. If a mission statement is imposed without consultation with management or is not effectively communicated, there is a risk that employees will not be engaged in it. To avoid misunderstanding or any ambiguity, some organisations have the mission statement printed on small cards for employees to carry with them. Marks and Spencer is one such organisation. Mission statements also have a significant role in corporate publicity to communicate the principles and ethos of the organisation. For example, the Ford Motor Company uses their mission statement to convey a truly international message We are a global family with a proud heritage passionately committed to providing personal mobility for people around the world". This is clearly aimed at global consumers. Note that an earlier mission statement, when the main Ford activity was located in the western developed nations, was "Everything we do is driven by you obviously it was felt that the double meaning of the word driven would not be fully understood on a global basis. Conversely, mission statements have been criticised for being too general and containing statements which are difficult, if not impossible, to quantify or prove. Terms such as 'best', 'favourite' or 'quality' can be difficult to define. Mission statements are sometimes viewed as a public relations ploy with no real commitment and of minimum value in the planning process.

ABE

Defining Overarching Intent: Mission, Goals and Policies

111

Producing the Corporate Mission


Mission statements take considerable time and effort to prepare, particularly because they are likely to remain in place for the long term. However, it is important that the mission statement is reviewed from time to time to see if it is still relevant given changes in the business environment. A preferred method for writing a meaningful mission statement is set out below. Set up a project team. Carry out an attitude survey throughout the organisation, to check the validity and usefulness of the current mission statement. Ask for suggestions for improvement and/or any amendments that the staff feel are more in line with their level of operations, growth and development. Is the mission statement outdated and no longer reflecting current thinking about processes and policies? Elicit information from current customers and their perceptions of the organisation. Ask for suggestions for improvement/amendments/updating. A revised mission statement can then be drafted, and sent for consultation to representatives of the workforce and a selection of customers. Further comments should be elicited. This process of involvement must be communicated throughout the company in an appropriate way. Newsletters, workshops or meetings are commonly used. This is an important because a sense of ownership of the mission statement throughout the company is vital in realising its purpose. Finally it is important to monitor and review the process to ensure that the mission remains relevant and supported, and takes into account stakeholder views.

Once the mission statement has been established, it is possible to develop action plans and set objectives. Action plans should aim to build on the consensus and commitment developed within the senior management team and to spread it throughout the organisation. In effect, this is where the mission process meets with the strategic planning process, and objectives are set by asking what has to be done to realise the mission.

B. GOALS AND POLICIES


Whereas a mission statement gives some general guidance to the planning process, this general guidance has to be translated into something a little more concrete. Here, the terminology used by various writers can get confusing. The dictionary tells us that goals, aims and objectives all mean much the same, but management writers often use each word to describe a different level of target-setting. Unfortunately they are not always consistent in the way they do this, and you need always to define your meaning when using these terms.

Goals
Goals are frequently used to give substance to the mission statement and may be included as part of it or alongside it. If we take the example of the Association of Business Executives, its mission is encompassed in its general aim of 'the promotion and advancement of efficient administration and management in industry, commerce and the public service by the continued development of the study and practice of administration and management', and its primary objective that 'students successfully completing its examinations will be more effective managers'. This is given more substance by a series of goals which accompany these statements. 'To be the first choice for business management education worldwide.

ABE

112

Defining Overarching Intent: Mission, Goals and Policies

To focus the range and quality of our courses and qualifications. To provide our members with a positive learning experience for business. To deliver respected and recognised UK qualifications. To open up a world of opportunity for now and the future. To provide effective responsive management for the millennium and beyond. To meet the needs of tomorrow.' You can see how these goals start to focus the mission statement into more specific areas of intent, although they are not yet sufficiently specific to enable us to measure how successful the ABE is at achieving its mission.

Policies
All organisations have policies: some are formally laid down and others are less formal, but they represent the way in which "things are done" in the business. They are overarching specifications which concern how managers should behave in certain circumstances and which define the ways in which rules and procedures are to be applied. They relate strongly to the culture of the organisation. Policies often flow from the mission and goals of the organisation, and as such will constrain strategic choice for example, to use only organically grown food products, or not to trade with companies who are known to pollute the environment. Policies may also be determined as part of the strategic planning process where overarching concerns about the conduct of business may be identified, often in reaction to pressures from stakeholders or for competitive advantage. Policies act as guidelines within which other decisions are taken and procedures are developed, with the aim of: Ensuring consistency of decision-making for example, a retail chain may have a policy of always prosecuting shoplifters, or a company may adopt a travel policy that states that staff always travel standard class on journeys of less than two hours. Ensuring compliance with legislation for example, companies have equal opportunities policies, and specific policies like the wearing of hard hats or specialist training to ensure that health and safety requirements are met.

ABE

Defining Overarching Intent: Mission, Goals and Policies

113

C. MISSION AND STRATEGY DEVELOPMENT


Strategy development is the process by which the organisation's mission and goals are translated into plans which will enable them to be achieved. Here we are concerned with a key element of this - the planning gap which strategy needs to address.

The Planning Gap


This is the difference between the desired future and the likely future. Figure 6.1 demonstrates the concept. Figure 6.1: The Planning Gap SALES (m) New strategies gap

10 8 6 4 2

Objectives Revised forecast Initial forecast Operations gap THE PLANNING GAP

10

TIME (Years)

If an organisation continues on its current path the likely outcomes can be forecast, based on what has happened in the past and what is happening in the present. The objectives can then be plotted onto the diagram to show what is being aimed for at a certain time (represented by the vertical line on the diagram). The planning gap is where the aimed-for outcome differs from the likely outcome. The planners must find a way of "closing the gap" and this is where strategy choice is important. Strategies chosen must be aimed at narrowing, if not closing completely, the gap between what is being aimed for and what is likely to be.

ABE

114

Defining Overarching Intent: Mission, Goals and Policies

PRACTICAL ACTIVITIES
1. Look at the following mission statements from some important global organisations and assess them against the guidelines discussed in this chapter, making suggestions for improvement as you feel appropriate. DHL DHL enhances the business of our customers by offering highest quality express and logistics solutions based on strong local expertise combined with the most extensive global network presence. Customers trust DHL as the preferred global express and logistics partner, leading the industry in terms of quality, profitability and market share. Toyota "To sustain profitable growth by providing the best customer experience and dealer support." Wallmart "Our mission is to enhance and integrate our supplier diversity programs into all of our procurement practices and to be an advocate for minority- and womenowned businesses." Apple Computers "To produce high-quality, low cost, easy to use products that incorporate high technology for the individual. We are proving that high technology does not have to be intimidating for non computer experts." 2. The following mission statement is from the Bombardier organisation which was the subject off the June 2010 case study. Suggest some goals and policies that could support this statement. Our mission is to be the world's leading manufacturer of planes and trains. We are committed to providing superior value and service to our customers and sustained profitability to our shareholders by investing in our people and products. We lead through innovation and outstanding product safety, efficiency and performance. Our standards are high. We define excellenceand we deliver.

ABE

115

Chapter Seven Selection and Evaluation of Strategies


Contents
Introduction

Page
116

A.

Ansoff Growth Matrix Market Penetration Strategies Market Development Strategies Product Development Strategies Diversification Strategies Risk and the Ansoff Model Use of the Ansoff Model Porters Generic Strategy Model

116 116 117 118 118 120 120

B.

121

C.

Bowman's Strategy Clock

123

D.

Harrel and Keifer's Business Portfolio

125

E.

Strategies for Hypercompetitive Markets: Reducing the Impact of Competition

126

F.

Marketing Mix Strategic Options Standardisation Adaptation Globalisation

127 127 130 132

G.

Strategic Direction and Implementation Strategic Direction Strategic Implementation

135 135 136

ABE

116

Selection and Evaluation of Strategies

INTRODUCTION
In the last chapter, we looked at the planning gap and identified the need for strategic development to enable the business to bridge the gap between what it wants to be achieve (in order, essentially, to fulfil its mission) and where it is now or will be if it continues as it is. In this chapter, we examine a number of strategic options for bridging that gap.

A. ANSOFF GROWTH MATRIX


Igor Ansoff in 1957, developed a matrix based upon markets and products to show the possible options that organisation have to fill the planning gap. The Ansoff Matrix identifies four possible combinations: existing products which they can sell to existing markets existing products which they can sell to new markets new products which they can sell to existing markets new products which they can sell to new markets. Figure 7.1: The Ansoff growth matrix EXISTING PRODUCTS EXISTING MARKETS Market Penetration NEW PRODUCTS Product Development

Using these combinations gives a choice of four possible basic strategies:

NEW MARKETS

Market Development

Diversification

Market Penetration Strategies


Market penetration means taking advantage of opportunities to increase market share. This strategy same product/same market will be appropriate when a market is growing and is not yet saturated. Penetration can then be achieved in one of two ways: Attracting non-users of a product Increasing the usage, or purchasing rate, of existing customers.

The strategy will usually be implemented by increasing activity on one or more of the marketing mix elements for example, using more intensive distribution and aggressive promotion in order to increase market awareness and availability. We noted that the strategy is appropriate when the market conditions are that it is growing and not yet saturated. We can explain this further as follows: If a market is expanding, it may be relatively easy for an organisation to expand sometimes because a competitor creates a bigger demand than it can satisfy itself.

ABE

Selection and Evaluation of Strategies

117

In mature markets, penetration is more difficult, because the market leaders have a distinct cost structure advantage. In declining markets, there is little opportunity for a company to build its market share unless others withdraw from the market, and a company perhaps has to hang in there until others are forced to go never a very comfortable situation.

Market Development Strategies


This strategy same product/new market is often found when a regional business wishes to expand or if new markets are emerging because of changes in consumer habits. It can also occur when a new use has been discovered for an existing product. Implementation of this strategy involves appealing to new market sectors, geographical regions and new countries not currently catered for and may mean a repositioning of products as well as considering new distribution methods such as franchising or channels. (a) New Segments Not all consumers of a product are the same. They can differ in terms of their characteristics such as age, sex, income, race, location, lifestyle, etc., and in terms of their needs, such as preferences in respect of price, brand or quality expectations, etc. Consequently, markets are best thought of in terms of their different segments, rather than the total market as a whole. Different segments of the market, then, cater for different, definable, groups of consumers. It is possible, therefore, for a company to operate successfully by having a foothold in a number of different segments in its market, without actually being dominant in any one segment. A company can then develop by entering a "new" segment i.e. one it was not operating in previously. It may even be possible to identify a segment that has not been identified previously, and so be the first to enter. (b) New Territories Another source of market development, very relevant to the International context, is in entering new territories, such as new geographical territories. This may or may not be successful. Past failures include Marks and Spencer's attempt to enter the American market through Brooks Brothers, and Boots' retreat from Holland and Japan. On the other hand, in the drinks sector, both Budweiser from the US and Foster's from Australia have successfully entered the UK market for lager, despite European companies having been there much longer. (c) New Uses/Reinvention New uses can often be found for existing products/technologies and so be a means of market development. The car brands of the Volkswagen Beetle, the Mini and the Fiat 500 have all been reinvented from being mass market brands to being niche brands. Lucozade was originally a drink which was drank when people were ill, but has now been repositioned as a health / energy drink mainly for sports people. Running shoes are now seen as fashion footwear. (d) Heavier/More Frequent Usage It may be possible for a company to expand by convincing its customers to use its product more frequently. This type of market expansion can be seen in the cosmetics sector for example, where shampoo manufacturers advocate the frequent use of their products.

ABE

118

Selection and Evaluation of Strategies

Product Development Strategies


With this strategy new product/existing market an organisation develops new products to appeal to its existing markets. This may simply be a product "refinement" for example, a change of packaging or taste or a completely new product which aims to satisfy the same consumers. Product development is most prevalent when strong branding exists. Promotional aspects will emphasise the added qualities of the "new" product and link it specifically to the security of, and confidence in, the brand. This strategy builds on customer loyalty and the benefits to be gained by purchase. Other marketing mix elements, such as distribution, may remain unchanged. One example of this approach is Kodak, which saw its annual sales of film decline from 15 billion dollars to 200 million dollars in the five years to 2010 and were late into the digital camera market, but have successfully used their technology in the development of printers.

Diversification Strategies
Diversification new product/new market is the most risky strategy (as we shall consider below), but also offers considerable gains. It is sometimes introduced so that a company does not become too dependent on its existing SBUs, in which case it is a form of "insurance" against potential disasters that could occur in the event of drastic environmental changes. It can also simply be a means of growth and expansion of power. There are two basic approaches to diversification: (a) When a company develops beyond its present product and market whilst remaining in the same area, this is described as related diversification. For example, a newspaper expanding by taking over a radio station remains within the media sector. It has built on its present strengths by using its expertise to develop new interests in the same sector. The term unrelated diversification is used to describe a company moving beyond its present interests into unrelated markets or products. For example, when it considered diversification targets, Philip Morris believed that the core competence it had developed in marketing cigarettes could apply to other, similar markets. Based on this belief, the company purchased Miller Brewing and then used the Philip Morris marketing skills to move the Miller brand from seventh place to second in its market. Another example is that of General Electric. Jack Welch, the founder of GE transformed the organisation from a purely manufacturing company into a more diversified company with an increasingly important service component. In his 1996 annual report, Welch wrote: "Services is so great an opportunity for the Company that our vision for the next century is that GE is 'a global service company that also sells high-quality products' ". When asked if GE was going to become a more productoriented or service-oriented company, Welch replied, "It's got to be a big combination... It's an integrated game." In 1996, GE Capital Services earned US$4 billion. In 2005, GE services agreements increased to $87 billion, up 15% from 2004. In particular, financial services revenues increased 12% to $59.3 billion. Diversification can bring a number of advantages to a company. (a) Related diversification can: take advantage of existing supply chains, leading to continuity, improved quality, etc. lead to control of markets, by guaranteeing sales and distribution through tied outlets

(b)

ABE

Selection and Evaluation of Strategies

119

(b)

take advantage of existing market expertise and knowledge in the company when expanding into new activities provide better risk control, through no longer being reliant on a single product in the market. exploit under-utilised resources provide movement away from declining activities spread risks by avoiding having "all the eggs in one basket" reduce seasonal peaks and troughs create greater positive synergy.

Unrelated diversification can:

Firms can diversify by producing their own new products or by taking over some other product. In the latter case there are two main types of diversification integration (which may be vertical or horizontal) or conglomeration. Vertical integration This involves the acquisition of some other enterprise in the chain of distribution between the manufacturer and the customer. It can be either "forward", i.e. towards the customer, or "backward" towards the source of raw material. For example, a company dealing in writing stationery may vertically integrate forward by taking over a retail outlet to sell its products, or backward by taking over a paper mill. Although there will obviously be control benefits to be gained in either of these examples, the company will be dealing with a product, or products, and markets which are new to them. Horizontal integration This is the acquisition of another organisation that has a feature that is desired i.e. the acquired organisation may be using similar materials or components for which they have a monopoly of supply. This is particularly relevant when materials, etc. are in short supply. The company that is acquired may use similar production methods and have greater capacity; or its distribution channels may be highly effective and would prove advantageous; or it may have some other quality which could be seen as a benefit for example, Johnson Brothers (china manufacturers) taking over the Wedgwood china company and capitalising on the Wedgwood brand and reputation. Conglomeration This strategy moves the firm away from its existing product-market situation into an entirely new area in order to satisfy a primary objective. Quite often this is done as a short-term activity that will allow an organisation to recover from a temporary setback in market conditions. Note that diversification does not always improve a company's business. For example, high street banks who decided they could operate successfully in the property market by buying up estate agencies found themselves having to dispose of the businesses at a loss when the market collapsed.

ABE

120

Selection and Evaluation of Strategies

Risk and the Ansoff Model


There are different levels of risk associated with the different Ansoff product/market quadrants. In general, these are as follows: Risk factor Existing product/existing market Existing product/new market New product/existing market New product/new market 1 2 4 16

A company selling the current product to the current market is in the safest position. All key factors such as buyers, distribution, competition, are known.. Once the company begins to change some aspect, risks occur. With "new" products to existing markets there is always a danger that the customers will not adopt the new product and, possibly, that the new product will have an adverse effect on the existing range. Likewise, unknown market sectors, or regions, can be risky and, of course, the unknown variables involved in diversification make it the most risky strategy of all. The risk element can vary according to the competences of the organisation. For example, if it has proven expertise in new product development, particularly with regard to innovation, then the risk element connected with new products will be lessened the Apple Corporation is a good example with products such as the IPod. Similarly if an organisation has proven international market entry capabilities, then the new market risk element will be reduced. As has been noted earlier, there has been convergences in many markets, so that whilst the Indian youth market, for example, may at first seem quite different to the French youth market, it has some key similarities. These will lead to the same, or very similar, buyer behaviours and hence the new market element of risk will be low.

Use of the Ansoff Model


Ansoff's model is one which is so widely used that you cannot afford not to know it really well. There is no doubt that it is extremely useful in deciding which strategy to adopt in a given set of circumstances, and its value can be seen in considering the following examples: McDonald's moving into growing coffee bar market with the introduction of Mc Coffee. Nestl developing new sectors of the coffee-drinking market by introducing coffee capsules and machines for domestic use. Honda using their proven competence in small petrol engines from their motorcycles in developing small engines for products such as powered lawn mowers and portable generators. Pepsico using their business expertise in soft drinks on marketing bottled drinking water in countries where the supply of safe public drinking water is currently a problem. It takes no account of any environmental factors. It does not give any room for judgment on profitability. It can inhibit the creativity of planners.

However, you should recognise that the model is not perfect as it does not cover everything.

It should also be noted that each of the four strategic directions needs detailed and careful analysis in order to determine their viability in the short, medium and long terms, before a strategic choice is made. It is on the basis of such quantitative analysis that decisions will be taken, and the growth matrix is not in itself a decision-making tool.

ABE

Selection and Evaluation of Strategies

121

The International Dimension From an international perspective, growth can often be obtained by developing into new country markets through the strategy of market development. As we have seen, it is particularly risky to attempt to launch new products into new markets, and this is especially true in the case of international markets. However, the degree of risk will vary according to the degree of difference between the existing market and the new market, and the existing product and the new product. A useful way to visualise this is by developing the Ansoff growth matrix from its standard four-cell format to a multiple, incremental scale on both the market and the product axes. This modification can be used when considering options and assessing strategies for entering new international markets. This adapted model is often referred to as the Ansoff Incremental Matrix and is shown in Figure 7.2 below: Figure 7.2: The Ansoff growth matrix using an incremental scale Increasing increments of product newness Increasing increments of market newness

The idea of this matrix is that it is possible to assess different degrees of risk in entering new international markets by considering degrees of market newness and product newness. So, for example, it will be more risky to launch a product into a new country with considerable distance, both geographically and culturally, from the country markets that the company is used to. For example, a UK company that has developed markets in the EU will experience higher risks in marketing to Latin American countries or to Japan and China than it would to Turkey and Switzerland. All the countries mentioned would be new markets, but Switzerland and Turkey are closer geographically and culturally than the high context and geographically distant Latin America, Japan and China. Entering these markets therefore would be a very high-risk strategy, particularly if it were combined with the need to produce entirely new products.

B. PORTERS GENERIC STRATEGY MODEL


In essence, strategic choice involves a company deciding how best it will compete. The strategy selected should be one which enables a company to achieve and sustain a competitive advantage. One of the best-known frameworks for distinguishing between strategic alternative bases for competing is that proposed by Michael Porter, based on his notion of "generic strategies. Porter identifies three alternative generic strategies cost leadership, differentiation, and focus. Cost Leadership This strategy is based on the company being the lowest-cost producer for example by pursuing economies of scale, low-cost supplies, basic product designs or minimum

ABE

122

Selection and Evaluation of Strategies

service levels. Such an advantage is, though, difficult to sustain, because competitors often copy these strategies, and the advantage is therefore only short-term. Nevertheless, many successful international companies pursue this strategy, although not necessarily to lower prices to customers but to achieve higher profits in the long run. It can also prove to be an effective barrier to entry to new firms entering the market since it provides scope to reduce market prices in the short term. Differentiation This is where a company offers a unique product or service as the basis of its strategy. Some organisations are able to offer something to their customers which enables them to charge more for their products/services i.e. some added value. This is often associated with brand names that customers feel (not always correctly) are superior; or it may be, for example unique designs or packaging. Some companies differentiate on quality and levels of service. In order to be successful, it is essential that customers value, or can be "persuaded" to value, that element which is being used to differentiate the company's offerings from competitors. Focus This third alternative strategy is where a company concentrates on catering for a small section of the market and so competes through being specialised. This allows the company to develop in-depth knowledge in a particular area of the market and, by concentrating on a small segment of customers, it is better able to meet their needs. However this can be risky if a larger competitor enters the market or if the market segment goes into decline. Porter suggests that these are the only three main strategies available, and that a business not following one or other of them is "stuck in the middle". Nevertheless, whichever strategy is followed, it is always vulnerable to changes in the environment which cannot be forecast and over which the organisation has no control. Figure 7.3: Porter's Generic Strategy Model Differentiation

Stuck with no clear strategy Cost Leadership Focus

ABE

Selection and Evaluation of Strategies

123

C. BOWMAN'S STRATEGY CLOCK


Whilst Porter's Generic Strategy Model remains useful, since his original work, other, more refined, models have been developed which have added to the range of generic strategies based on the two competitive dimensions of price and added value. Bowman's "strategy clock" took Porter's original idea of generic strategies and refined and extended them to give a total of eight possible alternative strategies based on different permutations of price and perceived value to customers. These eight permutations are as follows:. Strategy 1 2 3 4 5 6 7 8 Basis/characteristic "No frills" (low price/low added value) "Low price" "Hybrid" (low cost base allowing low price and differentiation) "Differentiation" (with or without price premium) "Focused differentiation" "Increased price/standard value" "Increased price/low value" "Low value/standard price"

The way in which these are assembled into the model of a clock is shown in Figure 7.4. Figure 7.4: Bowman's Strategy Clock High 4 3 Perceived added value 5

1 8 Low Low Price Strategy 1: No frills

High

As the term implies, this strategy is based on products or offerings which have no additional features, design elements, service back up and so on. They represent the most basic of products and therefore the lowest perceived added value. However, this strategy also allows the lowest prices to be charged. This can be a very effective strategy for market segments who are unwilling, or unable, to afford anything but the most basic product or service. An example of this strategy is that employed by budget airlines.

ABE

124

Selection and Evaluation of Strategies

Strategy 2: Low price Some companies seek to obtain a competitive advantage by reducing prices while, at the same time, attempting to maintain the quality offered by others. The major disadvantage of this strategy is that it is easily copied by competitors and can result in price wars. A company needs to be the cost leader, in order to successfully pursue this strategy.

Strategy 3: Hybrid As the term suggests this is a strategy based on relatively high perceived value but low price. Obviously, this combines two strategies which are likely to give a company a competitive advantage, and is therefore potentially very attractive to customers. However, it is normally a strategy which can only be supported for a short time as margins and profits are too low in the long run for it to be sustainable. A company may follow this strategy with the intention of gaining market share quickly and driving competitors away. It is a strategy often chosen by sellers of "flat pack" furniture, such as IKEA. In this system, costs are lowered by leaving the customer to assemble the product for themselves, which then allows it to be of good quality at a low price.

Strategy 4: Differentiation These strategies are an attempt to offer perceived added value over competitors at a similar, or even higher price, thus giving the company better margins whilst remaining competitive through differentiated products. The key to success for this strategy is that the basis for differentiating the product or service must be of value to the customer and must also be based on sustainable competences which are difficult for competitors to copy or match. In the automotive sector, a good example of a company pursuing this strategy is Toyota with the Lexus brand.

Strategy 5: Focused differentiation This is similar to strategy 4, the difference being that the differentiated product or service is offered to a particular group of customers or segment of the market. This enables a company to concentrate on those customers who will value the differentiation being offered and also has the advantage of being potentially easier to protect from would-be competitors. An expanding area which lends itself to this type of differentiation is that of the health and leisure industry. Those who can afford it prefer to pay for additional luxury, which they also see as raising their own image above those of others.

Strategy 6: Increased price/standard value At face value this would appear to be a seemingly attractive alternative for a company. In fact, it often leads to ultimate failure. In the short run this strategy can be used where, for example, the customer cannot buy from somewhere else or where they are unaware of a more competitive alternative offer. However, for most companies in the long run this is not a viable strategy, because customers will eventually "see through it".

Strategy 7: Increased price/low value This is a variation on strategy 6. It takes increased price and low value to the next level. Needless to say, this strategy is only really feasible for an organisation which has a monopoly, and there are fewer and fewer of these today. Many state-run organisations come under this category and the success of privatisation initiatives throughout the world shows this as an unsustainable strategy.

ABE

Selection and Evaluation of Strategies

125

Strategy 8: Low value/standard price Although in this strategy prices are lower than in the two previous strategies (6 and 7), so also is the value. Again, this is not a viable strategy in the long term. Many would argue that this is the strategy which led to the demise of the British car industry in the face of Japanese imported cars offering higher value with standard pricing.

Bowman's strategy clock provides a useful way of identifying alternative strategies based on "perceived added value" versus "price". However, whereas the first five of the strategies are likely to be successful, the others seem to be destined for failure.

D. HARREL AND KEIFER'S BUSINESS PORTFOLIO


Companies all have different strengths and, understandably when it comes to identifying and selecting international markets, the business should be looking to match its strengths to the most attractive markets. In this way, it should be possible to build a portfolio of operations in different country markets which provides a strategic fit with the company's mission and goals, and its experience and strengths. A useful approach linking company strengths and the attractiveness of different country markets has been developed by Harrell and Kiefer (1993). Country attractiveness is measured by criteria such as market size and growth, economic and political stability and the lack of tariff and non-tariff barriers. Company strengths are measured by criteria to evaluate the relative competitive position, the degree of co-operation to be expected from distribution channel members and the fit between the existing range of products produced by the company and the need to adapt products to make them acceptable in the country market. The market share available for the company in the country market is also usually very important because it influences the economies of scale and experience that can be gained in that market. The country attractiveness/company strengths matrix can also be used to help identify suitable strategic options. Countries that are, in themselves, highly attractive and which overlap with countries in which the company already has a high strength, will be countries in which the company should develop strategies for investment and growth. On the other hand, countries with low attractiveness in which the company has few strengths, will require strategies to harvest the profits that are available or the company should consider selling off its interests in the market (see figure 7.5 below). Figure 7.5: The Harrell and Kiefer country attractiveness/company strength matrix Company Strength High High Country Attractiveness Invest/Grow Medium Low Dominate/Divest/ Joint Venture Selectivity

Medium

Low

Selectivity

Harvest/Divest

ABE

126

Selection and Evaluation of Strategies

Companies might well wish to develop their own modified versions of the Harrell and Kiefer Matrix using their own criteria with regard to what constitutes the important elements underpinning country attractiveness and company strength.

E. STRATEGIES FOR HYPERCOMPETITIVE MARKETS: REDUCING THE IMPACT OF COMPETITION


In most markets companies face other organisations trying to capture their customers, increase market share, compete for recognition, launch new products first and so on. This constitutes competitive rivalry. The degree of competitive rivalry experienced by most organisations has increased in recent years, with larger numbers of ever more aggressive competitors. In some markets competition can become so intense that they become dysfunctional, with few companies making any profits at all and with large numbers of bankruptcies and company failures. When competitive rivalry reaches this level it is often referred to as "hypercompetition". Such a situation has several disadvantages, as follows: (a) (b) (c) Excessive competition usually lowers the overall profits of every company in the market. Excessive competition increases uncertainty and risk, with returns being highly volatile and competitors unpredictable. Customers tend to be less brand-loyal, instead constantly looking for the "best deal" and switching between suppliers.

Because of these adverse effects organisations often pursue strategies designed to reduce this intense rivalry. Four possible strategies for achieving this are discussed below. Increasing barriers to entry Intense competition often occurs when new competitors enter the market. New entrants are usually attracted by the prospect of high profits and or rapid growth in a market. An organisation already active in the market can try to make it difficult for new competitors to enter the market by creating "barriers to entry". There are various ways by which this can be achieved. For example an organisation can increase levels of marketing, and particularly advertising /promotional spend, thereby making it difficult for new, often smaller companies to enter the market. Another barrier to entry is the use of patents and new technology whereby a company that developed a new product or technology can prevent new would-be competitors from acquiring the new technology. Aggressive pricing too can also be used to deter potential new entrants to a market. Agreements/strategic alliances A second approach to reducing competitive rivalry in a market is for the organisation to seek agreements with other competitors about limiting competition in some way. For example two or more competitors may agree not to compete directly on price. Alternatively they might "agree" not to target each other's customers. Agreements between competitors may take many forms, ranging from the tacit unspoken "understanding" with no formal arrangements, through to highly formalised and structured agreements between competitors such as those when, as discussed earlier in this Unit, competitors form strategic alliances. Though this approach is to reducing competitive rivalry is widespread it can be a risky strategy, particularly when agreements are with a view to maintaining prices and profits. Price-fixing agreements, cartels, and so on are looked upon unfavourably by legislators in most countries, and by transnational bodies such as the European Union, and

ABE

Selection and Evaluation of Strategies

127

companies can find themselves in serious trouble if they are found to be trying to manipulate competitive market structures in this way. Mergers and Acquisitions At least some mergers and acquisitions are prompted by a desire to reduce competition (although this is arguably not the best motive for merging with or acquiring a competitor company). This approach to reducing competitive rivalry has the advantages of immediacy and predictability. However, again the main problem is the potential for attracting the attention of the legislator. In many countries there are strict rules governing mergers and acquisitions which appear to be prompted by, or simply result in, reduced competition. Building brand loyalty This fourth approach to reducing competitive rivalry is potentially one of the most powerful and effective. A company which can build brand loyalty effectively insures itself against competition. Brand-loyal customers are less likely to switch to competitors' products and services even when tempted by low prices and special offers. Brand loyalty can be built in many ways including, for example, superior service, superior quality, strong brand image and so on. Building brand loyalty though is a longterm process and can be costly. It is nevertheless a very positive strategy for reducing some of the worst effects of excessive competitive rivalry.

F.

MARKETING MIX STRATEGIC OPTIONS

In determining the strategic approach to the development and marketing of a product or service on an international level, there have traditionally been two alternatives standardisation and adaptation: Standardisation refers to the approach taken in which the marketing mix is used in the same way in different countries. Adaptation relates to the approach in which the business strategy is deliberately changed so that it relates to each market.

Note that there is an important distinction to be made between the same and similar. It is unusual for exactly the same business strategies to be used in different countries. It is more frequently the case that the intention is to introduce the same approach but that minor changes are required for different markets. We will regard this as standardisation. More recently, a third option has emerged. After looking at standardisation and adaptation, we will move on to examine the issue of globalisation as a strategy. In itself globalisation could be regarded as an extreme form of standardisation. As you will see, although globalisation does involve some standardisation, it does not depend upon it.

Standardisation
The ability of companies to develop standardised approaches to different markets is a major debate in international business strategy. Approaches to Standardisation It is possible to view standardisation both as a process and in terms of implementation: Process standardisation Because a company can control the processes it uses, this is an easier form of standardisation than implementation. A company can establish the particular planning

ABE

128

Selection and Evaluation of Strategies

methods that it thinks appropriate. In this way, analytical methods, planning and international strategy can be controlled substantially within the company and it can insist that the same approaches are taken by subsidiaries in different parts of the world: (i) Analysis can be similar, based on policy decisions to use the same marketing research methods and surveys. Information can be collected, stored and disseminated in the same ways using a common information system. International strategies can be developed from the same analytical methods using a standard format of business models and techniques. Business planning can be based on similar lines in the company headquarters and in country subsidiaries. The business operations can be developed along standard planning approaches. For example, the company could use the same planning methods for advertising decisions.

(ii) (iii) (iv)

Implementation standardisation It is much harder to standardise implementation than the processes of international business. The reason for this is that the implementation involves direct contact with customers, potential customers, distribution channel members and others. Direct contact will be influenced by the market structure and behaviour in the market. For example, in some markets there may be strong competitors with aggressive business strategy programmes designed to increase market share, whereas in other markets, competition might be much less aggressive. Another direct contact issue is the need to take account of the culture of the country market. Thus, we can see that, when a company attempts to implement its chosen strategies, it may find that its various customers do not all react in the same ways. The company has little or no control at the implementation level and it is more likely, therefore, that the company will have to change parts of its business strategy in order to satisfy customers: (i) Product This is a part of the marketing mix that many companies aim to standardise. The augmented view of the product includes the physical product plus the brand and company name and trademarks. It includes the packaging, warranties and guarantees. It is possible, therefore, to standardise part of the product and adapt other elements. Some companies will keep the same physical product, but may change the packaging and the labelling. Language change is an obvious adaptation. Price It is very difficult to standardise price because it is influenced by so many country factors. There are many differences in the tariff rates charged for imports, value added tax rates, distribution channel margins and the prices set by the main competitors. In addition, there are considerable differences in the ability of consumers to pay a particular price level. Whilst a company can have a policy to charge good value prices in the middle of the market and, therefore, have a standardised process approach, the practical implementation will give rise to many detailed adaptations. Promotion The selling part of promotion is usually adapted. The reason for this is the interface between the sales force and the country distribution channel. Because distribution channel members are strongly influenced by the culture in the country, the sales force, if it is to be successful, has to adapt to local requirements. Public relations and sales promotions are also often adapted to fit local requirements. It is the advertising decision that stands the best chance of standardisation. This is because it uses media that are less culturally specific

(ii)

(iii)

ABE

Selection and Evaluation of Strategies

129

than the other elements in the marketing mix. It can also standardise the advertising message if customers have similar buying motivations and if they seek similar benefits. (iv) Place (Distribution) This is a marketing mix element that is strongly influenced by market and country forces. It is difficult to standardise the implementation of distribution although thanks to initiatives of organisations such as Tesco and Wallmart the phenomenon of the hypermarket is becoming global.

In the case of service products of course, the traditional 4Ps of the marketing mix can be extended as follows: (v) People Perhaps as one might expect, this is one of the most difficult elements of the services marketing mix to standardise. By definition, people are individuals and in addition, of course, people differ between different cultures. Standardisation can be achieved to some extent, however, through careful and methodical training. Process As you are aware, the process element of the services marketing mix relates to things such as how the service is delivered, ordering systems and so on. Compared to the people element, process is generally much easier to standardise so, for example, McDonalds processes for taking orders, cooking these orders and treating customers in their outlets are very highly standardised throughout the world.

(vi)

(vii) Physical Evidence Like process, this element of the services marketing mix, too, can be standardised to a high degree. Again we can use the example of McDonalds where the layout and dcor is more or less standardised throughout the world. Standardising physical evidence is particularly important in trying to develop a uniform company image, and is often a key part of franchise services marketing. The Arguments for Standardisation The main arguments for standardisation are based on two areas cost and customers: Cost The general and financial management of companies presents a strong argument for standardisation. It can be demonstrated that the elimination of variety and the constant repetition of company activities around the same products will give economies of scale and experience benefits. Economies of scale relate particularly to manufacturing, whereas the experiences effect can be gained in any part of the organisation through the efficiency gains resulting from familiarity. Within the marketing mix the main areas of saving will be based on the high cost areas. The highest costs, for most companies, will be in the product area. Most companies will attempt to reduce the amount of variety in the products that they produce. They will prefer to produce one product that can be sold in all markets. Unfortunately, this ideal state is rarely found. The other main area in which companies seek to standardise is the marketing communications (promotion) area. Companies that have large budgets for media advertising can often make substantial savings by using the same advertisements in a number of different country markets. Customers When customers are mobile between one country and another, as for example in the purchase of film for cameras, there are benefits in selling the same product and promoting it in the same way. If the product and the way it is presented change, customers can become confused and end up buying a different product. For the

ABE

130

Selection and Evaluation of Strategies

customer, a strong consistent brand image that does not exhibit variations in different countries will be reassuring. Even in markets in which customers are not internationally mobile, there can be customer benefits in a standardised approach. If the same customer segments are found across country boundaries, it makes sense to use similar products and advertising. Whilst the benefits in this instance relate to cost savings, there is the marketing logic of developing a marketing mix that is based on customers. If the customers are the same, in terms of the benefits that they seek, why not make the marketing mix the same? In many companies the cost-saving argument will be stronger than customer similarity it is easy to demonstrate cost savings and harder to show customer similarity. However, it is important for companies to be responsive to customer requirements. It is quite possible that cost savings through standardisation will be pursued too vigorously and ultimately to the dissatisfaction of the customer. Customer satisfaction, though, can be achieved at the same time as benefiting from standardisation based on customer similarity. The important proviso is that similar customer benefits have been identified in different countries.

Adaptation
The reasons for adaptation lie in specific attempts to develop an appropriate strategy to satisfy a specific customer group. The type of company culture or orientation can have a strong influence on the extent to which changes are made. In a company with a polycentric orientation, adaptation is the likely consequence. As each subsidiary becomes more and more familiar with its host country market, it becomes more and more aware of the differences that exist between that countrys requirements and the head office view of what it should be doing. This leads inevitably to a situation in which the subsidiary aims to customise its business more precisely. The ways in which this customisation will take place will be influenced by the overall company policies and the strength and independence of the subsidiary. If the subsidiary is a major contributor to sales and profits, and if the subsidiary regularly meets its corporate and marketing targets, it will be granted more independence than a subsidiary with inexperienced and unproven management. Approaches to Adaptation In a consideration of the business and the ways in which adaptation takes place, it is clear that most companies will concentrate attempts to standardise on products and on marketing communications. Price and distribution are influenced by so many local factors that very precise standardisation is impossible. Some companies will use a standard price list and some will use a standard distribution channel approach, but these are the exceptions. For service products, as we have seen, it is process and physical evidence elements of the mix which are likely to be standardised, especially where the operation is a franchise operation. For the reasons stated earlier, the people element of the services business can be much more difficult to standardise. The main areas, therefore, in which the standardisation/adaptation argument will take place will be products, marketing communications, physical evidence and process. For many companies it will be easier to adapt marketing communication than products. It will be usual for the company to have a sales force that is adapted to local customers and to their requirements. Many companies use sales promotions in a tactical way that relates very closely to the market and the competitive situation that exists in the country. Furthermore, public relations is frequently developed around knowledge of local media and journalists, and is often, in addition, based on events and activities that are country-specific. For example, in

ABE

Selection and Evaluation of Strategies

131

the UK with its intense liking for animals as pets, PR events can be based on dogs and cats, whereas that could be unworkable in many other countries. International advertising, particularly if it is dependent upon the visual TV, Internet and Cinema media is likely to be the exception to the obvious need to standardise. However, the extremely high cost of developing a TV commercial is one factor that encourages its use across many countries. A further factor is the difficulty in finding an advertising approach with a strong, positive, demonstrable effect. If the company develops a very good TV commercial, there will be strong pressure on company subsidiaries to use that same commercial. Imposed Adaptation Adaptation is not necessarily the outcome of a conscious decision by a company to change its marketing mix to meet the needs of its customers in a particular country. A whole series of rules, regulations and laws may also be imposed on companies requiring them to adapt the business that has been developed in other countries, usually the company headquarters country. Examples of such forced changes are given in the following table. Causes of imposed adaptations Marketing Mix Element Product Cause of Imposed Change Safety standards legislation Technical standards Product liability laws Laws on prices Different tax levels Restrictions on the types of retail outlet, the types of product they can stock Laws on which sales promotions can be used in a country Legal and voluntary controls on advertising content Controls on the amount of advertising that the media can carry (which is particularly the case for TV and radio). Employment legislation Local planning regulations Health and safety regulations

Price

Distribution

Promotion

People Physical evidence Process

If we take the example of a car, we can see a number of imposed changes necessary in different markets. The product will need to meet the safety standards required in different countries, resulting in changes to seat-belt fittings, external and internal surfaces to reduce injury on impact, the type of braking system, the strength of the body cage, etc. The product will also need to be adapted for left-hand drive or right-hand drive. Other changes will be imposed by local climatic and driving conditions for example, in hot countries airconditioning might be an almost standard part of the car. Other adaptations to the same product may not be imposed, but will be influenced by market demand. These will be used to enhance the cars appeal in a specific market through such adaptations as colour schemes, different levels of instrumentation fitted as standard or

ABE

132

Selection and Evaluation of Strategies

different warranty arrangements (in one country the warranty might be for one year, whereas in another, because of competitive factors, it could be as long as three or five years).

Globalisation
Globalisation is a particular form of standardisation, perhaps even being seen as its ultimate form. The increasing convergence of customer demand for some products and services enables those products and services to be thought of as serving a world market. For example, a worldwide market exists for fuel for cars and lorries, for film for cameras and for many consumer durable products. The demand for music and film entertainment services is a very wide one across country boundaries. With a market demand existing across many countries, and as communications and transport systems in the world improve, it is not surprising that some companies have sought to co-ordinate their marketing approaches. Companies have grown larger and have resources that enable them to take a wider and wider view of world opportunity. Approaches to Globalisation The types of co-ordinated approach are obviously related to standardisation as we discussed previously. We can see globalisation in the following ways: Globalisation as a process In this way companies can view the world market as a total opportunity. They can develop analyses, plans, and international strategies using a standardised format. Some companies will also develop a standardised approach to competitive strategy that can be co-ordinated across the world, defending in some country markets and being aggressive in others. Using the process approach, companies can develop a completely similar strategy across the world, or they can develop one that has major elements of standardisation, or one that shows considerable degrees of adaptation, as shown in the following table. Global process standardisation Type Completely similar Comments The world standard brand this hardly exists in its absolute form. Even Coca-Cola and McDonalds make some minor adaptations in various countries. This will reflect some significant customer differences in parts of the world. Companies might take a different approach in, say, Asia and in Europe. This is most likely to occur in markets that are culturally highly sensitive. Food products often, but not always, fit into this category.

Major elements of standardisation

Major adaptation

Global implementation standardisation At the implementation level, standardisation is possible in certain parts of the strategy, but other parts will continue to demand adaptation to the particulars of different country markets. The following table summarises the different approaches.

ABE

Selection and Evaluation of Strategies

133

Global Implementation Standardisation Type Completely similar Comments This does not exist. There are always local and country and trading bloc differences that cause some adaptation, even if it is quite minor. Standardisation might be groupings of countries, or by standardising the product and perhaps the advertising and then adapting the other elements. This approach will benefit from the process standardisation, but at the implementation level will look as though everything is totally different. Companies like Nestl will benefit from similar planning and strategy and control processes, but will exploit market differences to the full by using a highly adapted marketing mix.

Major elements of standardisation

Major adaptation

The Range of Globalisation Strategies At first sight, the choice of strategies with regard to approaches to global markets would seem to be a choice between the two alternative strategies of standardisation or adaptation for both process and implementation aspects of business. However, we can distinguish between three alternative strategies with respect to globalisation as follows: Global strategy A truly global strategy is characterised by an attitude and an approach to planning in an organisation where no distinction is made between domestic and foreign markets. Plans are developed on a global basis and the only consideration in considering each market is the extent to which the market will contribute to the achievement of overall corporate objectives. A company which has this truly global approach to its markets and business, therefore, will not think of itself as primarily, say, an American or a Japanese company, even though the company may have been founded in one of these countries and may still have its headquarters there. A global strategy involves a company looking for and planning for global opportunities irrespective of where in the world these occur. A global strategy may or may not involve standardisation depending on the circumstances of the markets and other factors such as competition, the company itself and so on. However, companies that pursue global strategies are often looking to standardise their business plans as much as possible. Multi-domestic strategies Essentially, this strategy is based on developing different strategies for different parts of the world and as such is based on the notion that the differences between markets are more important than the similarities. This approach may still be underpinned by a degree of standardisation, particularly with regard to the process elements of business planning, but the elements of the marketing mix and, in particular, price and distribution are likely to be adapted. Nevertheless, a company pursuing this type of strategy can still seek to prosper from global opportunities. A company adopting this strategy is often said to be thinking global, but acting local.

ABE

134

Selection and Evaluation of Strategies

Grouping/clustering strategies, global segments This approach represents something of a middle ground between the first two strategies and essentially is a segmentation and targeting approach. In this approach customers and/or markets are grouped together according to the similarity of their needs and wants. Once grouped in this way, these customers can then be targeted with a standardised, or at least relatively standardised, strategy. Examples of ways in which customers can be grouped and targeted in this way include groupings by geographical area, grouping by trading blocs, grouping by stage of economic development and so on.

Global Branding Perhaps one of the most significant developments associated with global business in recent years has been the growth of the global brand. Companies such as Nike, Levis, McDonalds, IBM, Sony, Coca Cola and many more are all successful global brands. A global brand is generally considered to be a brand supported by the same strategy everywhere in the world. However, under this strict definition, it is very unlikely that there is a global brand at the moment or that there will be many in the near future. If, though, we amend the definition to allow for some minor adaptations in the strategy between country markets, then we can identify many global brands now and it is probable that more will appear in the future. By minor adaptations, we would include changes to translate the meaning of the brand packaging into different languages as well as other minor business strategy changes to accord with country rules and regulations. The substance of the product would, though, be the same in each market and, importantly, the brand name and its trademark would remain unaltered. Global brands offer some key advantages and benefits both to companies and customers. In the case of companies, global brands facilitate the growth of worldwide customer loyalty. This, in turn, enables easier access to new markets and, in particular, to distribution channels. Finally, a global branding enables a company to build a global presence whilst at the same time achieving global economies of scale in areas such as advertising and promotion. As far as customers are concerned, global brands often bestow status on the customers who display them. This is particularly important in some of the lesser-developed economies. Similarly, global brands reduce the risks associated with purchase for customers, both in consumer and business-to-business markets. Finally, global brands help facilitate the buying process by making a companys products easily identifiable. No wonder, then, that global branding has been such a growth area. However, there are disadvantages to developing and supporting the global brand. For example, the business must pay careful attention to managing and co-ordinating brands throughout the world. This can be very difficult where some degree of adaptation is required in different markets. There is also a risk with global brands that if there are any brand scares or problems such as the recent problem with the Mercedes A Class product (which initially was found to be prone to rolling over) these can have a very rapid knock-on effect for the reputation and image of the brand throughout the world. Finally, global brands bring the attendant problems of pirating, counterfeiting and parallel imports. Customised Business Strategy Finally, no discussion of globalisation including aspects such as global branding would be complete without a brief mention of the trend towards more customisation throughout the world. There is some evidence to suggest that customers are increasingly looking for customised solutions to their needs, i.e. individual products and brands to satisfy their requirements. Obviously, global brands and standardised business strategy are a complete anathema to

ABE

Selection and Evaluation of Strategies

135

this. At one time, of course, developing customised marketing mixes for customers would have been impossible apart from in the more specialised markets such as sales of high priced fashion items, industrial products and services and so on. However, a number of developments have begun to facilitate at least a greater degree of customised business strategy that at least some customers are looking for. So, for example, manufacturing systems have changed to include flexible product customisation based on computerised systems. Coupled with this, as we have seen, businesses now have access to intelligent databases and intelligence systems that enable them to identify more closely the needs of individual customers. Finally, the Internet is increasingly facilitating the speed and ease with which companies and customers can communicate on a real time interactive basis. Company Size and Globalisation The very large companies are those that most frequently attempt to change from the polycentric orientation of the multinational enterprise to the geocentric orientation of the transnational global company. These very large companies, for example Ford, Unilever or Procter and Gamble, compete in a substantial way in many markets in the world. They are able to make considerable gains by seeking process and implementation standardisation on a worldwide scale. Smaller companies are not necessarily prevented from taking a global stance. They are not necessarily smaller in the relative terms of their position in the world market for the products/services that they provide, for example, in the high technology area or, perhaps, in entertainment services. Smaller companies can, therefore, develop both a process and an implementation standardisation in a global way. Many companies will not consider globalisation because of a limited management view. As we have indicated before, some companies will be confined closely to their own domestic market because of their ethnocentric orientation. Other companies will serve markets that exist in few country markets (the markets for frogs legs or snake soup, for example) and cannot develop a global view.

G. STRATEGIC DIRECTION AND IMPLEMENTATION


Development strategies contain a number of elements, which can be considered by asking the questions: What is the basis of the strategy? Which direction is it going to take? How will it be carried out?

We have already discussed a number of strategy options, and here need to briefly consider the options in respect of direction and implementation. Note that decisions with regard to generic strategy, direction and method are not independent. As Johnson and Scholes point out, an organisation which is following a generic strategy of providing a product or service which differs from that of its competitors, i.e. a strategy of differentiation, can also be following a strategic direction of product or service development and still have further choice as to the method which is to be used to achieve this end.

Strategic Direction
The direction of the strategy can take several different forms: Withdrawal from the market, either full or partial, can be the correct direction to take. For instance, withdrawal from the market of those parts of a business which are

ABE

136

Selection and Evaluation of Strategies

underachieving will release resources which may then be used more effectively elsewhere. Consolidation. In a mature market, consolidation can mean putting more money into the market, as Nestl have decided to do. In declining markets it can be productive to take over the assets of competitors who are leaving the market, as a means of consolidating the business. Market Share Growth.

Strategic Implementation
Again, there are three basic options. Internal development By developing products internally rather than using outside agencies, the company can have the advantage of using skills and knowledge acquired during the development in order to market the product more effectively. Similarly, developing new markets through the use of internal staff helps the sales force to better understand the market. Acquisition One of the advantages of acquisition as a method of carrying out a strategy is that it enables the company to obtain new products or markets very quickly. In order to test the effectiveness of acquisition Drucker has suggested five simple rules: (i) The acquiring business must consider what value it can add to the acquired business. This may include management, technology, distribution, etc. Finance is necessary, but unlikely to be sufficient on its own. A common core of unity must exist between the businesses in terms of markets, products, technology, etc. This helps to create a common culture or at least sympathy between the two separate ones. The acquiring company's management must understand the business being acquired. The acquiring company must put a quality management team quickly into the acquired business. The acquiring business must be able to retain the best management from both businesses.

(ii)

(iii) (iv) (v)

As managers will see the acquisition both as a risk (and may therefore leave) and as an opportunity (and will stay), a clear promotion and management development strategy must be in place at the time of the takeover. Porter suggested that the rate of acquisition failures is between 60% and 74%, where there is a mismatch between the core competencies or experience of the acquirer and those of the acquired business. The greater the mismatch, the greater the risk of failure. Joint development/alliances One of the ways that businesses develop is through franchises, where the franchiser is responsible for setting up an outlet (such as McDonalds or Holiday Inn) and for marketing, training, etc., and the franchise holder undertakes specific activities such as selling.

ABE

Selection and Evaluation of Strategies

137

Joint ventures are arrangements between organisations which remain independent, but have an equal share in the new organisation. In these arrangements the assets are jointly managed but can be separated.

PRACTICAL ACTIVITIES
1. 2. 3. Consider how Bombardier (November 2010 case study) may decide upon its future strategy bearing in mind its main SBUs and the sub divisions. What strategies would be appropriate to Acer (June 2010 case study) in the next five years. What approach to globalisation would you suggest that Marks and Spencer adopt to their international business?

ABE

138

Selection and Evaluation of Strategies

ABE

139

Chapter 8 Market Entry Strategies


Contents
Introduction

Page
140

A.

Market Entry Options Exporting Overseas Production/Service Branches Ownership Strategies

140 140 142 143

B.

Selection of Entry Modes Sales Generation Profit Earning Capacity Investment Payback Period Balance of Direct and Indirect Costs Exposure to Risk Speed of Achieving Market Coverage Degree of Control Match Between the Product and Entry Route Sources of Global Finance to Support Entry Strategies

144 145 146 146 147 147 147 147 147 147

C.

The Entry Decision Subjective Approaches Objective Approaches

148 149 149

ABE

140

Market Entry Strategies

INTRODUCTION
The strategic decision to enter a new market is an important one for any organisation. It is particularly so when that new market is in another country. The main choice facing a business is whether to conduct its business in the new country from its home base by means of exporting, or whether to base at least some level of operations in the new country itself. Within these two options, there are a range of possible methods for actually conducting business, including various ownership options if it is decided to establish branches in other countries. The decision will depend on a number of selection criteria covering aspects such as sales, profit, investment, risks, timing, control, suitability/relevance and broad financial incentives.

A. MARKET ENTRY OPTIONS


Companies have a range of choices for how they can enter a new country market. These can be broadly grouped into two main areas, exporting and overseas production. In addition, companies need to determine the degree of ownership and involvement that they wish to commit to in developing their international business. Most companies, large and small, use exporting as an entrance route for some of their country markets. To generalise, smaller companies often use exporting for all their international business. On the other hand, larger companies will often use a range of exporting, foreign production and ownership approaches. The difference stems from the greater resources of the larger companies and therefore their ability to choose between different approaches.

Exporting
There are two main means of exporting: Direct exporting which takes place when the distribution intermediaries used are based in the country market that is the target for the exports, for example, agents or distributors. Indirect exporting which takes place when the country market is developed through distribution intermediaries, such as export management companies, who are based in the same country as the exporting company.

Direct exporting The main methods of entering foreign markets through direct exporting are as follows: Distributors A distributor earns a profit by selling products that have been previously bought by the distributor. Distributors usually have a sales force and provide some logistics and marketing inputs in addition to the sales function. Agents Agents act on behalf of a principal. In the case of export distribution, the agent sells products on behalf of a principal who is based in another country. The agent provides a sales function, but does not own the product that is sold. Agents receive lower levels of sales commissions than distributors because they provide fewer services to the principal. Agents are usually smaller organisations than distributors, and indeed may be just one person who acts primarily in a sales capacity.

ABE

Market Entry Strategies

141

Agents are similar to distributors in that they often represent a number of companies, sharing their time and efforts between a number of products and clients. The companies that use agents and distributors need to manage them and to motivate them to sell their products. There is a tendency for agents and distributors to cherry pick in the sense that they put their main efforts behind those products that are easiest to sell and those that provide them with the best profit earning possibilities. Company sales force A company can also use its own sales force to sell in another country market. If the market potential is sufficiently large, the company can use salespeople who are based in that country. If the market is smaller or risky, the company is more likely to use salespeople who merely visit the country and its customers from time to time. An important consideration in using this method of entry is the nature of its cost. Most of the costs of using the company sales force are fixed or indirect costs. This means that if the level of sales is poor, the same indirect costs will be spread across a small number of sales. The decision as to which entry route is appropriate will partly relate to company experience in international business, but it will also relate to the type of product. If the product requires high levels of after-sales service, then there will be a need for in-country presence and service capability. Some companies have the resources to be able to carry out customerresponsive servicing, while other companies will need to delegate this to local companies. If this is the case, the company would need either to appoint a distributor to carry out these tasks or to appoint a service company in addition to the agent. Indirect exporting Indirect exporting is the method used by companies that wish to reduce their risk and exposure carrying out business on an international stage. It is a way in which companies can attempt to sell some of their excess capacity without incurring the problems associated with dealing with customers in different countries. The main problem with indirect exporting is the lack of control over how the companys products are marketed. It is quite common for the company to be unaware of who its customers are and how some of the marketing mix elements are used even to the extent, at times, of being unaware of the final price charged to customers. The main methods of entering foreign markets through indirect exporting are as follows. Export management companies (EMCs) Export management companies (or export houses) have similarities with agents and distributors, but are different because they are based in the exporters own country. For the exporter, the export management company seems easier to deal with because of the absence of any language, cultural and export documentation difficulties. EMCs, by selling a range of products, can offer an interesting package of products to foreign buyers whilst at the same time splitting the costs of selling, marketing and physical distribution across a number of products from different client companies. They usually, though, specialise in some way for example, by part of the world, by product type or by type of customer. An EMC might therefore specialise in selling toys to retailers in Asian countries on behalf of UK companies, and this offers the companies the ability to have its products sold into a large number of different country markets. Piggyback operations This method of entry is based upon the use of the established distribution arrangements of one company by another company. One company gives a ride to the other company. The ride consists of the selling and export administration, and benefits from the ongoing nature of the sales contacts that the company has. The rider

ABE

142

Market Entry Strategies

company receives an immediate benefit by gaining access to the working system that has been built up by the other company. The carrier is either paid a commission and acts as an agent, or buys the product and acts as a distributor. Purchase in domestic market Some companies sell their products to companies that send buyers, or who have established buying offices, in the domestic market of the selling company. Some large retailing companies from countries such as the United States or Japan will buy products in this way. This method, whilst creating export sales, keeps the selling company away from a direct understanding of the country market and minimises their need to handle the full range of export documentation.

Overseas Production/Service Branches


Overseas production in the country market will rule out exporting. There will be no need to transport products physically across country borders as the products will be produced within that country. There is a range of methods of achieving foreign production: Wholly-owned subsidiary This would be a company set up in another country which is 100% owned by the parent company. A wholly owned subsidiary with a complete production facility is the most obvious means of achieving foreign production. Foreign assembly The company could produce most of the product in the domestic market and merely assemble it in the country market. Contract manufacture The company could arrange for another company to produce the product for them through contract manufacturing, as is the case with computer companies Acer and Foxcom in China. Licensing Licensing is an arrangement whereby one company, for a fee or royalty payment, allows another company to be responsible for production and distribution, using a patent or a trademark, within the areas defined by the licensing agreement. This is a low-cost, low-risk way to enter markets. The enterprise is only directly involved with the market through the company with which it has its licensing agreement. It is a method used by small and medium-sized companies, particularly those in advanced technology, because it enables quick returns to be made with the use of extra capital. The difficulties with licensing relate to the usually low profit returns available, and the difficulty in selecting suitable licensees. It is not uncommon for licensees to use the licence as a quick way to learn about new products and new technologies, and in this way the licensee can often become a competitor. Another difficulty with licensing is the lack of market control. Franchising Franchising is similar to licensing in that the franchisee is responsible for production and distribution, but allows the main company to retain more control over the use of the product, usually through specifying the use of not only the trademark, but also the name and logo, the particular method of operation. The franchiser also, very often, retains responsibility for advertising.

ABE

Market Entry Strategies

143

Franchising is particularly used in fast food operations (for example, Kentucky Fried Chicken (KFC) and Burger King) soft drinks (for example, Coca-Cola and Pepsi-Cola) and service based businesses such as car rental (for example, Hertz and Avis) and hotel groups (for example Hampton Hotels/Hilton).

Ownership Strategies
Companies will need to decide on the level of direct ownership they desire when making entry decisions. The extreme positions are complete ownership or complete reliance upon other companies, with the intermediate option of entering into part-ownership schemes. Ownership decisions will usually be corporate strategic decisions in addition to operational decisions. The decision will be strongly influenced by the level of political and economic stability in the chosen country. The higher the level of risk of interference, the more likely it will be for the company to want others to bear the risks of ownership. Distribution-channel decisions are also significant and have important and relatively longterm consequences for companies. The decision to include company ownership as part of the distribution-channel decision serves to increase the commitment and results in a major medium- to long-term view being taken about the market. The following represent the major alternatives with regard to ownership: Wholly owned Here, the alternatives are the setting up or acquisition of a subsidiary in the country market, or using the companys own sales force. Both these methods have been outlined above. Partly owned There are two main possibilities for part-ownership of foreign companies: (a) Joint venture A joint venture is a kind of partly-owned subsidiary in which a multinational enterprise decides to share the management of a company with one or more collaborating companies. The reasons for entering into a joint venture are often to reduce political and economic risk. In some countries, joint ventures might be the only way in which a company can invest in the country (this is usually called inward foreign investment). Other reasons for using joint ventures include using the specialist skills and cultural knowledge of a local partner, to gain access to the distribution channels of a joint venture partner, and as a means of limiting the capital requirement of international expansion. Strategic alliance There are differences between joint ventures and strategic alliances. In a joint venture, two or more companies contribute specific amounts of capital to form a new company. In strategic alliances the arrangements between, usually, two companies are more flexible. The alliance may or may not result in a new company. The usual purpose of a strategic alliance is to combine and gain benefits out of each partners skills and resources. Alliances are most common in connection with providing access into distribution channels (entry) and also as a means of gaining research and development expertise for new product development and manufacturing capability. Alliances are a comparatively recent method of conducting international business. It is possible that the very flexibility of the alliance will result in its eventual transition into a new company or a more formal joint venture, or the take-over of one company by the other.

(b)

ABE

144

Market Entry Strategies

Owned by others Here, the strategy will be to operate through separate companies, the methods including those considered above such as licensing and franchising, distributors and agents, and EMCs and piggyback operations.

From this, we can see that the degree of involvement, in terms of ownership and commitment, in the country can range from high to low: Figure 8.1: Spectrum of ownership options High involvement Wholly-owned subsidiary Partly-owned joint venture Strategic alliance Licensing/Franchising Distributors Agents Using the company sales force Export management companies Piggyback operations Low involvement Purchase in domestic market by buyers from other countries

B. SELECTION OF ENTRY MODES


A companys selection of entry routes is a key organisational decision and will depend upon a series of factors. The main factors are: Potential for sales generation Potential for profit earning Investment payback period Balance of costs between direct and indirect Exposure to risk Speed of achieving market coverage Degree of control The match between the requirements of the product/service and services provided through the particular entry route Sources of global finance to support entry strategies.

Before looking at the implications of each of these factors for the selection of entry routes, we should note some of the constraints on the decision. A company is likely to have different business objectives in different countries. In some countries there might be significant long-term potential, in which case the company would wish to follow a key market concentration approach. In other markets, the levels of risk might be high or the sales potential might be low, so the company would be looking for a low commitment method of entry. Therefore, the preferred entry method will vary from country to country.

ABE

Market Entry Strategies

145

In the previous section the entry choices were listed in order of involvement in the country market (Figure 8.1). The entry method with the highest involvement is to set up and run a wholly owned subsidiary the company becomes extensively involved in the country because it is manufacturing and marketing there. The selection of this entry method has major consequences for the company. The fixed nature of the assets needed to establish the subsidiary makes the company vulnerable to changes in the political and economic management of the country. At the other extreme, the company that sells its products in its own domestic market to buyers who will sell the product in other country markets has a very low involvement or no involvement at all in that country market. When looked at from a sales and profit-generation perspective, the wholly owned subsidiary route offers the possibility of large returns that could grow substantially. The domestic sale route, on the other hand, provides quick but comparatively small sales and profit opportunities, with very limited opportunities to expand the business in the future. The preferred entry method might also not be available or might be blocked in some markets. For example, the company might wish to establish a wholly owned subsidiary, but find that country regulations only allow a joint venture with a local company. Even then, the company might not be able to find a suitable joint venture or alliance partner. Where the ideal strategy for a company may be to use an agent as the means of entering a country, it is quite possible that there will only be a few good quality agents those with the requisite geographical coverage, technical knowledge of the product, or customer base. However, the agents that exist may be already contracted to competitors, in which case the company would need to find a different strategy to gain entry. In countries with distribution systems that have been subject to considerable adaptation through cultural influences, such as Japan, it will be particularly important to select distribution partners who have the right customer contacts. We will now look at the various selection possibilities for each of the main entry methods.

Sales Generation
Companies will be concerned about the speed with which sales will grow in the country. Obviously companies would prefer sales to grow rapidly, provided that they have the production and organisational capability to sustain such growth. The slowest method of increasing sales will be the wholly owned subsidiary, since the company needs to become established and production levels built up before sales can begin, and this might take a number of years. The fastest methods of generating sales are to use companies that are already established in the country and who are regularly selling to the right type of customer. In this way the extra lines for the new company can be added on to the sales list and sales can therefore begin almost immediately. Wholly-owned subsidiary For the generation of sales, this will be the slowest of all methods, but in the long term this offers the highest total sales. Joint venture/strategic alliance The initial sales generation will be slow because of the need to find and to negotiate a suitable agreement with a partner. Once this is completed, sales can develop rapidly, because one of the normal bases of the agreement is the local knowledge and distribution capability of the other partner. Licensing/franchising Initially, sales will be prevented because of the need to find the correct companies for the licence or franchising deal. Once this has been achieved, sales can take off rapidly. The extent to which sales grow rapidly will depend upon the qualities of the licensee or franchisee.

ABE

146

Market Entry Strategies

Agents/distributors Sales are most likely to develop more quickly through this method than from other methods. Agents and distributors will already have established contacts so sales could commence at once. In practice, the initial sales levels will be influenced by the unknown nature of the product and the company in that country.

Own sales force Sales will start slowly because of the need of the sales force to establish contacts with suitable customers. To sell successfully, the various linguistic and cultural barriers will need to be overcome.

Profit Earning Capacity


Organisations are always very concerned about profit-earning capacity, and this criterion will have a strong influence upon the final decision about which method to use: Wholly-owned subsidiary This will be the slowest way to earn profits, but again in the long run it offers the highest profit potential. Joint venture/strategic alliance These have moderate to high profit-earning capabilities. The shared costs and the input of expertise from the partner organisations give good chances of profits, provided that the partners have been selected carefully. Licensing/franchising Licensing gives a less strong profit payback because of the limited basis on which the company providing the licence acts within the arrangement. In franchising, the wider range of marketing mix activities employed and a more proactive approach give a better rate of profit return. Agents/distributors The profitability from these two methods is comparatively modest. Profit flows will start quickly, but will not grow to the potentially high levels achievable from most other methods. Own sales force Initially the high indirect costs will eliminate the possibility of profits for anything more than infrequent flying sales visits. If the company establishes a resident sales force in the country, it will take some time before customer contacts and sales negotiations will generate a flow of sales revenue sufficient to cover costs. For some very large sales of capital equipment, for example Rolls Royce aero engines, the high profit potential from one order will make it worthwhile to base a large team of company personnel in the country to negotiate the order.

Investment Payback Period


The wholly owned subsidiary route will take a long time before the breakeven point is reached and even longer until an overall profit point is reached. The shortest payback periods are for agents and distributors. Here, the initial investment costs relate to the costs of searching for suitable agents and distributors and the costs of training them in the company products and systems. Costs will include travel expenses and may include visits of the agent/distributor to the companys headquarters.

ABE

Market Entry Strategies

147

Balance of Direct and Indirect Costs


The agent/distributor costs are primarily based upon direct costs that relate specifically to the sales of the product. Indirect costs related to training programmes and other non-salesrelated costs will be incurred, but in the main the costs are direct. All other methods have a higher percentage of indirect costs and these will be at their highest in the wholly owned subsidiary.

Exposure to Risk
This will be lowest in the case of agents and distributors and highest in the case of wholly owned subsidiaries. However, there are risks associated with this approach, primarily that they will not gain sales and underachieve on their agreed sales targets. In addition, they may alter the marketing mix without prior agreement. It is important, therefore, that the contract signed allows the company to cancel the agreement without legal difficulty if the agent/distributor fails to deliver his or her side of the bargain.

Speed of Achieving Market Coverage


For some companies, it will be important to gain widespread distribution very quickly. This is most likely to be the case for consumer products, which will be supported with national marketing communications programmes. Other companies might wish for a rapid build-up to beat competitors into the market place. The fastest methods of gaining market coverage will be through the use of agents/distributors. However, appropriate companies need to be selected and trained before sales can commence. This is, though, a much quicker process than the other methods. Agents/distributors will have an existing customer list that can be activated very quickly. Usually individual agents/distributors will only cover part of a country. In order to gain complete national coverage a number of agents/distributors will be required.

Degree of Control
The degree of control relates quite closely to the degree of ownership. The agent/distributor route offers little control as they are likely to have their own organisational objectives. They will usually handle the sales of a number of other products and the company will need to plan and manage agents/distributors to gain the best performance from them. In licensing and franchising, the ability to control will relate directly to the contract. In joint ventures and strategic alliances, control has to be balanced between the participants. In some situations the battle for control can cause the venture to disintegrate. It is only in the company sales force and the wholly owned subsidiary that the company has complete control.

Match Between the Product and Entry Route


It is sometimes difficult to find the correct blend of services provided by other organisations. In some countries, there may not be a tradition of providing that particular product at the desired service level. In other countries the organisations may exist, but be contracted already to competitors. Because of this, companies will often have to accept a less than ideal situation and rectify the deficits through inputs from their own company. Sometimes, of course, the solution will be through a wholly owned company operation.

Sources of Global Finance to Support Entry Strategies


A final factor affecting the choice of entry strategy concerns the availability and sources of finance to support any proposed entry strategy. We have already seen that the different entry strategies involve different commitments with regard to the initial levels of investment required. So, for example, entry via a wholly owned subsidiary will require much higher levels of investment than, say, using piggyback operations as a method of entry. We can

ABE

148

Market Entry Strategies

also see that often a company, which would otherwise prefer to select a more direct entry strategy, may be forced to use one of the more indirect entry strategies simply because of lack of capital. The business, therefore, must be aware of the financial investment implications of the range of entry strategies and also some of the sources of global financial capital that might be available to support a preferred entry strategy. Obviously, a company can use its own internally generated funds to fuel overseas expansion and such funds, of course, are generally cheaper than external sources of finance. Where internal finance to support a proposed entry strategy is not available, then the company can turn to conventional external sources of finance such as banks, and the issue of new shares. However, when it comes to funding entry strategies, businesses can also draw upon a number of other potential sources of global finance to support a proposed entry strategy: Host governments Sometimes the government of a country that the business wants to enter may be prepared to offer financial incentives and inducements. So, for example, the United Kingdom government has, in a variety of ways, provided special financial incentives to Japanese companies wishing to invest in direct manufacturing facilities in the United Kingdom. Clearly, there are a number of reasons for such financial incentives, such as boosting local employment and providing access to new technologies and skills that would otherwise not be available. International funding bodies International organisations such as the World Trade Organisation and the International Monetary Fund will, under certain circumstances, help companies to build up their international trading activities. International venture capital Increasingly, there is now a global fund of capital available to companies who are wishing to exploit international business opportunities. These global funds are operated by venture capital companies sometimes connected to, for example, the larger world banks. Such global capital funds began to develop in the 1960s and, some say, have in the past been a major source of international financial instability inasmuch as they are often operated outside the control of individual governments. Customers Particularly in business-to-business markets, customers may help provide finance to help a valued supplier invest in overseas markets. We have seen that, increasingly, business customers are seeking to develop long-term relationships with suppliers to maximise the potential of all the value chain activities as part of their competitive strategy. Some of the larger global companies will often help a smaller supplier invest in, say, manufacturing facilities in a country in order to ensure effective just-in-time delivery.

C. THE ENTRY DECISION


The decision on which entry method to use is, as we have said, one of major strategic importance. It is a decision that many established businesses have not taken before. In the domestic market, few established businesses have to make conscious decisions about which distribution channel to use, since in most situations these decisions will have been made previously. The main activity is based upon improving and enhancing the existing distribution arrangements and in balancing other activities of the business such as production processes and the marketing mix.

ABE

Market Entry Strategies

149

In international business, the large number of country markets around the world gives rise to various opportunities to decide upon the best form of entry. It is unusual for companies to market their products in every country more usually, companies tend to be restricted to less than 50 country markets. The decision approach to entry can be made on subjective or on objective grounds. The significance of the decision strongly supports approaches that attempt to be systematic and to use formal evaluative criteria.

Subjective Approaches
Elements of subjectivity are inevitable because of a lack of complete and reliable information. It is often difficult to obtain factually correct data about prospective agents, distributors or joint venture partners, and it is always difficult to forecast future sales, particularly in a new situation. Once the company has been established in the market, it can use past sales data to help in the forecast of future sales. The company needs to make judgments about the various information gaps and it is therefore forced to make decisions which have various amounts of subjectivity contained within them. The most common subjective approach would be to use a particular entry method because that is the way that the company has entered other company markets for example, the company uses agents in its other markets and therefore automatically looks for agents when it wishes to enter a new country market. The most likely entry routes to be the subject of the less rigorous subjective approach are the use of the company sales force (especially if the sales force remains based in the domestic market), the use of agents and distributors, and sales that are made domestically. All of these approaches lessen the risk to the company, so that if things go wrong, the company will not suffer major loss. It is worth remembering, of course, that the company could be missing substantial sales and profit opportunities by selecting inappropriate entry approaches. Because the lost sales can only be estimated, it is easy for the company to ignore the missed potential. It is unlikely that a company will take a subjective approach with distribution methods that require a lengthy period to pay back the initial investment. Therefore, the wholly owned subsidiary particularly, but also the joint venture, strategic alliance, licensing and franchising would normally be evaluated in a formal way.

Objective Approaches
It is advisable for companies to examine the advantages and disadvantages of each entry method before making a decision. You will see already that it is improbable that any one approach will have no drawbacks. The final decision will not be easy. Furthermore, the decision will be based upon imperfect information. It is difficult to estimate what the future demand patterns will be for each of the entry approaches. Will agents generate more sales than distributors? How easy will it be to motivate agents? If we set up our own wholly owned subsidiary, what will the economic and political situation be in five to ten years time? These and other questions make it very difficult to develop a reliable evaluation of the entry options. The two main approaches that companies can take are to: Evaluate entry options through applying scores to the different options Carry out a computer simulation to estimate expected revenues and profit paybacks.

The decision between the two will be influenced by the importance of the decision to the company and its sophistication in using decision-making techniques. The more the decision is based on reliable information, the more likely it is that the decision will be successful. Thus, subjective judgment should be minimised and the company needs

ABE

150

Market Entry Strategies

to collect the information necessary to make a rational decision. However, the cost and the time taken for this is likely to influence the way in which it is approached. The main decisionmaking techniques are: The weighted factor score method The weighted factor score method can be used in all situations, even if information is limited, and is preferable to complete subjectivity. The method works by the company establishing the major factors that it should consider in making the decision and assigning weights to reflect the relative importance of each factor. Each option can then be rated against these factors and compared to identify the best option. If we take an example in which some of the options have already been eliminated because the company wishes to gain direct contact within the country market, this leaves eight options using the company sales force, agents, distributors, licensing, franchising, strategic alliance, joint venture and a wholly owned subsidiary. Assuming that the company wishes to develop its international sales rapidly and in the long term achieve a substantial global position, the factors that would be relevant and their weightings might be as shown in Figure 8.2. Figure 8.2: Factor weightings Factor Factor Weight (A) 0.3 0.1 0.2 0.1 0.3 Factor Score (B) Rating (A*B)

The speed of sales growth Investment payback period Amount of learning about international markets Degree of control Long-term profit potential Total Score

The total scores for each of the options can be calculated. In this way the company will make a careful evaluation of each option. Subjectivity is still part of the process. There are elements of subjectivity in deciding which factors to include and which to exclude. The factor weights and the factor scores both contain elements of subjectivity, but, nonetheless, it does provide a useful way to make the important entry choice. Simulation method A computer simulation could be developed to quantify the profit and sales revenue positions for each option. The options could then be decided by reviewing the payback period, the return on capital employed, the market share obtainable and other similar measures. To be able to compute the solutions, various estimates would be needed to forecast sales revenue, profit contributions, business operations expenditures (for example, on advertising and sales promotion), the capital expenditures and the probability of results being achieved. The estimation of all this, and other, information would again involve making subjective judgments about the future. However, the advantage with this method is that it encourages a comprehensive review of costs, revenues and profits for each of the options.

ABE

Market Entry Strategies

151

PRACTICAL ACTIVITIES
1. What methods of market entry are open to a retailer such as Marks and Spencer attempting to develop its first presence in a new country? Consider the relative pros and cons of the main alternatives. Toyota has production plants and research facilities in many countries. What were the factors that influenced this policy? Under what conditions might Acer (June 2010 case study) consider licensing as a method of market entry into countries such as Russia and Brazil?

2. 3.

ABE

152

Market Entry Strategies

ABE

153

Chapter 9 Management, Organisation and the International Business


Contents
Introduction

Page
154

A.

Organisation and Management Centralisation vs Decentralisation Specialisation The Influence of the Type of Business Types of Structure Management Structures Factors Affecting Choice of Organisational Structure

154 154 155 155 156 158 160

B.

Organisational Culture Country Influences Company Factors Management Style and Structure Employee Composition

160 160 160 161 161

C.

International Human Resources Management Strategy The Role of HRM Staffing Policy and the International Business In-House and External Resources The Expatriate and the National Manager Building the Global Company The Concept of the Equidistant Manager

162 162 163 164 165 166 168

D.

International Labour Relations

169

ABE

154

Management, Organisation and the International Business

INTRODUCTION
This chapter considers the way in which the international business may be configured in terms of its management, organisation and staffing. These aspects are central to both effective implementation and the development and co-ordination of strategy. Management and organisational issues often underlie the problems of business organisations, both domestically and internationally. The issues are compounded for multinational businesses by the relationship between the home and host country, not just in terms of the co-ordination and control functions of management, but also in relation to the integration of cultures and staff.

A. ORGANISATION AND MANAGEMENT


The type of organisational structure that is appropriate for an organisation will depend upon many issues. Some issues are fairly obvious. For example, small and medium-sized businesses will have smaller and less complicated organisational structures than very large companies such as Unilever or Procter and Gamble. The number of different country markets and the current size of the company market share in different markets will influence the need for the number and type of people to be employed internationally. The types of product and service and the overall product mix will affect the organisation. For example, a management consultancy firm such as McKinsey and Company will require different types of people from a manufacturing company such as Ford or Electrolux. Perhaps less obvious as an influence on organisational structure will be the amount of experience that the company has in international markets. New and inexperienced companies in international markets are likely to use different approaches and have different tasks when compared with companies who have been established successfully in the market place for a number of years. Another important influence on the organisation is the level of challenge of the objectives that have been set by the organisation. If the company is seeking to grow rapidly, it will need a different type of organisation from a company that is attempting to hold a stable position. Another important influence on the international organisation is the extent to which the company is trying to standardise its activities. A company with a policy of running separate country operations may organise itself quite differently from a company with a pan-European or a global standardisation approach.

Centralisation vs Decentralisation
As in any organisation, the international business must weigh a number of competing bases upon which to divide its operations and decision-making. There are several conflicting pressures as companies expand their business internationally. Decentralisation As the company enters new country markets and expands its product mix, it comes under pressure to decentralise. By allowing more autonomy at the local country level, it can develop and implement plans that are more appropriate for the specific needs of the customers in that country. As the company allows more decentralised decision-making, it is likely to find that products become extensively adapted or even totally different between one country and another. Company and brand names, trademarks, and advertising campaigns will spread apart. In allowing differences, the company is denying itself the opportunities to make cost-saving economies it is denied large economies of scale and also some of the benefits of increasing experience, because the experience effect is limited to the country operation. If the company operations were more similar, then the total volume of production and sales would build up and thus allow economies to be achieved.

ABE

Management, Organisation and the International Business

155

Centralisation A different pressure is to centralise. Companies may wish to centralise their key activities in order to co-ordinate and control their international activities. The centralised approach has the benefits of organisational neatness, of standardisation and of the opportunities to profit from scale and experience advantages. More recently, some companies have sought a more centralised approach to allow them to develop an organisational capability to launch products simultaneously in a number of different country markets. Another reason for more centralised control is to mobilise the ability to plan and to implement international competition strategies. Certain difficulties result from an over-rigid approach to centralisation. The main problems are that central headquarters will be too remote, geographically and culturally, to understand the particular requirements of specific country markets. A further difficulty is the not invented here syndrome. Managers who are required to manage programmes that have been developed at central headquarters will not feel involved with the plans and will, therefore, not be so highly motivated. The extent to which the objectives of the plans are achieved will be influenced by the enthusiasm and motivation of the people employed at country level. The not invented here syndrome, therefore, needs to be taken seriously.

Specialisation
In developing the international organisation, the company will need to take account of specialisation across the dimensions of function, product and geography: Function is concerned with occupational specialisation. Functional specialisation becomes more important with the growth in organisational size and complexity so, for example, the marketing function in a large organisation itself will require functional specialists in marketing management, selling, sales promotion, marketing research and so on. Product is concerned with the co-ordination, integration and control of activities based on the product. This type of specialisation enables the company to deliver high levels of expertise in relation to particular products. Geography is concerned with matching the company with its external environment. In the domestic market, most companies organise their sales force with specialisation based on areas and regions within the country. In international business, it is usual to base at least some of the organisational structure around countries, trading blocs and world regions. In this way, closeness to customers and an improved knowledge of the factors influencing the markets are achieved.

In most organisations a balance between the conflicting interests of these three dimensions needs to be reached.

The Influence of the Type of Business


The extent of international involvement is a factor in determining the structure. We can build a match between these stages and the type of organisation appropriate to the approach to international business. This is outlined in the following table:

ABE

156

Management, Organisation and the International Business

Table 8.1. Stages of International Business Growth. Stage Export selling Export business International business Multi-national business Organisation form Ad hoc arrangements Export department International division Growing use of groups of countries/continents-based organisations Matrix and transnational organisation

Global business

As the company expands its international sales and profits, it inevitably finds that ad hoc arrangements are insufficient. The early arrangements are primarily concerned with facilitating the order by arranging the physical despatch of the product, and the necessary financial details of which currency is being specified and how the invoice will be paid. With more orders the company will benefit by developing a specialist department to handle the various demands of exporting. Over time the export department becomes less burdened by the administrative detail of exporting and begins to become more proactive in developing business plans. Increasing size will cause the company to consider the need to expand the function and status of the export department into a division. Further company expansion in its international business will bring forward the need to co-ordinate activities by parts of the world for example, Asia or South America and at its ultimate to attempt to develop a transnational organisation.

Types of Structure
Examples of international structures are given below: Figure 8.1: Export department in a functional structure Board of Directors Chief Executive Officer

Production

Marketing and Sales

Finance

Export Sales and Administration

Domestic Sales

ABE

Management, Organisation and the International Business

157

Figure 8.2: International division in a product structure Board of Directors Chief Executive Officer

Domestic Product Division A

Domestic Product Division B

Domestic Product Division C

International Division

It is probable that the international division would have specialist geographical regions based on the most important regions for the company. Figure 8.3: Continent/world region organisation with a functional structure Board of Directors Chief Executive Officer

ASEAN

EMEA

North American Free Trade Area

Production

Marketing

Finance

Figure 8.4: Matrix organisational structure - product divisions and world regions Board of Directors Chief Executive Officer

Global Product Division A

Global Product Division B

Global Product Division C General Managers

(Continent/ world/regional managers)

General Managers General Managers

EMEA
ASEAN NAFTA

EMEA
ASEAN NAFTA

EMEA
ASEAN NAFTA

EMEA
ASEAN NAFTA

ABE

158

Management, Organisation and the International Business

Management Structures
You will be familiar with the pyramid representing the basic management structure in any organisation as follows: Figure 8.5: Management levels in a basic pyramid structure

Strategic

Tactical

Operational

In all organisational structures, it is probable that there will be these three levels of management responsibility. The recent moves by many companies to reduce costs and to improve organisational responsiveness by reducing the number of layers in the organisation would tend to flatten the pyramid, but there will still invariably be a small number of senior managers involved in strategy and a larger number of tactical managers (middle management) concerned with organising and leading lower level operational management (supervisors). The extent and the importance of these levels of management may vary with different horizontal forms adopted by international businesses. These differences were considered by Majaro who identified three organisational types the macropyramid, the umbrella and the interglomerate: The macropyramid organisation Here, the whole of the strategic function is performed in head office. In these types of organisations the strategic planning is handed down to product, function and geographic managers to plan in detail and then to implement. In Figure 8.6 three country subsidiaries are shown. Figure 8.6: Macropyramid organisation

Central Headquarters

Region A

Region B

Region C

In the macropyramid the main elements of business decision making are managed from the main head office, and most processes are standardised as much as possible across the whole company. Local involvement in the main strategic decision process is limited. Unless the head office is very well briefed about local conditions, its planning may result in missed opportunities at a local level.

ABE

Management, Organisation and the International Business

159

The umbrella structure This is a decentralised system of planning and control. Subsidiaries are given full independence at all three management levels. The centre concentrates on providing very broad corporate objectives and has high-level expertise in various functional areas that can be used to provide advice and support to subsidiary companies. The umbrella structure is based on the multi-national enterprise with a polycentric orientation operating in a multi-domestic way. Figure 8.7: Umbrella structure

Central Services

Region A

Region B

Whilst the umbrella organisational structure encourages local managers to plan for their own market using their specialist local knowledge, it can be wasteful. It can result in many broadly similar strategies in different countries, yet with fewer of the benefits of shared knowledge or scale economies. The interglomerate In this organisation the centre is concerned with financial returns. The strategies to achieve the required returns are the responsibilities of the subsidiaries. Figure 8.8: Interglomerate organisation

Region A

Region B

Here, each subsidiary is responsible for its own strategic planning. This type of structure, for example used by Hanson, is most likely to apply to large complex organisations that have subsidiaries in different industries, using different technologies.

ABE

160

Management, Organisation and the International Business

Factors Affecting Choice of Organisational Structure


We have already touched on several factors that will affect the choice of the most appropriate type of organisational structure for international business. In summary the following represent the major factors: Company size. Organisational culture. Overall corporate and marketing objectives. Extent of international market spread. Range and diversity of products/services. Level and nature of involvement in international business. Company capabilities and resources.

It is felt that the ultimate deciding factor is the culture of the organisation and this is further detailed in the next section

B. ORGANISATIONAL CULTURE
Organisational culture refers to the values, beliefs and attitudes that influence decisionmaking and behaviour within a company. Here, we shall consider the following aspects of what constitutes organisational culture and review their implications for the international business: Country influences. Company factors. Management style and structure. Employee composition.

Country Influences
All companies originate from a particular country, and for many, their organisational culture is strongly determined by their country of origin. We have mentioned on a number of occasions how Japanese companies differ in their organisational approach. Japanese society is characterised by politeness and consensus decision-making, therefore organisational culture will be different from the typical US company with its stronger emphasis on directness and individualism. The strength of the country influence on the company will vary. Companies with a macropyramid structure might be unduly influenced by the location of the central headquarters, which in turn is invariably based in the origins of the company. Atlanta in the United States and Nottingham in England are the central headquarters of Coca-Cola and Boots respectively, because this is where these companies started. As these companies have grown, they have become less and less ethnocentric. Such major companies deliberately strive to change their company culture in order to grow effectively.

Company Factors
Company factors will revolve around the history and age of the company. Companies that are new will have a different set of values from companies that have been established for a long time. The origins of the company in craft practices might influence attitudes in the company long after production techniques have changed.

ABE

Management, Organisation and the International Business

161

The type of the EPRG (Ethnocentric, Polycentric, Regiocentric and Geocentric).orientation influences the attitudes of people employed within the company. For example, a company with an ethnocentric orientation may find it difficult to develop international markets, because the company is centred on the home market so, for example, production might find it difficult to spare the time in the production schedule to produce a strange foreign order or the advertising manager might be more interested in the home market. On the other hand, a polycentric orientation will limit standardisation and co-operation, and regiocentric will concentrate on one part of the world to the exclusion of other opportunities. Geocentric culture will be much more expansionist, although it might, however, result in lost opportunities at the country level.

Management Style and Structure


The values of managers are influential in shaping the culture of the company. Companies often evolve into recruiting a certain type of manager to perpetuate the existing management style, with different styles being related, for example, to defending the existing business, to being more entrepreneurial by constantly looking for new market opportunities, and to seeking more careful growth through the rigorous analysis of market opportunity. In considering management style, we find that some management styles might also be culturally related. For example, Chinese managers might be very hard working and inclined to consider higher risk markets and product developments, whereas UK managers have sometimes been criticised for failing to take risks and avoiding commercialising the apparent opportunities that have developed out of research and development programmes. Management structure can also influence the culture of the company. The three styles implicit in the macropyramid, the umbrella and the interglomerate, illustrate that controls will be exercised very tightly in some companies and much more loosely in others. The macropyramid style will be more enveloping than the umbrella style. The umbrella style will give subsidiaries considerable autonomy, provided that they achieve the agreed objectives. In one sense, the interglomerate will be even looser. However, the financial controls set are usually based on challenging financial objectives. The controls are fewer but the fear engendered in failing to achieve the financial objectives can substantially invade the culture of the company.

Employee Composition
Most companies start by employing people from within their own culture and/or nation state. In some countries this will mean the same thing, for example, most people in Japan are Japanese and therefore Japanese companies located in Japan will employ Japanese people. A company in the US, though, whilst employing US citizens, might employ people from a wide range of cultural influences some employees might be of Italian, Irish, Dutch, Puerto Rican or Mexican origin. The degree of international spread incorporated within the company will initially, therefore, depend considerably on the country and the employment policies of the company. Growth in the company and in its involvement in international markets will result in the employment of more and more people from different cultures and different countries. The company can seek to develop a more international organisation by recruiting, training and developing, and promoting people of different nationalities to achieve a team of multi-cultural international managers. International companies face difficult decisions about the use of expatriates managers and other specialists drawn from the company's home nation to staff their international operations, as opposed to nationals from the country of operations. It is quite common for extensive use to be made of expatriate managers on short to medium assignments of six months to three years in order to provide expertise and consistency to the more remote parts of the organisation. However, there is a risk that doing so will hold back the development of

ABE

162

Management, Organisation and the International Business

national managers to reach company standards of competence, and slow down the move toward a more international organisation. Once the national managers have shown their ability to perform, expatriate managers are used less and less frequently. The more successful national managers will be promoted into international positions. Truly transnational organisations will be particularly anxious to develop a team of very experienced and culturally sensitive international managers. Ohmae refers to the need to develop equidistant managers in the true global business. Such managers develop and respond to the most important strategic issues wherever they arise around the globe. This contrasts with the typical manager who tends to be most influenced by home-country events. However, the global manager, with equidistant cultural abilities, is quite rare, and it is arguable anyway whether there are companies that are operating on a truly global basis. Nevertheless, it is certainly true that there is a shortage of international managers with a high level of country-specific knowledge across many countries and a cultural awareness that enables them to analyse, develop and implement successful strategies. We shall discuss the issue of deciding between using expatriates, nationals or global managers in more detail in the next section, together with the related issue of whether to use in-house or external resources.

C. INTERNATIONAL HUMAN RESOURCES MANAGEMENT STRATEGY


One of the challenges that face organisations as they globalise their operations is the adaptation of their management to the different cultures in which the organisation is operating and the creation of HR practices that are both comfortable to the organisation, and appropriate for those cultures. This challenge is true for companies all over the globe. As organisations become more global and begin to do business in greater numbers of areas, the number and variety of cultures represented in their workforce also changes. As this number increases and as organisations attempt to treat each different culture with respect, practical issues can arise that may make doing business increasingly more difficult. In this section, we shall be looking, therefore, at the management and control of human resources in international business and in particular, some of the issues which arise when choosing between and managing local, expatriate and global staff.

The Role of HRM


The last 20 years has seen a major shift in focus for HRM. In particular, the activities engaged in by HR professionals has seen them move away from more transactional types of work towards those concerned with developing organisational capability and business development. It is in these areas that HRM can make a significant contribution to organisational success, and this is every bit as true in international business as in any other. In the UK, the Chartered Institute for Personnel and Development (CIPD) has identified the success of the HRM contribution as being dependant on: The organisational drivers for internationalisation being well understood; The key delivery mechanisms for HRM being in place, and being coherent and consistent; and The organisational drivers and delivery mechanisms meshing with the global HRM activities.

Where any one of these factors is absent, there may be problems in developing appropriate HRM strategies.

ABE

Management, Organisation and the International Business

163

The key drivers for international operations will generally include: Maximising shareholder value whether implicitly or explicitly stated. Forging strategic partnerships with similar organisations, groups or suppliers. Creating core business processes driven by business needs. Building global presence to be visible in the market place.

Organisations may exhibit several of these drivers at the same time. The key delivery mechanisms for HRM would normally comprise: e-enabling HRM, using new information and communications technology. Knowledge management, to exploit the internal knowledge stock. Cost-reduction/HR affordability, offering cost-effective solutions. Creating centres of excellence, avoiding replication and duplication of effort.

For a company to undertake any of the basic strategies outlined above, and have their organisation fit with this strategy, the staffing and other HRM functions must also fit with and complement the strategy and organisation. A critical aspect of creating global HR strategies is the ability to judge the extent to which an organisation should implement similar practices across the world or adapt them to suit local conditions. With the concern for being global, but simultaneously being sensitive to local conditions, several strategic concerns relevant to international HRM arise. For example, can and how do MNEs link their globally dispersed units through human resource policies and practices? Can and how do MNEs facilitate a multidomestic response that is simultaneously consistent with the need for global coordination and the transfer of learning and innovation across units through human resource policies and practices? Slogans like think globally and act locally sound good, but it requires effective HRM policies for these slogans to be put into action. The Acer corporation is a good example of an organisation that clearly values the roles played by its managers and employees. Its HRM strategy is a key part of its corporate plan.

Staffing Policy and the International Business


Staffing policy is concerned with the selection of employees who have the skills required to perform a particular job. Staffing policy can be viewed as a major tool for developing and promoting a corporate culture. In companies pursuing transnational and global strategies we might expect the HRM function to pay significant attention to selecting individuals who not only have the skills required to perform a particular job, but who also fit with the prevailing culture of the company. There are three main approaches to staffing policy within international businesses. These have been characterised as an ethnocentric approach, a polycentric approach and a geocentric approach. An ethnocentric approach to staffing policy is one in which all key management positions in an international business are filled by parent-country nationals. The policy makes most sense for companies pursuing an international strategy. A polycentric staffing policy is one in which host country nationals are recruited to manage subsidiaries in their own country, while parent country nationals occupy the key positions at corporate head quarters. While this approach may minimize the dangers of cultural myopia, it may also help create a gap between home and host country operations. The policy is best suited to companies pursuing a multidomestic strategy.

ABE

164

Management, Organisation and the International Business

A geocentric staffing policy is one in which the best people are sought for key jobs throughout the organisation, regardless of nationality. This approach is consistent with building a strong unifying culture and informal management network.

As companies grow and become more dependent upon international business to contribute to their total sales revenue and profits, they will employ more and more people internationally. The ways in which staff are deployed is of great importance and we shall examine three aspects of this in this section. The capability of an organisation to manage its tasks effectively is both an in-house and an external resources decision. Whilst lower cost is an important factor in the decision to use external resources, there are important cultural benefits to be gained from using locally based agencies and consultancies. Expatriates have been used by many multinational organisations to inject unavailable local expertise. They have also been used to provide glue for the organisation. The movement of expatriates from corporate headquarters to subsidiaries around the world provides the means to diffuse the culture of the company. Whilst expatriates can help the control and co-ordination of the company, they can block the development of local managers. A challenge facing management in the future is how to develop local management and how to develop multicultural management teams based on talent rather than on headquarters country citizenship. For the worlds largest companies the equidistant manager will be the very difficult goal.

In-House and External Resources


The general trend in many businesses is use direct employment of people within the organisation to concentrate on the main activities of the business. For activities that are undertaken less frequently or are less central to the company, the organisation will buy-in agencies, consultancies and people on short-term contracts, that is it will use external resources. The overall position is that it is unlikely that a company will possess, in-house, all the knowledge and specialist expertise that is necessary in international business. It will, therefore, be necessary to buy-in external resources. The balance between in-house and external resources will vary considerably from company to company. Some companies will have a policy of handling most activities in-house. This is likely to be the case if confidential information is an important part of company success. If the knowledge required for the product or service is very specialised, this will limit the chances of finding suitable outside people with the appropriate levels of knowledge. The main reasons for using outside specialists are: Outside specialists may have more specialist knowledgeable than in-house personnel. For example, in foreign exchange dealing or in handling marketing research surveys across a number of countries with widely different cultural behaviour. It is cheaper to use outside specialists. This is likely to be the case if the amount of work in-house is insufficient to justify full-time direct employment. To manage a temporary need for extra people to handle a particular issue. For example, the need for interpreters for the duration of an international trade fair. Outside specialists have the appropriate language and cultural fluency for particular markets.

In addition to these four factors, companies will, sometimes, need to undertake a stepchange in their approach to international business. For example, a large multinational company may wish to develop a more global approach. If this is the case, specialists will be

ABE

Management, Organisation and the International Business

165

useful to help define appropriate strategic directions and to devise ways in which the corporate culture can be changed to a more geocentric orientation.

The Expatriate and the National Manager


In this section we will look at the reasons for using company personnel working in their own country and compare these with the reasons for using company personnel, but basing them in another country. Company personnel based in a different country are often referred to as expatriates. Expatriates may exist at any level or functional specialism within the company, but the main area of concern is at management level. To look at the strategies for using expatriate and local managers we must first look at the main types of manager employed by international companies: Locals Managers who are citizens of the countries in which they are working. Home-country expatriates Managers who are citizens of the country in which company headquarters are based. Third-country expatriates Managers who are citizens of a different country from the company headquarters and the country where they are working.

We could posit that most companies will want to use local managers to fill the positions in both the company headquarters and the companys various subsidiaries around the world. Thus, the typical company would have something of an ethnocentric bias in its headquarters and polycentric influences in its subsidiaries, because of the proportions of nationalities and cultures that it employs in its various countries of operation. However, the position is likely to be more complicated depending on a number of different factors. Figure 8.9 sets out some of the strategies applicable in varying conditions. Figure 8.9: Different strategies for employing local and expatriate managers Country A Subsidiary Mainly locals
A few expatriates from company headquarters.

Country B Subsidiary Mainly locals


In this case more expatriates are used because of a shortage of suitably skilled local candidates. Homecountry and third-country expatriates will be used.

Headquarters of the Company Mainly locals

Country D Subsidiary Almost all locals


In this country the rules governing employment make it very difficult to employ expatriates.

Country C Subsidiary Almost all locals


This subsidiary is very successful and long established. It has little obvious need for expatriates.

ABE

166

Management, Organisation and the International Business

The position illustrated for Country A Subsidiary shows how companies will usually wish to use a number of expatriates in their subsidiaries to control the organisation and to ensure compatibility in the way in which systems are developed and implemented. Country B Subsidiary shows an example of situations in which a large number of expatriates might be needed for example, if there are few local marketing specialists in a company, expatriates will be needed to fill the gap. Country C Subsidiary illustrates the situation found when a subsidiary earns a high degree of independence from company headquarters because of its consistent ability to meet its objectives. The example of Country D Subsidiary is one in which the company may wish to employ expatriates, but is prevented from doing so by rules, regulations and laws in the country concerned. Many countries in Africa have considerably restricted the numbers of expatriates that multi-national companies can employ. The main reasons why companies use expatriates can be summarised as follows: To provide immediate technical competence. Expatriates often have the required knowledge and skills (for example, in the use of specialised technologies) which do not exist in the local workforce. To facilitate co-ordination and control between the subsidiary and the complete organisation. Expatriates familiarity with communications and the culture of the company provides a basis for developing similar systems and culture in the subsidiary. To enhance the (expatriate) managers development in the international arena.

There are problems with using expatriates, however. For many people the difficulties caused by geographic mobility are too great the move affects not only the manager, but also the managers family. There are also difficulties in career progression at the conclusion of the expatriate assignment. If the company does not manage the return of expatriates so that managers are able to enhance their career prospects, they will resist attempts at expatriate assignments in the first place. Cost is another important factor. The relocation costs, housing and costs such as the education of the children from expatriate families, are often surprisingly high. In addition, costs of living in other countries, particularly major cities, can be higher than the expatriates domestic residence. In a survey of the cost of living in the worlds biggest cities by the Economist Intelligence Unit, Tokyo was by far the most expensive city. Using New York as the base, rated at 100, Tokyo was just over 200. The next city was Zurich at 125; Paris, Seoul, Hong Kong, Moscow, Singapore, Frankfurt and London ranged between 125 and 100 in descending order. Mumbai and Belgrade at about 50 represented the cities surveyed with the lowest living costs. A further problem with the use of expatriates is the way in which it can inhibit the development of local managers. If all senior appointments are made to expatriates, not only does this prevent local managers from developing the experience necessary to operate at higher levels in the international organisation, but it is also a serious demotivating force discouraging people with the potential to be high flyers. Their reaction might well be to seek employment in other organisations in which their talents will be more aptly rewarded.

Building the Global Company


Figure 8.9 represents the type of approach taken by many multinational enterprises in the past. However, companies are now developing ways in which they can be more flexible and more attuned to the cultural requirements of their different operating environments. One way in which this flexibility is being sought is through approaches being propounded by gurus such as Tom Peters. They propose breaking down typical organisational hierarchies to enable companies to be disorganised, to allow them to cope with the disorganisation and change they face in their environment and in their markets. The other main development is the borderless world view of Kenichi Ohmae and the need to build management teams and managers to cope with the new complexity of international

ABE

Management, Organisation and the International Business

167

business. One strong view propounded by Ohmae is the need to develop what he terms "equidistant" managers who have the knowledge, experience and cultural flexibility to operate on a global basis without their decisions being flawed through self-reference criteria. This is obviously very difficult to achieve. We return to this below in more detail. Figure 8.10 represents a more global company. This company still has the major headquarters based in the country in which the company was originally founded. However, the company aims to use specialist centres based in different parts of the world and uses managers more on the basis of merit than the fact that they are nationals of the company headquarters. Figure 8.10: Strategies for building the global company Country A Subsidiary
Developed into a centre for worldwide IT development and support.

Country B Subsidiary
This subsidiary is in the development phase. It will be developed into a specialist centre for production.

Headquarters of the Company


Provides all functions. Uses locals as well as extensive use of thirdcountry expatriates.

Country D Subsidiary
This subsidiary is still in the development phase. Country restrictions prevent major development.

Country C Subsidiary
Developed into a centre for worldwide marketing.

In all subsidiaries, except the restricted case of Subsidiary D, the company employs a number of home-country and third-country expatriates. It aims to develop managers from each subsidiary, some of whom will be moved to company headquarters, others to other subsidiaries. Developing the International Manager The important issues in the development of the international manager centre on building personal competence in respect of management and business skills in general, and in the particular requirements of the international arena, including developing cultural flexibility and language skills. Companies will face the process of management development in a number of ways, but the main aspects will centre on planned experience and training programmes: Developing experience Experience needs to be developed in a progressive way. Managers will be exposed to jobs in various countries with progressive difficulty, success at one level being the normal prerequisite for progression to the next level. Experience needs to be

ABE

168

Management, Organisation and the International Business

developed in various countries. Each country will pose different cultural challenges. In particular, it will be the ability to apply management solutions successfully in different countries that will be crucial. Progression beyond the country management level to the grouping of countries level needs to take place. Training and development In most instances, managers will be given in-house training and training from external providers. This training will be used to develop managers general and international management expertise. In addition to specific management courses, though, the manager should attend courses for cultural preparation and inter-cultural analysis and to improve language skills. For managers operating in many different countries, it will be impossible to learn every language to a high level, such as is required for negotiating or presentation purposes. However, he/she should possess high-level language skills in at least one other language and social survival language skills in all the important languages that relate to his or her geographic responsibilities.

The Concept of the Equidistant Manager


In the major companies of the world, the imperative of global management is strong. These companies compete in global markets and in order to do this, they need to develop managers who avoid continual reference to constricting experience and values. Kenichi Ohmaes concept of the equidistant manager provides the basis of this. The equidistant manager develops strategy and implements plans based on the importance of the customer or market, not on geographic proximity or home-country cultural terms. He/she avoids: A vision dominated by home-country customers. A vision dominated by specific company subsidiaries. A view that everything outside the company and the country is part of the rest of the world. The words overseas, subsidiaries and affiliates because these serve to separate the home domestic operation from the rest of the world.

The whole process is, of course, very difficult. The main issue for those businesses who need to operate globally is that they must develop values and attitudes amongst their managers that are global. The UK is a part of Europe. Some people in the UK regard the UK as an essential component of Europe and the integration of the UK into Europe as crucial for the future prosperity of the UK. Others in the UK wish to retain a traditional country independence. So, even from the more limited perspective of the UK and Europe we can see how difficult it is to develop a reliable, equidistant view across national boundaries. When this is attempted on a global scale, the whole process is exceedingly difficult. The equidistant manager will need a strong educational foundation. This foundation must incorporate a fluency in several languages and an understanding of culture through immersion in differing cultures. The company will need to use selective international experience and training courses, within a company that is developing an equidistant culture, to build on the educational foundation. Of course, in addition to this, the manager must be capable and successful in international management and business. Specifically the equidistant manager must have the knowledge, experience and cultural flexibility to operate on a global basis without their decisions being flawed through self-reference criteria. This is obviously very difficult to achieve.

ABE

Management, Organisation and the International Business

169

D. INTERNATIONAL LABOUR RELATIONS


One of the characteristics of the international labour market, and of relations between employers and their workforce in particular, is that they are significantly different in different nations and these areas of differences influence operations worldwide. For example: The structure of unions and their influence over organisations vary by country Labour laws are virtually unique to every nation Levels of employee participation in setting HRM policies also vary Government regulation of business differs across borders.

In respect of the structure and power of unions varying between countries, we can take the example of France. Although membership of unions is comparatively low, their political power is high and the right to carry out industrial action seems to be implicit both in the constitution and the culture. Therefore, the impact of any industrial action, and the working conditions achieved through that, are significantly different to other European countries notably the UK where the power and hence the influence of the unions has been much curtailed as a result of legislation originating in the 1980s. In Japan there are over 60,000 unions but unlike the general rule where unions are literally trade unions linked to specific fields of work such as the Teamsters (Transport Workers) in the United States and UNISON (Public Sector Workers) in the UK, Japanese unions are directly related to companies. They are known as enterprise unions and are essentially inhouse unions and are very similar to the works councils in many European countries. The main concerns of organised labour include fears that the global company may counter union bargaining power by threatening to shift production elsewhere, or will try to import and impose unfamiliar labour practices from other countries. According to Hill (2001) organised labour has responded to the increased influence of international companies through: Trying to set-up their own international organisations Lobbying for national legislation to restrict the power of multinationals Trying to achieve regulation of multinationals through international organisations such as the United Nations.

However, it would appear that none of these efforts have been that successful to date. The roles of unions are typically seen as anti management, but working closely with unions can help organisations meet external challenges leading to significant changes in working practices. Most unions are realistic and recognise the realities of the business environment, particularly at the global level. The significant changes in the car manufacturing industry in the United Kingdom are evidence of this. The demise of the UK car industry over the last 30 years that was in part caused by poor labour relations has lead to traditional UK car brands being taken into foreign ownership. However Japanese manufacturers, such as Nissan, Honda and Toyota have successfully opened car manufacturing plants to the extent that the UK is now once again a significant exporter of cars. The fact that the workers and the management were able to cooperate in order to counter the significant decline in sales during the recession of 2008 and 2009 shows that most workers and their unions understand that the success and the ultimate survival of the organisation in the modern global world relies on flexible working relations. There is a growing realisation that the way in which work is organised within a plant can be a major source of competitive advantage and, increasingly, trade unions are acting to facilitate the flexibility required to achieve this. Nevertheless, a company's ability to pursue a transnational or global strategy can be significantly constrained by the actions of labour unions. A key issue in international labour

ABE

170

Management, Organisation and the International Business

relations is the degree to which organised labour is able to limit the choices available to an international business. Traditionally, labour relations have been decentralised to individual subsidiaries within multinationals. Recently, however, the trend is moving towards greater centralisation. This enhances the bargaining power of the multinational vis--vis organised labour.

PRACTICAL ACTIVITIES
1. Toyota is a global car company, with corporate headquarters in Japan, employing over 320,000 employees working in various locations across the world and various functions from manufacturing, research and development to sales and marketing. (a) (b) 2. What factors will influence the management structure of the organisation? How might they set about developing managers at a new manufacturing plant in Scotland

Bombardier (December 2010 case study) decided to relocate its global headquarters to Germany from Canada. What were the benefits of doing this and what were the HRM/organisational implications of such a move? "The concept of the equidistant manager is an unrealistic pipedream." Make the case for and against this statement.

3.

ABE

171

Chapter 10 Finance and the Multinational Company


Contents
Introduction

Page
172

A.

Obtaining Funds Internationally Borrowing Capital Structure

172 172 173

B.

Transfer Pricing Determining Transfer Prices Reasons for Manipulating Transfer Prices Large Transfers of Funds

174 174 176 176

C.

International Investment Decisions Factors Affecting the Investment Decision International Investment Appraisal Repatriation of Profits Overseas Taxation Foreign Direct Investment

177 177 178 179 179 180

ABE

172

Finance and the Multinational Company

INTRODUCTION
Multinational companies those that operate in more than one country, and usually several face a number of specific challenges in respect of their finance. They have a wide choice of source of funds through the global capital markets, but there are considerable risks associated with foreign investments, not least those associated with the political and economic conditions, and their stability, in the country concerned. The creation of foreign subsidiaries within a multinational group also opens up the prospect of trading between the separate divisions of the company. This can offer considerable opportunities for savings by moving funds and profits to those countries with the most favourable financial regimes. However, there are strict rules about such measures which companies need to follow with care.

A. OBTAINING FUNDS INTERNATIONALLY


When considering options for financing a foreign investment, an international business has two factors to consider: how to finance it, in terms of the source of the necessary funds and most importantly, if external financing is required, the company has to decide whether to borrow from sources in the host country, or to borrow from sources elsewhere how to configure the financial structure of a foreign affiliate.

Borrowing
MNCs often use international sources of funds, for example, Eurobonds, Eurodollars and overseas capital markets, to finance both themselves and their subsidiaries. The borrower must be of high credit standing and must need large sums of money, as these markets are for the international gathering of capital resources and are not aimed at the smaller organisation. Thus, the larger Multi National Corporations (MNCs) rarely have any difficulty in raising funds because of the scale of their operations, but smaller organisations may have problems obtaining funds for global expansion. However, host government regulations or demands may impose a local limit to the amount of borrowings which is allowed and this may restrict borrowing from the global capital market. In such cases, the discount rate used in capital budgeting must be revised upwards to reflect this. In addition, the global financial crisis has had an impact on all organisations and there has been a squeeze on lending partly as a result of the globalisation of the major banks. A company needs to consider the cost, timing and speed of overseas loans, as well as the size of loan and the currency the borrower wishes to obtain. The security required should also be borne in mind, as should any potential to reduce exchange rate exposure. Company treasurers should not forget that interest rate parity can show how, when considering exchange rate movements, the real cost of interest rates in different currencies are similar. However sometimes, because of market imperfections, there can be opportunities to obtain cheaper loans in alternative currencies. A common method of financing an overseas subsidiary is to finance its fixed assets with a long-term loan in the host countrys currency, thus allowing the repayment of the loan using the profits generated in that country. This is known as matching of assets and liabilities, and is a method used to reduce exchange rate risk. When considering such loans, companies also need to consider likely fluctuations in exchange and differential interest rates creating an interest rate trap, where a lower interest

ABE

Finance and the Multinational Company

173

than that achievable on the domestic market becomes more expensive in both domestic and foreign currency terms due to changes in the exchange rates. Arbiloans (international interest arbitrage financing) are variations on currency swaps that may be of use in financing MNCs. A subsidiary based in a low interest rate country borrows and converts at the spot rate to its parents currency. The parent then agrees to repay the loan at the term end and at the same time buys a forward contract. This is common when a parent faces credit restrictions and high interest rates.

Capital Structure
In deciding the financial structure of an overseas subsidiary, the parent must consider a number of features: The level of gearing (i.e. percentage of borrowed capital to the total amount of capital), the subsidiary should have, and from what source How much equity should be placed by the parent in the subsidiary and how much from outside (and from what sources) The level of reserves and working capital the subsidiary should aim for.

These choices will often be determined by political and legal restrictions in the parents country and the host country, and the expected level of permanence of the investment. For a longer-term investment, long-term sources of funds such as equity would be used in preference to short-term funds such as trade credit, which would be used for a short-term investment. Moreover the company, in common with all organisations, needs to consider the cost of capital, including the cost of local finance. Whilst the factors affecting a domestic company when deciding on its capital structure also need to be considered by an MNC, the decision is made somewhat harder by the greater choice of capital available from international capital markets, taxation and other legal restrictions (such as on dividends or the flexible repayment of loans to parents) in the various countries in which the MNC operates, as well as potential subsidies from host governments. A further factor to consider is that subsidiaries may have a guarantee from the parent company, thus permitting a higher level of debt than would otherwise be the case. Governments will often wish to encourage MNCs to establish operations in their country, thereby creating wealth and increasing employment. This is often achieved through grants, subsidies, favourable loans and guarantees. Whether help is given to a business applying for such help will be dependent upon whether its proposals qualify. Capital gearing is the term used to measure the extent of external borrowing compared to the total capital, with the formula for its calculation as follows: Gearing
Long term debt Equity shareholde rs' funds Long term debt

When taking an investment decision the gearing ratio must be monitored carefully, particularly with regard to the needs of shareholders. They supply the long term capital for the company and will expect a return on their investment in the form of dividends. However, companies are not obliged to pay dividends and in poor years there may not be sufficient funds available. Interest on loans must, though, be paid and this restrict the availability of funds. Further, if the rate of interest increases, this could lead to a decline in profits overall and may even mean that the returns on the investment are greatly reduced. So, shareholders like to see the gearing ratio being lower and in their favour! In addition, they have voting rights at general meetings and can affect major investment decisions.

ABE

174

Finance and the Multinational Company

B. TRANSFER PRICING
The underlying philosophy of the process of divisionalisation and the creation of SBUs is that, by allowing individual divisions to trade and operate autonomously, the management of each division able to cultivate its profit motivation in a competitive atmosphere. However, where this involves inter-divisional trading ( through an internal market), this can cause many problems. When a company expands into operations in other countries, it may become involved in selling semi-finished or finished products from one subsidiary to another. This may involve a situation where divisions supply not only the outside market, but also other divisions within the same company, in competition with other companies for example, Ford Motor Company supply engines for other car manufacturers. Within an internal market, the question of pricing has to be addressed. The price at which goods are exchanged internally is called the transfer price. Transfer pricing is an issue both for individual subsidiaries, because the level of the transfer price affects the profits made by the subsidiary, and for host governments, because the level of profits made by the MNC subsidiaries in their own country influences the amount of tax receipts for the country concerned. For some countries, tax revenue from MNEs can have a significant effect on total national income. The usual approach is to transfer at cost plus some element for profit contribution. The amount of the profit contribution can be changed to give the MNC the best overall international position, both in terms of minimising tax returns and in terms of its international competitive position. This is potentially a controversial area of multinational companies activities because transfers may be made at a price which suits the needs of the group as a whole and ignores the needs of the subsidiary or the requirements of the host country. The issues associated are: If divisions are to be judged by the criterion of profit and yet carry on trade with each other, profit or some representation of it must be built into the transfer price. If divisional behaviour is not to cause loss to the overall group, divisions may be directed by central management to provide or sell goods and services to their fellow group members. Alternatively, transfer prices may be determined centrally in order to ensure optimisation of the groups taxation policy. For example, group ABC (a multinational concern) finds that company A is facing high taxes on profits in a certain country. Company A can then be forced to transfer its goods and services to company B (also part of the group) at such a low price that company A makes little profit and company B makes a very large profit. The group as a whole gains by avoiding the taxes in the host country of company A.

The problem is that such direction may act against maximising individual divisions performance, compared with what would have been achieved, say, by trading with outsiders.

Determining Transfer Prices


Transfer pricing needs to meet two objectives: (a) (b) No divisional action must be allowed, by way of transfer price system inadequacies, to enhance the position of the division at the expense of the corporation it is important to promote divisional managerial motivation in the profit-orientated environment.

ABE

Finance and the Multinational Company

175

Within this, there are a number of methods of calculating transfer prices: Full cost Where full cost is used there is an obvious danger. The user-divisions taking units of service or commodity from a supplying division at full cost (to the supply division) will regard this full cost as a variable cost to themselves. The more they use or buy, the greater the cost incurred by them. In fact, the cost they regard as variable will have a fixed as well as a variable content so far as the supply division is concerned. Now, the user-division will have its own fixed/variable cost pattern, although some of what they regard as variable cost is, in fact, partially fixed. Marginal cost This clearly points to the use of a marginal cost basis that will, however, leave the problem of disposing of the supply divisions fixed costs. This could be achieved either by charging them to the user-divisions in blocks (perhaps related to usage) or passing them to the central head office for charging to the consolidated accounts, the userdivisions receiving, in effect, a two-part tariff charge. Full or marginal cost plus profit Full or marginal costs could have profit additions made to them to allow profit/investment measures to be unaffected by inter-group trading. The danger will be that user-divisions, possibly twice or more removed, will have a cost/selling price/discounts policy rather confused by the strata of internally added profits. Current market price Current market prices are the ideal solution to transfer pricing because they are objective and related to factual situations in the outside world. Unfortunately, however, there will be few conditions where a clear one-to-one situation will exist between a divisions product and one in the open market. External products will invariably have minor design or quality differences, packing charges and discount structures, which make exact comparability impossible. In addition, where the supply divisions output is a half-processed unit, i.e. work in progress, or some intermediate process, such as polishing or packing, a comparable market price will not exist anyway. Negotiated price The above situation may lead to the use of negotiated prices, but, then, might not individual managers spend more time and ingenuity squabbling over the negotiations than on advancing the overall corporate effort, perhaps leading to central dictation again? Which method to adopt will depend on prevailing circumstances in the company, namely: The degree of central control or freedom of action imposed upon or allowed to divisions by the corporate management. The existence of comparable markets for the products of the divisions at the intermediate stages of production. The extent to which divisions are free to buy from, and sell to, the outside market, rather than being restricted to using fellow divisions as suppliers or outlets.

All methods of transfer pricing are beset with practical difficulties related to circumstances in the company. Perhaps the most favourable technique is to have some two-part tariff arrangement, where each divisions fixed costs are charged to user-divisions regardless of their use of them. The variable costs, possibly with a profit addition, are charged on the basis of consumption by the users.

ABE

176

Finance and the Multinational Company

This suggestion, of course, tends to assume that usage is a sequential pattern with A passing to B, and B to C, etc. Often, in practice, a reciprocal position may arise, where subsidiarys costs are interdependent. Also, are the fixed costs to be amalgamated with Bs and passed on? In view of the optimising/allocation nature of the problem, a mathematical programming approach may produce the best answer.

Reasons for Manipulating Transfer Prices


One of the most common reasons for the manipulation of transfer pricing is known as tax planning, which involves the careful and systematic avoidance of taxes to make sure that profits are not taxed twice (i.e. by two governments). Another reason is the fear that, if too large a profit appears against a particular subsidiary, pressure will be applied by government or customs to reduce prices, or by trade unions seeking large wage increases. Another influence on transfer prices is the market conditions in which a subsidiary operates. The family network of a large worldwide group may make possible a price war to gain a market advantage. Governments are always finding ways to cancel out any tax advantages a company may discover. They can make a careful check on comparative import and export prices, and will soon discover if transfer pricing is being allowed to distort the position. For example, in the UK, the Controlled Foreign Company legislation was introduced to prevent transfer prices being manipulated and tax havens used for undue tax avoidance.

Large Transfers of Funds


One of the most controversial aspects of the MNC is its ability to move enormous sums of money between subsidiaries in different countries. The reasons for large transfers of funds around the world include: Funds for new investment Payments of profit and interest Making and repayment of loans between member companies Payments for goods, services and expenses.

The main fear of international companies is that money will be lost due to factors beyond their control, such as restrictions on the return of profits from a subsidiary to a parent company, and the effects of changes in the value of currencies. This is why one of the trends in international business is to pay the parent company as large a profit return as possible, even if loans have to be made in order to keep the subsidiary in liquid funds. If international trade were entirely a matter of arms length transactions i.e. between separate and unconnected companies in different countries the movement of funds would be easier for governments to follow and control. (When a subsidiary in another country is not fully owned problems are likely to arise as group objectives pull one way and those of the subsidiary the other. For this reason MNCs much prefer to make their subsidiaries wholly owned.)

ABE

Finance and the Multinational Company

177

C. INTERNATIONAL INVESTMENT DECISIONS


The criteria by which investment opportunities are selected will vary between companies. MNCs often prefer to invest in their own domestic market, and will only go abroad if they can secure a higher return on capital by so doing. However, sometimes the MNC will undertake a foreign investment that is uneconomic. The main reasons for this are: To ensure an outlet for some other aspect of its worldwide operations for example, an oil company may construct a refinery as an outlet for its own crude oil production. To safeguard its existing interest for example, by producing a new but uneconomic car, in order to keep a brand name alive for the sake of a larger, successful model.

Studies indicate that many MNCs do not usually have a master plan for international investment, but review each individual project on its merits. It is generally the viability of the project, rather than the finance available for investment, that is the key to the investment decision.

Factors Affecting the Investment Decision


The decision to locate, or relocate, part of an MNCs operations in a foreign country will follow detailed research and often complex negotiations. Of the issues that will primarily concern the management team, the following will be of particular significance: The political, economic and currency environment, and particularly their stability, of the country. These factors affect number of important factors, including: (i) (ii) (iii) (iv) (v) The stability of the market for raw materials. Controls on the movement of product and currencies, and particularly how difficult the repatriation of funds may be in the future. Inflation and local taxes. Whether it would be politically wise to have a local participation in the chosen country. The support, assistance (and interference) of, and by, the government of the country.

Is it best to operate as a branch or should a separate local company be created? The answer to this question will depend on local considerations, including the tax laws of the country concerned, as well as strategic policy regarding decentralisation of control of subsidiaries. It may be advantageous to have a branch overseas if unprofitable, converting it to a subsidiary when it becomes profitable. Special EU rules (for example on mergers) can create other problems or advantages when deciding on the structure of overseas operations. Will the investment be temporary or permanent? For example, a temporary investment, such as a mine, will be worked out within a finite period of time. In such cases a loan will generally be the best method of financing, whereas for permanent investment equity will usually be the best approach. Where borrowing is envisaged, should funds be borrowed locally, provided through the parent or raised through the euro markets, and what exchange risk will be involved? What is the cheapest and safest way of providing capital? Other aspects of the business environment such as communication facilities, the ability to acquire an established company or whether a green field operation can be developed, the availability and cost of suitably qualified labour and management, and the industrial relations record of the country, and the level of competition already established in the region.

ABE

178

Finance and the Multinational Company

Entities trading internationally face particular difficulties based around different currency units that can cause potential problems in translating one unit of currency into another. They also have the problem of different laws, taxes, business practices and cultures that may be incompatible with existing operating methods.

International Investment Appraisal


The assessment of the viability of overseas projects has many features in common with the assessment of domestic projects. There are, of course, also marked differences so that domestic budgeting techniques form only the foundation of overseas capital budgeting. Investment appraisal in an MNC is conducted in a similar manner to the assessment of domestic projects, using such techniques as net present value (NPV) and internal rate of return (IRR). However, there may be differences adopted to reflect the differing nature of the investment: Cost of capital The first issue is determining the cost of capital to be applied for example, by using the capital asset pricing model or the dividend growth model. However, if the risk/return pattern of the project is in any way different to that of the company as a whole, then due allowance should be made by calculating a project-specific return. Because the project is overseas based it is possible that the elements used to finance it will be a mixture from the two countries concerned. If overseas funds are utilised then further adjustments may be necessary due to the following: (i) (ii) Retained earnings of the subsidiary or project that may be subject to withholding taxes or tax deferral (which we shall look at shortly). Local currency debt this is the after-tax cost of borrowing locally in the country concerned:

Discount rate applied An increase in currency and political risk may lead to the company increasing the discount rate used to evaluate projects; or the company may use the discount rate determined by its overall systematic risk level (if it is assumed to be unchanged by the potential investment) and adjust the cash flows for the expected political and currency risk. In practice, the discount rate is adjusted for political risk, because all cash flows would be affected by adverse political circumstances, whereas currency risk may have either beneficial or detrimental effects on cash flows and as such is accounted for their adjustment.

Parent or project cash flows The project must be shown to be beneficial both in the host country and its currency, and in terms of funds remitted to its parent, in order to fully justify it, both from the point of view of the parent company and in comparison with other (potential) projects in the host country. However, the cash flows that are generated by the project are not necessarily those that will be received by the parent. There may, for instance, be exchange control regulations limiting the transmission of funds, in which case some of the methods outlined earlier under the unblocking of funds may be used. It is important that the distinction between the two is understood, as decisions made on the strength of project cash flows can be very misleading. The factors affecting cash flows, which must be allowed for in investment appraisal, include the following:

ABE

Finance and the Multinational Company

179

(i) (ii (iii (iv) (v)

Exchange rates with the added complication that cash flows have to be converted from the host currency to the domestic one Differential tax rates between those in the home and host country Royalties and fees payable out of the income, which may cause differences between cash flows to the project and to the parent company Restrictions imposed on the flow of funds from subsidiary to parent, which may alter the complexion of the project from the parents point of view The different rates of inflation between the host country and that of the parent.

Repatriation of Profits
The aim of investment in overseas subsidiaries is to increase group profits for the MNC and central to this is the ability to transfer value through the group. Those companies with inter-divisional trade need to determine the level at which to set transfer prices for goods and services provided by one group member for another. The basis on which the transfer price is set will affect the profit share of the group, and should be determined in order to maximise group profits by developing the motivation of subsidiaries and circumventing any repatriation controls imposed by the host government. Transfer prices of goods and services provided by group members for each other are one way of obtaining cash returns from an overseas subsidiary. Others include: Royalties charged to the subsidiary for making goods, or providing services, for which the parent holds the patent. Management charges levied in respect of services provided by head office. The subsidiary may borrow from its parent, and thus pay interest charges to it. Dividends that can be paid to the parent on the equity provided by it.

The choice of method of obtaining cash returns, and level received from each (often by manipulating the various factors, such as the rate of interest for parental loans), will be determined by the requirements of the parent and the subsidiary, any exchange controls present and the perceived risk of the investment. This manipulation can make the interpretation and evaluation of the accounts of MNCs and their subsidiaries extremely difficult. The problem is exaggerated by the differing accounting policies used in different countries, the differing choices made as to which exchange rates (actual (and at what date) or predicted) to be used in setting forecasts and translating accounts into the parent companys currency, and the different economic and political circumstances a subsidiary may be operating in.

Overseas Taxation
The impact of overseas taxation can play an important part in the investment decision, as noted above. Withholding taxes, for instance, will be met quite regularly. These are taxes collected from foreign corporations or individuals on income earned in that country. A UK resident in France, for instance, may find that any dividends received could be subject to a withholding tax of 20% that is then paid over to the French revenue authorities. Credit is usually given in the home country for any taxes paid abroad. Thus, if a UK resident was in the 40% tax bracket and had suffered the 20% withholding tax above, he/she would be liable for 20% of UK tax on that particular income. It is often the case, however, that if the withholding tax rate exceeds the home country tax rate then no credit is given for the excess tax paid abroad.

ABE

180

Finance and the Multinational Company

Thus, double taxation relief is available in income earned abroad. An important strategic consideration that must be taken into account when setting up an operation overseas is whether to operate it as a branch or subsidiary. If the former, then UK tax is paid on income which is repatriated, and there may be cash flow advantages in manipulating dividends to be taxed in a different accounting period. If income from abroad is not repatriated then it will be subject only to foreign tax and not to withholding tax or UK tax. If the profits of an overseas operation were transferred to a tax haven they would not be subject to UK tax, but the withholding tax would be deducted. A tax haven is a country where tax on resident companies, foreign investment and withholding tax paid on dividends paid overseas are low. For these reasons they are often used by MNCs as a means of deferring tax prior to the repatriation of funds. For this to be successful, the tax haven requires adequate financial services, a stable exchange rate and a stable government. UK companies may also consider transferring residence in order to avoid paying UK corporation tax (this is subject to various Inland Revenue rules).

Foreign Direct Investment


There are several reasons why a company may grow via foreign direct investment (FDI) and become a multinational. Often, in making the decision, financial considerations are outweighed by strategic reasons. The common reasons quoted for FDI are listed below, but you should note that there is often more than one reason why a company may decide to invest overseas: The provision of raw materials such as oil and minerals , many MNCs base part of their operations at the location of their raw materials, for cost or logistic reasons, or in order to comply with the political and legislative wishes of the host government The provision of cheap and productive sources of labour often cited as the reason given for many MNCs locating in the Far East and Mexico Location in the market for the companys goods for example, the major Japanese car manufacturers of Honda, Nissan and Toyota have located in the United Kingdom in order to have easier access to the EU market (as well as there being an existing skilled labour supply a legacy from a much larger domestic car industry). Location in centres of knowledge for example, several Japanese and European companies have purchased companies in the US (often located in Silicon Valley) in order to gain access to technological knowledge in the field of electronics, and Microsofts Research facilities in Cambridge is an example of a company investing in Britain for this reason To permit diversification opportunities not available in the companys domestic markets To allow growth if there are limited opportunities for the company at home such growth can take the form of diversification, horizontal or vertical integration. For companies based in countries with unstable or unpredictable political regimes, FDI may be a way of ensuring safety from interference in, or expropriation of, their business. Such fears led to FDI in Australia and North America by Hong Kong-based companies prior to its repatriation by the Peoples Republic of China. To avoid import controls or to obtain grants and concessions. The takeover of, or merger with, a company already established in the target country. This option has the same advantages and disadvantages as a domestic takeover in

The most common forms of investment abroad are:

ABE

Finance and the Multinational Company

181

terms of established markets, production and distribution facilities, but often poor performance, financial status and management. Joint ventures with an overseas partner local to the area where investment is to take place, either for a fixed period of cooperation on a defined number of projects, or a continuing long-term joint-equity venture. Joint ventures are common in the Middle East , India and Japan where legislation prevents or makes difficult 100% foreign ownership of companies. It is also becoming increasingly popular in areas with high research and development costs such as the aerospace and car industries.

Companies may also start up overseas subsidiaries or branches from scratch. This route reflects the same advantages and disadvantages as domestic start-ups with the additional problems/opportunities that may occur as a result of differences between the two countries concerned.

PRACTICAL ACTIVITIES
1. Car manufacturers such as Toyota and Kia (from South Korea) are among many companies that have undertaken foreign direct investment in the United States. What are the benefits to them in doing this and what are the implications for them regarding taxation? The enlarged Kraft Foods Group (including Cadburys) have significant global investments. What have been the main influences on these investments and what sources of funding have been used?

2.

ABE

182

Finance and the Multinational Company

ABE

183

Chapter 11 Implementation, Evaluation and Control


Contents
Introduction

Page
184

A.

Managing the Implementation Process

184

B.

Performance Evaluation and Control Difficulties in Measuring Performance Evaluation Criteria Use of Critical Success Factors Control Systems

185 185 187 187 188

C.

Techniques of Performance Management Self-assessment/Business Audits The Learning Organisation Benchmarking The Balanced Scorecard The Application Of New Technology

189 190 190 190 191 193

ABE

184

Implementation, Evaluation and Control

INTRODUCTION
Planning is central to the determination of effective strategy, and we have seen how the development of business plans works through the analysis of the environment, the identification of strategies and the specification of objectives for implementation to achieve the organisation's mission and goals. The final stage of the planning process, which is not usually thought of as planning at all, is the monitoring of the effectiveness of those plans. However, planning is not complete without some form of review which considers how successful the process has been - in terms of both the plans and their implementation.

A. MANAGING THE IMPLEMENTATION PROCESS


Good implementation requires different skills from good planning. Many otherwise excellent international business plans come to nothing because they are not effectively implemented. Effective implementation requires several aspects to be managed effectively and we shall consider four key aspects here. People management The implementation of business strategies and plans takes place through people. Because of this, the international business must have the necessary skills in managing people. One key skill in this area is the ability to empathise with the views and problems of other individuals. All business activities are fraught with uncertainty and risk and can therefore be very stressful, particularly where change is involved as a result of implementing new strategies. The international business must be aware of these issues and be able to see and anticipate problems as others see them, able to direct individuals whilst at the same time being fair in dealings with staff and allowing those members of staff to feel comfortable in approaching management. Incentives and rewards Our second factor affecting the implementation of international business strategies could also be said to be a people management issue, in so much as it relates to systems for rewarding, and therefore encouraging or motivating, staff charged with implementation activities. It is essential that incentive and reward systems in an organisation be geared to key performance standards in a business plan. So, for example, if the business plan requires a long-term perspective in terms of, say, increasing market share in a country, it is important not to have incentives and reward systems which are geared to shortterm success. Sometimes, because the development of international business is essentially a team effort, incentives should be group-based rather than individual-based. Incentives should be seen to be fair by all those affected by them and should seek to encourage extra performance. Communications Again, related to the people aspects, effective implementation depends on good communications throughout an organisation. Staff must be kept informed of objectives and plans and any changes that affect these. Communications should be both horizontal and vertical and should make maximum use of both formal and informal channels. Problems of communication can be exacerbated in international business due to, for example, geographically distant operations or sometimes an insular headquarters.

ABE

Implementation, Evaluation and Control

185

Regular meetings, status reports, newsletters and so on should be used to communicate. Increasingly, computerised information and decision support systems are helping to facilitate improved organisational communication in international business. Organisational structures and design Organisational structures for international business were covered in an earlier chapter. We saw there that there are several different types of organisational structure for international business and considered their relative advantages and disadvantages. Different organisational structures have different implications for implementation, with some structures being more effective in this respect. So, for example, more decentralised and flexible organisational structures are felt to increase the effectiveness of implementation as they tend to result in more functional communication and teamwork. Sometimes a company may require special organisational structures specifically to implement new international ventures. Such tasks teams may be composed of individuals from different functions of the organisation who are brought together to facilitate implementation. These, then, are some of the important considerations for the organisation when trying to implement international business plans. Failure to manage these aspects effectively can give rise to several problems including, for example: Decision making being delayed or deferred A lack of speed in responding to changing business and environmental circumstances Poor motivation and high staff turnover Increased conflict and lack of co-operation Increased costs and inefficiency.

B. PERFORMANCE EVALUATION AND CONTROL


In this section, we start by considering the process of evaluating business performance and in particular some of the more conventional approaches to, and difficulties of, evaluation.

Difficulties in Measuring Performance


It is difficult to arrive at reliable and fair ways to measure performance in the international arena. The reasons for this are as follows: Markets are not equal between one country and another markets vary considerably in size, in potential, in the variety of competitive forces that exist and in the ways that potential buyers react to changes in business strategies The strength of the company in different markets is not consistent many companies have a long-term established presence in some markets, but not in others, and may have used a disproportionate amount of resources in certain markets. It is, therefore, difficult to disentangle the measurement of current performance from what has happened, or is happening, elsewhere Performance by the company in a particular market is influenced by various interactions at different levels in the company. This is not a problem for companies with modest levels of sales, but for large companies with extensive international operations, the interactions are considerable. For some companies there are three or more layers within the company, as shown in Figure 11.1.

ABE

186

Implementation, Evaluation and Control

Figure 11.1: Layers of the company


World Region level, e.g. Europe, America, Asia

Company at the headquarters corporate level

Country level We have previously examined important strategic decisions such as those that that relate to country selection, the mode of market entry, and standardisation and adaptation. If we apply these at the three levels, we can imagine that sometimes the managers at a country level might argue strongly for an adapted approach, but that the corporate and regional level might impose a global standard or a regional standard with very little country modification being permitted. The evaluation of international performance is significantly influenced by changes in foreign exchange rates. If evaluation is proposed on sales revenue or profit contribution, it is certain that some of the figures that are calculated will merely reflect exchange rates. Obviously, in evaluation it is important to measure the right things. The company has no control over changes in exchange rates. What the company needs to find is a measure that can be used to compare cross-country performance that is largely independent of currency changes.

We can illustrate some of these problems by reference to market share. This is often recommended as a basis for evaluating performance, particularly as it has been used by many companies as an objective of long-term strategic planning in international markets and, indeed, forms the basis of a number of strategy formulation models (for example, the BCG Growth-Share Matrix). However, there are problems in measuring market share accurately, including the following difficulties. Within country markets it is difficult to find a 100% accurate method. Most markets are measured through marketing research techniques and thus suffer statistical errors. In international business, there are further problems that relate to the variability of marketing research techniques used in different countries. This is very much the case in LDCs and this will result in critical statistical errors. Business statistics based on government data might be influenced by incorrect reporting to minimise tax returns, by unhelpful ways in which information is classified in sub-groupings, or by unreliable import/export data. This is likely to be the case if crossborder smuggling takes place and where there is a high incidence of black market activities. Market valuations will be influenced by the foreign exchange problem. This does not affect the size of the market share, but it does affect the value of that market share.

ABE

Implementation, Evaluation and Control

187

Growth-share matrices are dependent on market growth rate and relative market share data. It might be possible to estimate growth rates without necessarily having reliable data for market size or relative market share.

Evaluation Criteria
It is most unlikely that a company will be able to develop evaluation methods that do not entail some problems. It is equally certain that relying on just one form of evaluation will provide an incomplete picture of company performance. For example, it is quite usual for short-term sales to increase, but for short-term profits to decline, or even become losses, when a new product is introduced, whereas over the longer term, the company hopes to show good profit increases. Thus, companies will vary in the number and range of evaluation criteria used. The most likely ways in which performance will be evaluated are: Comparing performance against the agreed business objectives. Comparing performance against industry averages and against competitors, including (despite all the above comments) market share. Profitability. This is the basis that most companies use, at least as one measure of performance, since it is the key measure at corporate level. There are, though, obvious problems in using profitability in a comparative way foreign exchange variations, the way in which transfer prices have been calculated and different country taxation structures all interfere with accurate inter-company profit performance across country boundaries. At a subsidiary company level, companies will use profit return on capital employed, profit return on sales and similar criteria. It is usual for this to be assessed at a pre-tax level, because after-tax includes the tax element over which the local manager has no control. Measurements of quality, customer satisfaction and shareholder value. The first two of these are of particular interest to business as both quality issues and customer service and satisfaction levels have become more and more important in recent years, both in domestic markets and internationally.

Most measurements will be on a quantitative basis and ratio analysis is frequently employed for example, in the ratio of marketing costs to sales revenue for each of the different elements of the marketing mix. Performance criteria that relate to sales and profitability will be communicated through the company accounting and financial control systems. Those that relate specifically to measures obtained through, say, analysing market performance will be communicated through reporting systems based on research, often on a monthly, quarterly or half-yearly basis.

Use of Critical Success Factors


A critical success factor (CSF) is anything on which the successful achievement of a specified objective depends whether at the strategic or operational level. It is important, therefore, that business plans should make sure that all CSFs are identified. CSFs will relate to the key areas of competition, upon which successful performance is crucial. They should, though, be kept to a minimum and specified in such a way that performance can be monitored. For most organisations, achieving their critical success factors will need constant review of their organisational capabilities, and at least incremental changes to ensure that they are remain compatible with the business strategy. At IBM, defining CSFs is part of the strategic planning programme, using a consensus approach with groups of senior managers. This takes place in the following stages:

ABE

188

Implementation, Evaluation and Control

(a)

Understand the mission The team collectively agrees a mission statement, in no more than three or four short sentences, which clear defines the circumstances in which the mission will have been successfully accomplished.

(b)

Identify issues which will impact on the mission The team focuses on the mission and identifies dominant issues by listing one-word descriptions of whatever they think will impact on the mission's achievement, by means of a brainstorming activity in which everyone contributes. Nothing is ruled out, no judgments are allowed, and the facilitator writes down everything so that all team members can see it.

(c)

Identify the CSFs By referring to the list of things they believe will impact on the mission, the team identifies the CSFs.

(d)

CSF statements These define what the team believes needs to be done to accomplish the mission. They are not only necessary to the mission, but also, together with the other CSFs, are sufficient to achieve the mission.

(e)

List of CSFs There should not be more than eight CSFs, and they should include a mix of strategic and tactical factors. Absolute consensus must be obtained for those CSFs listed.

(f)

Identify and define actions necessary to meet the CSF requirements This stage involves identifying and listing what has to be done to meet the CSFs, and defining the business processes needed to enable those actions to be successfully carried out.

(g) (h)

List CSFs and processes A matrix is produced which lists the CSFs and the processes relevant to each. Ensure that CSFs and processes will achieve the desired results The team reviews each CSF to ensure it has all the necessary processes which are sufficient to achieve the required results.

(i)

Implement the action plan The team confirms the action plan associated with the processes and sets up the implementation programme. Monitoring and follow-up arrangements are also put in place.

Control Systems
The analysis of performance against the above types of criteria is, as we have seen, more difficult in the international context for a variety of reasons. This is also true of control systems. Of particular importance here are the extra problems that result from geographic distance that reduces the amount of face-to-face contact and gives rise to extra communication difficulty. Furthermore, there are cultural differences that affect the usefulness of control systems. Managers from low context cultures will have more difficulty in interfacing with managers from high context cultures than with managers from similar types of cultural background. This will be further influenced by the local manager/expatriate balance and by the extent to which a real international management culture has been achieved. In addition, country-related differences might influence performance to a greater degree in some countries than others. These differences are difficult to isolate.

ABE

Implementation, Evaluation and Control

189

Control systems are essentially concerned with isolating the causes of performance problems and taking corrective action. At the simplest level, corrective action may be just making an extra effort in implementation for example, motivating agents or distributors to better levels of sales performance. At another level, more resources might be required. For example, a larger marketing communications budget might be needed, or an extra budget to fund price reductions, or to prevent price increases, which could be necessary if there are unfavourable currency fluctuations. In the short term, it might be advisable to reduce the level of profit contribution in an attempt to reduce the impact of such price rises. At another level, it could be that the strategy chosen was incorrect. This might mean that a complete review of the planning process would have to be undertaken environmental analysis, the identification of strategic options, the selection of the preferred strategy and its implementation. It has been suggested that strategic control needs to take account of a number of key elements: Selecting the right evaluative criteria These need to be as measurable as possible and should be limited to the most important criteria. The criteria need to have short-term and long-term measures and to be benchmarked against key competitors. Achieving good strategic performance It must be seen that top management is concerned with performance that directly relates to the achievement of the key criteria. There must be regular reviews of progress against the criteria. It is essential in doing this that there is a balance between certain objectives where conflict is possible for example: (i) (ii) Achievement against different criteria, where there might need to be a trade-off between the various criteria. Achievement of short-term and progress towards the long-term strategic targets, where, if attention is focused on the short-term, the end result may be a failure at the strategic level.

Achieving good strategic control It is important to achieve a high level of strategic planning. If the strategic plan is fundamentally flawed, the control mechanisms will not be able to correct underperformance, and the strategic planning process will need to be repeated. Control needs to take place both through formal and informal appraisals. If things appear to be going wrong, then top management involvement is signalled through rapid intervention.

C.

TECHNIQUES OF PERFORMANCE MANAGEMENT

As we have seen throughout the different elements of international business, this is a very dynamic and fast changing area. Organisations are constantly looking for ways to improve the effectiveness and efficiency of their activities and this is just as true in the area of evaluation and control as in any other area of business planning. In fact, as we shall see, approaches to evaluation and control in international business are changing dramatically. There are a large number of specific developments in the techniques of evaluation and control, but the main thrust of change in this area has been two-fold: The development of more outward-looking and much broader approaches to evaluation and control which seek to take greater account of both customer and competitor

ABE

190

Implementation, Evaluation and Control

considerations in the evaluation of business performance and include more qualitative aspects than the more traditional evaluation and control techniques. The use of new technology, and in particular information technology, that has enabled much more sophisticated techniques of control to be introduced.

Some of the more important approaches in these areas are considered below.

Self-assessment/Business Audits
Increasingly, companies are undertaking full business audits. A business audit examines every facet of a companys operations with regard to both efficiency and effectiveness. In doing so, the audit acts as both a control and an input to planning activities based on a comprehensive and wide-ranging review of a companys total business efforts. The audit therefore covers responses to changes in the business environment and the implications for future opportunities and threats, and assesses how valid and relevant the companys objectives and strategies are. Obviously, an audit is a very wide-ranging assessment of a companys business performance and needs to be done on a regular, perhaps annual, basis using objective appraisals carried out by the audit team.

The Learning Organisation


This is not so much a technique of evaluation and control, but rather an approach with regard to the control and evaluation process. The notion of a learning organisation centres on the idea that, as a result of evaluation, a company should gradually and continuously learn to perform better. In other words, the learning organisation would require fewer imposed control procedures if it takes the time and trouble to learn from its past mistakes. Essentially, the idea is that, eventually, in the learning organisation, imposed control procedures will not be necessary. This does not mean to say that the company will no longer need to measure performance, or indeed that what constitutes effective performance might not change over time, but in the learning organisation the control process becomes one of self-control with managers taking responsibility for their own actions and learning to improve over time. This idea of a learning organisation leads us to consider the notion of empowerment in the control and evaluation process.

Benchmarking
Benchmarking is essentially comparing a companys business performance against the best in class competitors. There are a number of approaches to benchmarking: Truly competitive benchmarking compares a companys business performance against the best direct competitors. Functional benchmarking compares a particular aspect of a companys business activities, such as procedures for dealing with customer complaints, against those organisations that are considered best in this area. Generic benchmarking is based on comparing business practices with the best companies in the world, irrespective of whether or not they are direct competitors.

For the international business, the benchmarking exercise should be done by comparing a companys performance with other international businesses rather than purely domestic ones. Benchmarking has the advantage of ensuring that a company does not become insular in evaluating its own performance, perhaps judging that it is doing well in terms of its business when in fact, compared to the best companies, it is performing badly. So, for example, a company might consider that it is effective in developing and launching new products until it considers its best-in-class competitor who can bring a new product to market twice as fast

ABE

Implementation, Evaluation and Control

191

and at 15% lower cost. Needless to say, many companies that have embarked on benchmarking exercises and have compared their performance against their best-in-class competitors have experienced a nasty shock. Since its introduction, the use of benchmarking to evaluate performance has become widespread. The first step in a benchmarking exercise is to determine what constitutes the important measures of business performance. In establishing these measures, it is important to look at customer perspectives as to what constitutes effective market performance rather than simply consider internal measures of performance such as profits, etc. This understanding of customers wants and needs is vital to an effective benchmarking exercise. A company can then establish the key factors for success and proceed to measure its performance with regard to these factors against the best practices. Benchmarking should extend to every facet of the value chain and we should always be looking for ways to improve competitive market performance. For benchmarking to be effective, it is important to have the right attitude towards this process. In particular, it should not be seen and used to expose individual weaknesses in performance in order to punish those responsible. Nevertheless there is no doubt that the use of international benchmarking has helped sometimes insular organisations to realise that they need much better levels of performance if they are to compete in world markets against the best.

The Balanced Scorecard


This approach to the evaluation of performance is specifically intended to move away from purely quantitative measures, and particularly the financial measures of company performance. Again, important though these financial measures are, as the name of this approach to evaluation and control implies, they are considered unbalanced inasmuch as they do not reflect the full range of indicators of business performance. In order to address this imbalance, it is suggested that the organisation identify key performance indicators appropriate to the company and markets in question. It was originated by Drs. Robert Kaplan (Harvard Business School) and David Norton as a performance measurement framework that added strategic non-financial performance measures to traditional financial measurements to give managers more 'balanced' view of organisational performance. There are four perspectives to this, as illustrated in Figure 11.2 below: The financial perspective The customer perspective The internal business perspective The learning and growth perspective.

The balanced scorecard provides a framework that not only provides performance measurements, but helps planners identify what should be done and measured. It is also a management system that helps organisations to clarify their vision and strategy, and translate them into action. It provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic performance and results.

ABE

192

Implementation, Evaluation and Control

Figure11.2: The four perspectives of the balanced scorecard FINANCIAL "To succeed financially, how should we appear to our shareholders?" Objectives Measures Targets Initiatives INTERNAL BUSINESS PROCESSES VISION AND STRATEGY "To satisfy our shareholders and customers, what business processes must we excel at?" Objectives Measures Targets Initiatives
ABE

CUSTOMER "To achieve our vision, how should we appear to our customers?" Objectives Measures Targets Initiatives

LEARNING AND GROWTH "To achieve our vision, how will we sustain our ability to change and improve?" Objectives Measures Targets Initiatives

Adapted from Robert S. Kaplan and David P. Norton, Using the Balanced Scorecard as a Strategic Management System, Harvard Business Review (January-February 1996) The financial perspective Notwithstanding earlier comments, finances are an important factor. Timely and accurate financial data will always be a priority, and managers will do whatever necessary to provide it. In fact, often there is more than enough handling and processing of financial data. However, the point is that the current emphasis on financials leads to the "unbalanced" situation with regard to other perspectives. There is perhaps a need to include additional financial-related data, such as risk assessment and cost-benefit data. The customer perspective This perspective recognises the importance of customer focus and customer satisfaction in any business. Other important measures of performance are likely to encompass aspects such as customer retention levels and service levels. These are

Implementation, Evaluation and Control

193

leading indicators if customers are not satisfied, they will eventually find other suppliers that will meet their needs. Poor performance from this perspective is thus a leading indicator of future decline, even though the prevailing financial picture may look good. The business process perspective This perspective refers to internal business processes. Measurements based on this perspective allow the managers to know how well their business is running, and whether its products and services conform to customer requirements (the mission). The learning and growth perspective This perspective includes employee training and corporate cultural attitudes related to both individual and corporate self-improvement. In a knowledge-worker organisation, people the only repository of knowledge are the main resource. In the current climate of rapid technological change, it is becoming necessary for knowledge workers to be in a continuous learning mode. Metrics can be put into place to guide managers in focusing training funds where they can help the most. In any case, learning and growth constitute the essential foundation for success of any knowledge-worker organisation.

The Application Of New Technology


Information technology is changing the process of evaluation and control by opening up new possibilities for information acquisition and analysis. Some of the more important developments in this area are as follows: The computer has facilitated the growth of sophisticated data collection and handling systems that facilitate more effective evaluation and control. Using these systems, the international business can increasingly speed up the control cycle. Information is available in real time, which enables the business to respond almost immediately to any adverse trends. In many companies, computer technology and databases are combined to provide decision support systems (DSSs), which allow managers to manipulate and analyse data at will and act accordingly. Again, such data and decision-making can be done on-line. Associated with DSS is the use of increasingly sophisticated software programs to assist managers in their planning and control processes. Developments such as Extranets, Intranets and the Internet have facilitated improved communication both within the company and between the company and the other members of the value chain. This has led, once again, to much speedier on-line decision-making. This is particularly important in international business where distances are greater and traditional methods of communication are sometimes inadequate.

ABE

194

Implementation, Evaluation and Control

PRACTICAL ACTIVITIES
1. 2. 3. Looking at the Delta Airlines case study in Chapter 1, what are the critical success factors in the international aviation industry? For the Bombardier Transportation Division (December 2010 examination). suggest an appropriate performance measurement framework. Conduct a balanced scorecard analysis with regard to Marks and Spencer to show its importance in enabling them to assess its performance.

ABE

195

Chapter 12 Management and Change in International Organisations


Contents
Introduction

Page
196

A.

The Dynamics of Change

196

B.

The Driving Forces of International Change Pressures from the External Environment Pressures from the Internal Environment

196 197 198

C.

The Nature of Change

199

D.

The Process of Change Lewins Force Field Analysis Planning Change Lewins Three-Step Model of Change Change Agents Overcoming Resistance to Change The Role of Managers

201 201 201 203 204 205 206

E.

Organisational Culture and Change Managing Cultural Change The Importance of Innovation

207 209 209

ABE

196

Management and Change in International Organisations

INTRODUCTION
All organisations are subject now to almost constant change in their environments and this means that they are also under constant pressure to change their operations, often in fundamental ways, to survive and prosper. In this chapter we consider where the pressures for change come from and how organisations can manage the process of change itself.

A. THE DYNAMICS OF CHANGE


Organisations are dynamic enterprises that are constantly changing to be able to cope with changing external and/or internal environments. The international aspect adds a further dimension and exposure to change. The management of change is difficult irrespective of whether that change is minor or major. The change process starts with the recognition of a need to change, resulting from understanding the implications of changes in the external and/or internal environments. Pressure comes from these environments for the organisation to adopt a new position. The organisational response to recognition that change is required will be to define that new position in terms of new goals, strategies and objectives, and finally new activities and methods of operation. This involves specifying: New working practices, in respect of the existing output or to accommodate new outputs; and/or New management structures, involving changes to the way in which authority and responsibility are distributed throughout the organisation; and/or New approaches to markets and servicing the needs of customers.

In theory, it is managements prerogative to introduce and impose the new position. However, this would require complete compliance from the workforce affected and this is highly unlikely. People are, in general, resistant to change where they do not see it as offering greater satisfaction, particularly where there is any uncertainty about the outcome. For change to be effective, the people affected must accept the new position before they will amend their working practices and behaviours to that required. To achieve this, management needs strategies for change, which will effectively move the organisation from the present position to the desired new position. There is a range of such strategies, which involve overcoming resistance to change through a process of involvement and participation among those affected, such that they share the goals of the new position. Increasingly, in recognition of the need for continual change in response to a turbulent environment and the fact that there will never be satisfaction with the current position, organisations have attempted to build in some degree of permanent flexibility to accommodate the ability to change. Organisational development is a process whereby certain change strategies are institutionalised into the management of the organisation to allow change to occur, so providing the means to identify and respond to environmental pressures and adapt organisational practices and behaviour on a continual basis.

B. THE DRIVING FORCES OF INTERNATIONAL CHANGE


Certain forces in the environment act as long-term drivers of change. The two main forces in recent years have been rapid changes in technology, leading in turn to shorter life spans of such technology, and the need for lower costs and increased efficiency in the face of increasing competition, often achieved by economies of scale. In addition, globalisation of markets has led to world-wide searches by companies to obtain skilled labour, raw materials, total market share, etc.

ABE

Management and Change in International Organisations

197

Nestl, for example, the world's biggest food company, improved sales growth by over 5% in the first half of 2001. This was achieved by means of what they termed their "Globe" project, which was aimed at increasing business efficiency by increased spending in launching new products as well as the planned acquisition of other companies in the food sector, particularly the mineral water and nutrition businesses. Organisational change comes about as a result of a change in strategy. As we have seen earlier, strategy is determined by organisational goals and policies, and changes in these are likely to be a reflection of pressures originating in the environment of the organisation, both external and internal. The extent to which these pressures act as driving forces for strategic change will be a function of two forces within the decision-making structures of the organisation: the strength of the threat posed to the existing goals and strategy and/or the strength of the opportunities presented for furthering the existing goals. how these are recognised by decision-makers the threats and opportunities need firstly to be recognised, but also, crucially, that recognition needs power backing within the decision-making structure such that they are converted into driving forces.

Thus, understanding the pressures requires effective environmental analysis action within the decision-making structures to effect a change in strategy.

Pressures from the External Environment


The external environment encompasses both the general external environment which we can examine through the PESTLE analysis seen in Chapter 4 and the specific environment of the market within which the organisation operates. Political/legal pressures These arise from changes in the direction of government policies which can affect the way in which regulations are interpreted (for example, in relation to planning permission), the pattern of public expenditure and the economic climate and the expression of these changes in legislation. Legislative changes have a considerable direct impact on organisations. Examples include employment law, health and safety requirements, data protection legislation, and environmental measures such as European Union packaging and recycling directives. Economic pressures These arise from changes in the economies of the countries in which the organisations operate. In the past, this might only have constituted the home economy but, as business becomes increasingly globalised, organisations are more affected by economic happenings around the world. In 2008, for example, risky lending by US banks to domestic customers (the so called Ninja mortgages) led to a worldwide credit crisis as a result of financial markets being globally linked. To an extent, economic changes interact with political changes, in that governments determine national economic policy such as interest rates, currency exchange rates and taxes that have an effect on economic activity affecting businesses. Social/demographic pressures These arise from changes in such factors as birth and mortality rates, social tastes and fashions, and public attitudes. For example, the UK has an ageing population as the birth rate declined sharply after the 1950s. Such changes have affected product and marketing decisions, so that many businesses are now targeting the affluent over-60s.

ABE

198

Management and Change in International Organisations

Changes in social tastes are often quite subtle and not immediately discernible, but do have an impact on businesses. Public attitudes towards green issues and ethics in business have also impacted on organisations. Also, attitudes towards the treatment of different sections of the population; particularly women, ethnic minorities and disabled people, have radically changed since the early 1990s. All of this has been reflected in employment law, policies, internal relationships and even the use of materials for packaging products. Technological pressures This has been the area in which most change has taken place. Continual innovations in communications and information technology provide the means to improve efficiency and open up new approaches to the conduct of business for example, the availability of personal computers, laptops and portable telecommunications linked to the Internet, company intranets and sector wide extranets has fundamentally changed working practices and has changed the ways in which business is done, opening up worldwide markets and increasing the speed of communication. This has greatly enhanced the efficiency and effectiveness of managers especially on a global level. These changes often seem to be the most difficult to adjust to because of the speed of change and the potentially revolutionary and radical effects the new technologies can have on jobs, skill requirements, and keeping up with competitors. Market pressures These arise principally from customer demands and the competitive environment. Organisations must react to these pressures and maintain at least some foothold in their markets, or they will cease to exist. Customer pressures reflect the way in which the publics expectations of both products and the way in which they interact with the organisation are changing. Thus, there has been a move in many areas of commerce and the public services for the voice of the consumer to be recognised and products to meet their needs, rather than acceptance of what the organisation may feel are appropriate products. This development of consumer power has been particularly felt in the service sector, but may also be seen in terms of the quality and price of all products that customers are prepared to accept. The actions of competitors are also a significant force, since organisations have to compete with other organisations offering the same or substitute products. Thus, competitive advantage becomes a priority and where one competitor has established such an advantage, all others in the market must adopt similar actions or innovate to develop their own. The market environment has been characterised by intense competition in recent years and this increasingly being felt on a global scale.

Pressures from the Internal Environment


Assessment of the way in which the organisation is currently operating as evidenced by performance in respect of existing objectives will exert its own pressures in the form of the identification of strengths and weakness. Change will be required to build on strengths and resolve weaknesses. In addition, though, there are other forces at play in the organisation, which may drive the organisation to change. These are in respect of the demands of external stakeholders such as shareholders. Performance The extent to which an organisation is currently achieving its objectives will naturally be a driver for change. This is most clearly felt in respect of under-performance, indicating that the current operational strategies and plans are not effective in delivering the required results and, therefore, that some change is needed either in respect of the

ABE

Management and Change in International Organisations

199

strategy and objectives or, if these are sound, in the way in which operations are designed to achieve them. Note too, though, that over-performance may also be significant, in that it shows particular strengths which it may be possible to apply in other areas to achieve similar results. With the improvements in communication and technology generally as noted above, the performance of international organisations is monitored continuously and any signs of decline in performance will inevitably lead to change. Employee demands The employees of an organisation are an important stakeholder group and their interests, and particularly the way in which they may be expressed and promoted, represent significant pressure that needs to be responded to. The interests of employees are often thought of purely in financial terms, through demands for increases in pay, but there are also strong demands for changes in working conditions and activities, which are seen, as basic to their satisfaction. The commitment and motivation of staff may well be seen as critical success factors in themselves, and attention needs to be paid to these pressures. Innovation Innovation is defined as the development of new ideas or products, which have an impact on the operational procedures, and practices of the organisation and its outputs. These may develop inside the organisation itself, perhaps in a research and development division; but they most often occur outside the organisation and are taken up by it through the identification of new applications relevant to the organisations own circumstances. This is slightly different to the reaction to competitive pressures. It refers to the capability of the organisation to develop its own innovations which will provide competitive advantage. Not all such innovation comes from deliberate searching for new products, but may arise naturally from the actions and concerns of staff in identifying possibilities. Any or all of the above pressures may be a driving force for organisational change. However, we must also note the way in which the strategic reaction to them may itself bring about clearly identifiable drivers. These may be seen in the form of strategic imperatives which underpin the direction of the organisation. Chief among these is the imperative of quality, where the introduction and maintenance of quality as an organisational driver implies substantial change to the input, operational and output requirements of an organisation. It is common for organisations to react to pressures emanating from the environment. However, the problem with reactive management is that the organisation is always behind the game, trying to catch up with events elsewhere. What is more effective is for organisations to constantly scan their environments in order to try to anticipate and predict change so as to be more proactive and hence more in control of events.

C. THE NATURE OF CHANGE


The problem for many organisations is not that they need to change, but that they do not see any need for change. This is especially true for organisations which have been successful in the past and cannot see why they should change what they see as a winning formula with which everyone has become safe and comfortable. Gardner says of this phenomenon that: Most organisations have developed a functional blindness to their own defects. They are not suffering because they cannot solve their problems, but because they cannot see their problems.

ABE

200

Management and Change in International Organisations

And Galbraith, the famous economist, comments that: Faced with the choice between changing ones mind and proving that there is no need to do so, everybody gets busy on the proof. Thus, one of the most typical initial effects on organisations of the need for change is to deny that it is necessary! However, sooner or later the organisation has to react to the changes in the business environment and make internal changes. This will almost always necessitate changes to operational and administrative systems, structures and procedures. Change may sometimes be forced upon organisations by a sudden change of circumstances, but in most circumstances there is some control over the pace at which change occurs. As far as a general approach to introducing change goes, there are two basic possibilities: The earthquake approach, where changes are made in the shortest possible period. The spread approach, where change is staged and each new function/process is allowed to settle in before the next one is introduced, thus spreading the whole change over a relatively long period.

The earthquake approach is quite common, usually coinciding with the appointment of a new manager, a merger of two companies, or a move to a new site. The main advantages of this approach are that it minimises uncertainty about the future and enables all the problems inherent in change to be addressed together. Also, when carefully managed, it can create a dynamic and exciting environment, provided that the organisational culture for innovation and dynamism is already present. If this is not the case, this approach can easily destroy harmonious and productive relationships. Rapid changes are often perceived as threatening and, although the timescale may leave little room for the build-up of resistance, in the longer term resentment and suspicion may lead to future problems. In contrast, the spread or incremental approach minimises the change at each stage and this is likely to be more manageable. In addition, for most people, this incremental approach is more likely to win support more quickly by allowing time for communication, questions and reassurance. However, time may allow resistance to build up and barriers may need to be overcome at each stage. The ability to use this approach will depend upon the nature of the change being implemented some types of change cannot be approached in this way. Timing is just as important as speed. Actions need to be taken at a time appropriate to both the challenge facing the organisation and the acceptability of the outcomes to those affected. The outcomes of the change need to be seen as appropriate to the challenge in order to maintain credibility, and this will require a period of reflection to devise such outcomes. There are often hidden challenges associated with change. It would be rare for all the effects of a change to be predicted with 100% accuracy, and in most cases a period after a change is required for adjustment and consolidation so that minor difficulties can be addressed. The bigger the scope of the proposed change, then the greater the risk of unpredicted difficulties will be. Thus, in considering issues of time associated with change, the whole process must be considered, not simply the change event itself.

ABE

Management and Change in International Organisations

201

D. THE PROCESS OF CHANGE


Lewins Force Field Analysis
A good point to start is Lewins force field analysis developed in the late 1940s. Simply put, this states that all organisations are subject to competing forces in respect of change: driving forces compelling change, which arise mainly from the external environment of the organisation (both general and specific), but also from the internal environment in terms of performance results and aspects of the organisations resources; and restraining forces, which seek to resist change and maintain the status quo, and here we can identify such features as organisational inertia, vested interests of groups and the fears of individuals, etc.

Lewin maintained that the present state of any situation is an equilibrium between the forces for change and the forces resisting change. This represents the status quo. This position may be shown diagrammatically as follows, with the strength of the forces represented by the length and thickness of the arrows. Figure 12.1: Force field analysis S T A T U S Q U O

Driving forces

Restraining forces

To change the status quo to a new desired condition, it is therefore necessary to increase the driving forces, to decrease the restraining forces, or to do both. Although managers tend to think in terms of increasing the driving forces, such increases, according to Lewin, are likely to provoke a corresponding increase in the resistance forces. Hence, movement towards the desired state is achieved more easily by reducing the resisting forces, rather than by increasing the driving forces. In other words, the best way to get the change accepted is to identify those things/persons which are resisting and look for ways of satisfying their needs, etc. The pressures for change may be so strong that continued resistance threatens the very existence of the organisation itself. Where the driving forces are strong, accentuating them may be an effective strategy for overcoming resistance. The identification of all the forces, their strengths and how they may be modified provides a diagnostic tool which can help in developing the key actions which need to be taken in order to solve the problem of introducing the change.

Planning Change
Change presents a threat to the status quo and powerful forces will exist in any organisation to resist the implications of this. Management needs, therefore, to treat change in the same way as other decisions and adopt a systematic approach to considering all its aspects before implementing the agreed strategy in a planned manner.

ABE

202

Management and Change in International Organisations

(a)

Identify the required changes Organisational change is a response to new goals or strategies, themselves arising as a response to changes in the environment. This will give the direction to change, but that general direction needs to be made specific through three stages. Respecification of objectives to provide the basis for planning. This will involve setting timescales within which the changes are required to be completed, such that the new goals and strategies may be fulfilled. Careful analysis of the current position and identification of the factors/elements which are no longer appropriate in meeting the objectives. This may be in terms of activities, methods of decision-making or in the behaviours (or, indeed, numbers) of staff. Specification of the new position the outcomes of change in relation to those aspects of the current position which are no longer appropriate. This will involve drawing up detailed plans for revised operational activities and management structures, and establishing exact requirements in terms of behaviours.

(b)

Identify and involve those affected Organisations are made up of people and, as we have seen, change will affect them in many different ways. It is generally agreed that staff have the right to know of changes which will affect their working lives at the earliest opportunity at which it is feasible to do so. This may be constrained by issues of confidentiality and sensitivity, and concern over what form resistance may take. However, staff will have to know in the end and it is more than likely that the informal channels of communication (the grapevine) will carry elements of the news anyway. It is, therefore, beneficial in the long run for management to establish open communication with those affected, keeping them informed and seeking their ideas and suggestions for strategy and implementation. In this respect, this stage may run parallel to the first stage and certainly continues through those that follow.

(c)

Identify and select the best overall strategy Management needs to consider the best way of implementing the changes the means by which the operational outcomes identified may be brought about. Initially, this will involve agreeing strategies which will overcome any resistance to change. There are a number of models and approaches available to draw on in developing the overall parameters for a plan of implementation. We shall consider these in the next section of this chapter.

(d)

Draw up and implement detailed plans Within the agreed strategy, the exact means by which the change to the new position is to be achieved must be established. This will involve decisions on the length of the changeover period and the programmes necessary to train staff in the required activities and behaviours. Control of this process is essential since the credibility of management may be affected by the way in which plans are implemented. The financial costs need also to be addressed. Change can be expensive, but is rarely an area in which savings may be made, since such savings are likely to be outweighed by the costs of not implementing change effectively, both financially and in terms of goodwill among staff and external stakeholders.

(e)

Review and evaluation As in any process there should be a review stage in which effectiveness is evaluated. There are two aspects to this: The effectiveness of the new position in achieving the required objectives.

ABE

Management and Change in International Organisations

203

The effectiveness of the process itself in enabling a smooth transition with minimal disruption to operations and the morale of staff.

This rational model of the change process is similar to the overall approach to planning that we discussed in an earlier chapter and, as such may be criticised on the same basis that it does not reflect the reality of incremental change and the emergence of change strategies, rather than their deliberate planning. However, it provides a useful structure to understand the different elements involved in the process and is also, perhaps, a more valid description of what actually happens (at least at the operational level) than was the case with strategic planning.

Lewins Three-Step Model of Change


Lewin worked on assessing the extent to which organisational change might be resisted by members of the organisation, notably employees and managers, as we saw earlier when considering force field analysis. His work on group dynamics has resulted in what is known as Lewins Three-Step model, which is frequently used in change programmes. Introducing a programme of change into an organisation tends to arouse expectations in those involved; and so a subsequent failure to come up with the goods can lead to a state worse than it was before the innovation, because of these hopes and expectations not being realised. Therefore, Lewin considered that attention should not simply be focused on the change itself, but should address what happens both before and after. The three steps of the process are unfreezing, changing and refreezing. Step 1: Unfreezing The first step is to create the motivation for change in the workforce. This part of the process is often neglected and is associated with breaking old patterns of behaviour the existing culture so that new patterns can be established. People should know why they are required to change and be committed to it (or at least understand the need for change) before they can be expected to implement change. To unfreeze the resistance to change, managers must increase the tension and dissatisfaction with the present, and enhance the desirability and feasibility of the alternative. This stage is therefore associated with the communication process, and should incorporate such matters as The reason for the change The benefits to the organisation likely to accrue from the change Who is involved The benefits to individuals from the change.

Step 2: Changing Change is concerned with identifying what the new behaviour/process/procedure is or should be, and encouraging individuals and groups to adopt the new behaviour, etc. It involves the development of new responses by staff, based on the new information being made available to them, and moving them towards the new culture as necessary to fit the strategic requirements of the organisation. Step 3: Refreezing This final stage encompasses consolidation or reinforcement to integrate the changes made and stabilise the new culture in order to prevent people slipping back into the old one. Ideally, reinforcement should be positive in the form of praise or reward for adapting to the new circumstances, but occasionally negative reinforcement, such as sanctions applied to those who fail to comply, may be imposed.

ABE

204

Management and Change in International Organisations

Some of the ways of reinforcement include: Setting up employee suggestion schemes Giving staff a greater input into the decision-making process Implementing schemes which reward good effort, such as staff member of the month Creating team spirit through company identification schemes such as logos, advertising T-shirts, etc. Producing company newsletters. Making managers more visible, for example by open door policies.

The process as a whole is achieved through leadership, communication, education and training. The hearts and minds of employees can only be won over by good leadership and training. Effective training can be used to create a major change in the attitude of employees, which must then be made permanent by creating the necessary structures, procedures and incentives to support the new culture.

Change Agents
In chemistry, the speed of a chemical reaction can be increased by the use of a change agent or catalyst. Such a catalyst increases the rate of the chemical reaction, but is itself not used up during the reaction. It is used over and over again to speed up the conversion of reactants to products. Different reactions need different catalysts. In a similar way, organisations can speed up and facilitate the change process by the use of change agents. These may be classified into three groups. New blood or new ideas This is the process of developing new ways of thinking and new approaches by introducing forces for innovation into the organisation. This can be achieved either through promotion or retraining of existing staff (and training is likely to be an important element of any change programme) or by bringing in people from outside, by recruitment into key roles or by the use of external consultants. Change agents can also be the formation of task groups made up of existing staff (with or without external advisers), quality circles, etc. The practice of downsizing reducing staffing numbers can also have this effect in that new opportunities are opened up and new power relationships develop. Structural or systems change This is the reorganisation of existing functions, processes and procedures. This has been a preferred technique by central government in respect of certain parts of the public sector, notably in the reorganisations of the health service and of local government. Increasingly, decentralisation and outsourcing are being seen by management as the keys to change in the pursuit of effectiveness, involving a breaking down of existing decision-making processes and power relationships. This is the approach taken by business process engineering. Resource allocation This is the application of financial constraints (usually) or pump priming to effect a reorientation of focus in particular operational areas. Again, this has been a feature of central government action, not only in the general constraints on public expenditure, but also in the areas of developing spending, either on broad service areas (for example, law and order) or in particular parts (such as youth training).

ABE

Management and Change in International Organisations

205

Overcoming Resistance to Change


Resistance will be overcome when it is accepted that the new position after the changes will satisfy the needs of those interests, groups and individuals who feel threatened by the change. The achievement of this acceptance is, therefore, the driving force for strategies of change. Indeed it has been noted that most employees of an organisation will recognise the need for change it is the end result that they are concerned with. In order to accept change, people have to fully understand the requirements of the new position the new objectives and their organisational implications in terms of both what it means in respect of new activities, relationships and behaviours, and how those new activities, relationships and behaviours can result in the satisfaction of their needs. The key to this process lies in involvement. People need to feel that their interests are a valued element in the change process and that there is an opportunity to have those interests heard at all stages in the process of change. Although change is generated by senior management, successful change comes through a participative approach. Listening to peoples concerns and acting upon them, and providing the support, advice and assistance to enable people to cope with the change, will all help to ensure motivation and acceptance. It is important that participation is genuine and not something the top orders the middle to do from the bottom. For participation to be successful there has to be genuine support from all levels and a prevailing culture of participation. An argument against participation is that it is a long, slow process and adds enormously to the timescale. It needs flexibility in the plan and a willingness to change original ideas. To make a major change usually seems to take about 18 months. However, it has been argued that people will take this time to adjust to change anyway. If you change fast, without consultation, you will go through 18 months of frustration, conflict, low productivity, absenteeism, and other signs of low morale. When participation has been introduced into the decision-making processes of the organisation in this way, it is difficult to revert to autocracy without causing a great deal of confusion and frustration among staff. The use of pilot projects, particularly in a global organisation, can assess the impact of changes. This approach to the process is based on gaining acceptance through experience over a period of time, taking advantage of the concepts of both participation and slow pace. Pilot projects involve the introduction of change on an experimental basis and for a defined period, on the understanding that the experience will be evaluated at the end of the period. Subsequently, permanent changes may be made if the project was successful, incorporating any amendments which become apparent in the review process. The advantages of this method are: It solves unforeseen snags It reassures less confident people that the scheme works before they are required to commit to it Anticipated problems may not arise. It is unwise if employees are to participate in the final decision The time of tension and uncertainty is prolonged It usually involves closer supervision Employees may sabotage the trial What worked in the initial trial may not work when the plan is extended.

The disadvantages are:

ABE

206

Management and Change in International Organisations

The Role of Managers


We live, according to Charles Handy, in an age of uncertainty, and managing that uncertainty therefore becomes a key part of any managers role. It is important to recognise that the manager has a number of different hats to wear when considering the issue of change. The manager: may be directly involved in deciding that change is necessary and what that change should be will have a role in planning and implementing change strategies will be responsible for the people aspects of change, minimising the problems, smoothing the transition towards change and helping staff prepare for and cope with change.

Change will also impact on the manager him- or herself. Managers are subject to the same personal fears and uncertainties which lead to resistance to change in others and their own needs must be recognised and addressed by their own managers. The personal traits and characteristics of managers may play a big part in their ability to successfully implement change. There is the potential of individual managers to act directly as change agents as mentioned earlier.. There are two further aspects to consider here: The role of the manager in providing the vision and leadership within his or her group to support change. The management of conflict which may occur as part of the change process.

Change is not something that can be imposed, except in exceptional circumstances, and we have seen that successful change comes through a process of involvement and participation such that employees feel their needs and interests are being appropriately addressed. When combined with the organisations own requirements for achieving efficiency and effectiveness in the new position, this emphasises the need for managers to provide leadership which is characterised by both strong task and relationship orientations. Task orientation refers to the degree of emphasis given to the organisations goals through getting the job done, decision-making, work organisation and control, etc., whereas relationship orientation refers to the degree of concern for group and individual goals expressed by the leader through interaction with members of the group. Giving equal emphasis to each would see the manager seeking to accomplish change by a committed staff, where workers and the organisations goals are the same. Concern for the task will be expressed through a vision of the outcomes of change for the efficient and effective functioning of the organisation, and a focus on the imperatives of change and the development of effective strategies for achieving new objectives. Concern for the group and individual goals of staff will be expressed through involvement and participation in the process by which those strategies are developed and the incorporation into them of the needs of staff, in respect of both the outcomes and the process.

ABE

Management and Change in International Organisations

207

E. ORGANISATIONAL CULTURE AND CHANGE


Change is closely related to the concept of an organisations culture and so any changes which are sought will either have to be effected within the constraints of the existing culture, or seek to change that culture. The extent to which the potential barriers to change act as restraining forces will be determined by the following factors. The degree of satisfaction with the existing position of the organisation, in terms of culture, power relationships and the satisfaction of individual needs The degree to which the proposed alternatives are seen as more or less desirable and/or feasible The extent to which these are felt by strategic decision-makers either by the individuals themselves or in respect of the power and influence they may be able to exert (for example, in relation to employees withdrawing their labour or customers not buying the products).

Much of the focus of the management of change is on overcoming resistance, so a closer understanding of the operation of these restraining forces is clearly critical to the success of the process. We shall now look at each of them. Culture as a constraint An organisation tends to build a paradigm for itself which is a way of seeing itself which encapsulates the values and beliefs of its stakeholders. This has the effect of limiting what may, or may not, be readily changed in terms of strategy. Once established, the paradigm tends to be self-perpetuating, since members of the organisation are reluctant to change their core beliefs or routines. The paradigm is preserved within what Johnson has described as a cultural web of the organisations actions, in terms of: (i) (ii) (iii) (iv) (v) Stories of its past events, often exaggerated into myths and legends Its rituals and routines for example, methods for being promoted, etc. being related to the way we do things around here Symbols of status such as reserved car parking spaces, the key to the executive washroom, etc. Control systems such as head office inspections The organisational structure hierarchies, extent of bureaucracy, formality of interrelationships, etc.

All of these add up to the way in which an organisation may appear, and the way it sees itself. Thus managers faced with the prospect of having to implement strategic change tend to look to accommodate it within existing beliefs and the accepted ways of doing things. One of the commonest reasons given for resisting change of any kind is that We have always done it this way, and it is this attitude which acts as the restraining force. The object of change itself may also clash directly with fundamental beliefs in the organisational or national culture. Thus, for example, the introduction of more marketorientated goals in public service organisations may be opposed on political grounds, or the introduction of Sunday trading may be met with resistance on religious grounds. This can be particularly problematic where new values imported into a country to see through organisational change clash with the cultural norms of the host country.

ABE

208

Management and Change in International Organisations

Vested interests in the status quo These may be seen in relation to both the formal and informal organisation where proposed changes represent a potential loss of the power to influence organisational direction and/or the behaviour of people. We tend to think of this in relation to the middle and lower management levels, and to the role of employee representatives; but it may also be a restraining factor at the senior, strategic level in the organisation. Perhaps the first thing that is shown by studying resistance to change is that it is not found exclusively at one level or within one area of an organisation. It is common to think of the general workforce as being more obstructive in this respect than managers, but this is probably because there are more of them, and therefore more examples to quote. Just as familiar as the conservative worker is the middle manager who resists organisational change, the managing director who ignores the advice of his subordinates about better working methods (this can happen particularly in small companies), and the board which refuses to change policies even when current ones are clearly inadequate. Among the groups which resist change are those who consider themselves guardians of the organisation employees of long standing who know its importance to their family and their area and who do not want, for example, to see a new MD ruining it.

Role and task cultures One of the central problems here is the nature of the bureaucratic form of organisation. The rigidity of the structures and role culture make radical change very difficult, and limit flexible responses to changing requirements. For example, centralised power and decision-making are too removed from the point of impact of decision, the tall organisational structures mean inefficient and often poor communication, the dominance of rules and procedures constrain action to established practice, clear delineation of discretion and responsibility limit broader-based responses (at individual and departmental levels), reward patterns discourage initiative and risk-taking, and short-term horizons constrain planning and innovation. This type of organisational form works very well in circumstances of relative stability, but has great problems coping in periods of change. Accordingly, attention is increasingly being focused on the development of forms and cultures more appropriate to the turbulent environment of modern society. In particular, more flexible and responsive structures and cultures are seen as both a means of effecting change and of ensuring a more adaptive internal environment for the future. The model for the more adaptive and responsive organisational form is generally held to be that of Japanese organisations. These are typified by flatter structures, more participative decision-making and collective involvement, as well as a longer-term view which must be the envy of many Western organisations. The writings of Handy have also been highly influential in the pursuit of increasing flexibility. His main concern is with role cultures and the need to move towards more flexible federal role or task cultures as a means of coping with change. Central to this are two aspects commonly found in Japanese organisations: (a) Leadership as an enabling role, rather than a directing role. This means going beyond the issuing of orders and instructions to the development and sharing of vision as to what the organisation is about and what, therefore, the roles of individuals are. The dominance of persuasion and consent, rather than imposition and compliance, so reducing the traditional them and us tensions of management by accentuating the role of groups and the manager as co-ordinator of group action.

(b)

ABE

Management and Change in International Organisations

209

A constant feature of change strategies is the need to break down rigid organisational structures and introduce more flexible forms. The degree to which such forms are successful is, however, dependent on the change of culture and orientation which goes with them.

Managing Cultural Change


Changing an organisations culture is a notoriously difficult thing to do. Culture is difficult to define and even more difficult to break down into parts which can be changed. Furthermore, an organisations culture is reflected in its recruitment policies, so that individuals who conform to the old culture will have been recruited in the past, perpetuating and strengthening the very cultural aspects which subsequently have to change. Most research has shown that it can take between three and eight years to change an organisations culture. Establishing new patterns of behaviour and norms demands a consistent approach which addresses the following areas: Top managements active involvement and commitment Managers must be seen to adopt the new patterns of behaviour, not just directing others to do so There must be positive support for new behaviours, preferably including recognition (perhaps through an appraisal system) and/or rewards for adopting new patterns of behaviour Recruitment and selection procedures and policies may require reviewing to ensure that individuals who will conform to the new patterns of behaviour are recruited The new behaviours must be clearly communicated to existing employees and to new employees via an induction programme Training is almost always required.

These requirements suggest the need for a pattern of change which is not simply focused on a response to a particular change event, but one which takes an overarching view to the capacity of the organisational culture to accommodate change in any circumstances. This approach may be affected through the process of organisational development.

The Importance of Innovation


For organisations to survive in todays increasingly turbulent and fast-moving markets, they need to constantly innovate and find new ways of beating the competition. For this to happen, they must have creative and flexible people and the organisational culture must be founded on a belief in controlled risk-taking, experimentation, and learning. To be innovative, organisations need to develop their structure, culture and technology. Functional structures often lead to thinking in drainpipes and to departmentalised thinking and behaviour. Empire-building is common. Divisional structures lead to more identification with customer requirements, products or geographical area, but may fail to see the potential in ideas because of their limited focus. Matrix or team structures are more likely to result in synergistic working and the cross-functional dissemination of ideas. In terms of culture, there needs to be support, encouragement and incentives for creativity for example, the Google organisation fully recognises these needs and incorporates creativity into its organisational/HR ethos at all levels. If these are absent from an organisations culture, its people are likely to keep ideas to themselves or, at worst, take them elsewhere: to a competitor, or to start their own business in competition. There also needs to be a learning attitude to failure, rather than looking to

ABE

210

Management and Change in International Organisations

shoot the person who has failed. If organisations constantly look for scapegoats for failures or mistakes, this will invariably lead to people not bothering to try anything new and simply keeping their head down and maintaining current activity. Similarly, innovators rather than maintainers need to be seen to be valued i.e. promoted or financially rewarded. Organisations particularly operating on an international scale such as Toyota that has research and development centres located across the globe, need to use their intranets or IT systems collaboratively to design and develop new ideas, to share knowledge and to enable successful innovation.

PRACTICAL ACTIVITIES
1. Consider recent changes that have occurred in the external environment of the fast food multinational company McDonalds. How has the company adjusted to these changes and how successful do you think it has been? Mergers and acquisitions are a major cause of organisational change. What could have been the likely cultural reactions arising from the takeovers of Gateway and Packard Bell by Acer, and the takeover of Cadbury by Kraft Foods?

2.

ABE

211

Chapter 13 Analysing the Case Study and the Examination


Contents
Introduction

Page
212

A.

Conducting the Analysis Structuring the Analysis Evaluating the Case Study Information Designing Solutions

212 212 213 215

B.

The Examination Preparing for the Examination Tackling the Questions Formal Requirements Grading Criteria

216 216 216 218 218

ABE

212

Analysing the Case Study and the Examination

INTRODUCTION
In this final chapter we look at the actual analysis of the case and then detail how you should approach the examination.

A. CONDUCTING THE ANALYSIS


The case study in which you will be examined will describe a situation relating to an organisation, dealing with a range of international business issues that should be viewed at a strategic level. You may be asked, in the examination, to analyse what has happened to cause the current situation and any issues that are apparent. You may be asked to consider what will be the result if the current situation is allowed to continue without adjustment and/or, by predicting alternative paths in future operations, offer strategic or operational solutions. Often you will be asked for alternative solutions. The best way to approach this is to prepare your response in the form of a plan. This will incorporate predictions of what may happen as a result of following different courses of action, with recommendations for which course of action should be adopted. In order to prepare for this, you will have to go much further in your analysis of the case than just the initial reading. Here, we suggest some of the considerations to be borne in mind in doing so.

Structuring the Analysis


In essence, the analysis should seek to determine: (a) What is happening and why What should be happening How the situation may be remedied. Evaluation of the data and information provided Here you should be isolating the relevant information and assessing and organising it so that the you get a detailed and clear picture of the situation. This is the audit (structured evaluation of the organisation). There are many audit frameworks that are available in helping you to carry out a structured analysis. The most common frameworks are SWOT, PESTLE, the 3 Cs, Porters Force Field Analysis, McKinsey's 7Ss and the value chain. Bowmans Clock provides a useful way of categorizing the situation with regard to strategy. By applying these frameworks you will be able to have a clearer idea of the key elements, driving forces and success factors that make up the sector. Take care when doing your analysis to provide clear understanding and insight. For example in your SWOT analysis, prioritise the points you make under each section and avoid writing long lists that are not fully explained. (b) Identification of the key issues, challenges and problems From your evaluation, you should be in a position to clarify the key issues in the situation. Remember that these may not necessarily be specific issues, but may also include potential emerging issues that maybe described as challenges, difficulties, threats or opportunities.

The stages in making this determination are as follows.

ABE

Analysing the Case Study and the Examination

213

(c)

Analysis of the issues This should detail the evidence associated with the key issues i.e. the causes which will need to be addressed in seeking solutions. These may be organisational (structure, management, governance), process and procedural (including systems), strategic or policy related, resource driven (including finance and personnel) or operational. Whilst there will be a concentration on weaknesses, do not ignore strengths it is often these which can be built upon in proposing solutions.

(d)

Identification of possible solutions Now you need to get your creative hat on and think what can be done about the issues you have identified. It is unlikely that there will be just one solution, so you need to consider what alternative approaches may be possible and what the outcomes of these may be. You should try to predict the results of pursuing different courses of action, taking into consideration potential different circumstances in which they may be played out (contingencies). You should also be thinking about which are the best solutions in different circumstances, and how you would justify recommending one course of action over another. However, do not get too fixated on particular solutions as the circumstances in which you may need to make a decision will be dictated by the questions in the examination, rather than just the information in the case. What is important is that you have considered a range of possibilities and can then bring them into play in the examination when you see exactly what is asked.

Evaluating the Case Study Information


You need to build up a detailed body of knowledge about the situation, and this will need to go further than just the information and data presented to you as the case study. You will have to work out what that information and data is telling you about the situation. Key considerations in this evaluation include the following. Concentrate on the facts Ask yourself whether the information provided is entirely factual. You may be presented with opinion in the form of commentaries on the situation or anecdotal evidence supplied by persons involved in the company. How significant is this? Apart from the validity of information, there is also the relevance of the material to the main features of the case and its issues. You must ask yourself whether the information is relevant to the analysis or is necessary only to provide a total description of the situation and events, i.e. mere "padding". In addition, you need to retain objectivity in your assessment of situations and events. Everything you use to build your analysis must be supported by evidence even assumptions about what you might consider to be the case must be backed by evidence which suggests that your interpretation is true. Note that, when you come to proposing particular courses of action, these too must be supported by evidence and not simply your own personal opinion or what you consider right. Don't expect everything you need to be presented to you You are likely to have to look beyond the evidence presented to identify some of the issues. What you are given may well just be the symptoms and you will need to use the information to look for the underlying issues or issues. It requires the capacity to interpret data and combine qualitative with quantitative assessments, to see a problem clearly and objectively. Note that the case may not be full of unsolved issues. You may need to look for potential difficulties and challenges with ways of tacking future issues.

ABE

214

Analysing the Case Study and the Examination

Use knowledge and techniques from different disciplines Whilst the case study is very much set in the context of international business, do not limit yourself to just using the knowledge and skills built up in this manual. Business success depends on the effective interdependence of all the different aspects, which make up the total enterprise, and you should similarly apply your broad understanding of the business world to the case study. That means bringing in concepts and techniques from other disciplines such as economics, law, quantitative methods, and financial management. The information given in the case may be sufficient in some respects, but there may often be parts of it, which, as they stand, are inadequate to make a judgment. This is particularly so in the provision of quantitative and financial data. You need to assess any performance figures given to you in the case and consider whether you need to obtain more sensitive indicators, both operating and financial. For example, sets of figures and general summaries may not necessarily identify trends or the extent of change. The use of key ratios to indicate operational or financial performances should be computed where possible from the information given. (Note that the use of such techniques in support of judgments will indicate to the examiner the extent of your analysis.) This is also true when you come to considering possible solutions to issues. For example, consider whether there is scope for building performance models to demonstrate the results to be expected from alternative solutions, by using available statistics. Could you forecast, by extrapolation and suitable weighting, the effect of variables and different contingencies on results?

Consider interrelationships between elements of the case Organisations consist of series of interrelated activities, and often it is success at the interface between such activities or systems which determine effectiveness in overall performance. So, consider how the different elements of the case fit together to produce the overall picture and do not just look at them in isolation from each other. For example, an expansion of business will mean an increase in labour and may lead to issues such as recruitment, skills shortages and training.

Think about the availability and application of resources A company operates by setting objectives, and to fulfil the objectives there must be planning. For plans to be successful, they require adequate resources, and those resources need to appropriately applied. Optimum utilisation of resources and the avoidance of issues rest with skilled management. You need to consider all aspects of this use of resources are they adequate to meet the objectives, can additional resources be obtained, how successful is their current management. The so called 5 Ms Money, Machinery, Men, Minutes and Means is a good framework to bear in mind.

Consider strengths and opportunities as well as weaknesses and issues When assessing the current situation, do not just look for issues, but consider the strengths of the business and the opportunities that are available. For example, the financial position may be strong (although possibly under-utilised), the market position held by the company may be dominant (despite issues elsewhere) or the competition may be weak or have its own issues. From strengths arise opportunities/challenges to exploit those strengths and develop the company's position.

Don't lose sight of the environment Companies operate in competitive markets which are subject to change and can be affected by a wide range of variables. These present threats and opportunities. In

ABE

Analysing the Case Study and the Examination

215

assessing the current situation, you need to think carefully about the environment within which the company is operating and how this impacts now, and may impact in the future, on both the company's policies and its operations. Remember the PESTLE analysis as a means of analysing the environment. Consider also the competitive environment in terms of what the main competitors are doing and how they are likely to react to your actions. The Porter Five Forces analysis will lead you to an informed judgement in this area.

Designing Solutions
When you have completed your analysis of the current situation and identified what you see as the key issues whether they are current or potential future issues, or possible opportunities which may be exploited you need to think about what needs to be done to achieve the best results for the company. The key questions are, how can the present situation be changed and what will be the result of those changes? Some of the considerations to bear in mind in answering these questions include the following. Consider possible alternatives A determination to find one way of resolving a problem situation with the certainty it would be the right one ignores the fact that, in a dynamic industrial organisation, many variables have to be taken into account which may lead to the possibility of more than one solution. There is rarely one simple solution to a problem, and the complexities of organisations mean that you may find a number of ways in which the issues may be dealt with. These may also be applied in different combinations to address multiple parts of the issues. Work with the information you have You only have the information provided, and any assumptions that you can justifiably infer or deduce from that information, to go on. When making any assumptions state the basis for these for example, in the case of Acer any future plans will depend upon the political situation with regard to the Peoples Republic of China and Taiwan being resolved equitably. Any future courses of action proposed, then, must fit that information. Predict the outcomes of courses of action It is important to work through the impact of changes so that you can justify taking a particular course of action, or recommend one course of action as opposed to another. This may be by using quantitative methods to predict changes in, say, cash flows or production capabilities, or qualitative assessments of, say, the impact on working patterns and staffing. Use contingency planning Whilst you must fit solutions to the present situation as described in the case study, it is also important that you consider how the situation may develop (using the information provided as your starting point, but also bringing in your own understanding of the circumstances surrounding the case). Any solutions will need to stand up in the future situation, so you need to test outcomes against a range of potential future scenarios. This is the basis of contingency planning what will happen if ?? The best way to encapsulate your analysis and thoughts about future strategy is to make a business plan. This will help bring your analyses of both the macro and micro environments together, and lead to the development of strategies and functional plans human relations, marketing, finance, and operational aspects.

ABE

216

Analysing the Case Study and the Examination

Planning is one of the key parts of this subject and the themes of the case study will reflect the overall planning nature of the syllabus. (The other key parts are the continuing drivers/aspects of globalisation, the volatility of the global environment and organisational responses).

B. THE EXAMINATION
As always, careful preparation before entering the examination room is the key to success. If have undertaken a thorough analysis of the case and have a clear idea of how to address the global issues involved, you should be confident in your ability to succeed. Many students work in groups with others in producing analyses. This can be an efficient way of processing the information, but to make it effective it is important that you personally fully understand the content and conclusions from these analyses. By the time that you enter the examination room you should have developed an insider view of the organisation, so that any strategies and plans will show good insight and understanding.

Preparing for the Examination


Since you receive the case study several weeks ahead of the examination date, you will have plenty of time to analyse the case and build up your understanding. It is important to ensure that the results of your analysis are at your fingertips when you go into the examination room. As this is an "open book" examination, you are allowed to take any material which may help into the examination room. This can be your own notes, books or any other printed or copied material you have acquired. You should ensure that such materials are well organised so that you can access the information you need about any aspect of the case quickly and easily. You might, for example, use a system with a number of headings such as company situation, environment, threats, opportunities, specific problems/solutions, financial and quantitative analyses and detail both the facts (and your interpretations of them) and your ideas under each. Make sure that all your thoughts and ideas about the case are written down do not simply rely on your memory to recall them in the examination room. Even just a couple of words in your notes can be enough to jog your memory. You may find it helpful to try to predict possible questions and note them with the points which you consider would answer them. Ask yourself what points you see as particularly suitable for questioning there will usually be a number which seem obvious, and these are likely to emerge from your analysis and identification of the key issues. However, do not place so much emphasis on this that you ignore other areas. There are no guarantees that your prediction of questions will be right and you need to be prepared for whatever is asked of you.

Tackling the Questions


What is expected of you in answering the questions? It is required that you bring to the analysis: A sound knowledge of the International Business syllabus and all related subjects, and that you apply their essential theories, principles and techniques to a realistic business situation. The ability to identify issues and provide a solution or alternative solutions if appropriate to the problem, and make a recommendation which can be justified.

ABE

Analysing the Case Study and the Examination

217

The communication skills to produce a logical, clear analysis, and, if necessary, present a well-written report, i.e. legible and free from grammatical and spelling mistakes.

You have no doubt been urged many times to read the examination questions carefully for their meaning and extent, and to answer directly what the question requires. This exhortation bears repetition. And finally, here are a few more pointers to getting the right approach to answering the questions: Plan to use the time allowed to give adequate time to each question. In the examination room read the question carefully to see exactly what is required. Remember, at this level, you will be required to show a high level of critical evaluation and application. Answer the question as set. Make sure that you are aware of all the aspects asked for for example, in the June 2010 case (Bombardier) the question covering the international environment was in two parts and specifically called for an evaluation of the major threats and opportunities. Some students have tried to guess the questions and have produced prepared answers that do not match the actual requirements of the question with a low level of success. Plan the content and structure of each answer. Marshall your main points and give brief explanations, supported by examples of techniques and data charts where relevant and helpful. Support your diagnosis of the issues or issues with relevant evidence, using facts and figures derived from your analysis. Remember that the purpose of the case study is to examine your ability to apply frameworks and business models to an assessment of the case, rather than your ability to recall facts and theories. There is absolutely no need to repeat large chunks of the case study materials in your answers, which is often done with regard to the financial information. Your focus should be on the meaning of the figures as demonstrated by relevant calculations and ratios. It is also acceptable to refer in your answers directly to the relevant parts of the case for example, "see page 4, paragraph 3". Note, too, that any theories, models and frameworks mentioned must be applied to the case. There will be no marks given without application. Treat the impulse to make assumptions with care, be objective and seek to link any assumptions with evidence. However, if you have to answer a question in the examination on which you think that sufficient factual information has not been provided in the case, your answer may be subject to assumptions which you have had to make to proceed with the analysis. Clearly state your assumptions in your answer and justify them as far as you can by related evidence. Justify recommendations by reasoned arguments, again supported by facts and figures (including projections). Do not assume the examiner can read your mind explain your answers. Relevant examples of international practice from other industries and organisations can be useful in adding understanding and clarifying to your answers. Plan the presentation clearly written in short paragraphs in logical order, using figures or diagrams where appropriate. It should always be businesslike and have the clarity of communication that one would expect at the advanced level. Take care with your presentation make sure your handwriting is legible.

ABE

218

Analysing the Case Study and the Examination

Formal Requirements
The formal requirements in respect of the examination are as follows: 1. 2. 3. 4. 5. 6. 7. You should acquaint yourself thoroughly with the case study before the examination. You must take your copy of the case study into the examination. Time allowed: 3 hours. Answer ALL questions. All questions carry different marks. Note the mark allocation and allocate your time accordingly. Calculators are allowed. This is an open book examination and you may consult any previously prepared written material or texts during the examination. You must not insert such material into your answer book. Only answers that are written during the examination on paper supplied by the examination centre will be marked. Candidates who break ABE regulations, or commit any malpractice, will be disqualified from the examinations.

8.

Grading Criteria
You should also find the following table, which sets out the criteria for grading the case study (and cites good and bad examples), useful.

Grade

Knowledge and Comprehension Quotes appropriate theoretical knowledge e.g. theories and techniques. Demonstrates adequate comprehension of knowledge, e.g. by use of illustrative example, analogy or explanation.

Analysis and Application Applies theories/principles correctly to the circumstances quoted. Analyses the situation and inter-relates material from various parts of the case. Considers and evaluates alternative solutions where these exist. Evaluation leads to selection of a feasible solution (not necessarily the 'best' solution).

Communication Skills

1 (Distinction)

Logical structuring of the entire answer. Analysis and evaluation are developed comprehensively, i.e. no faults or gaps in the logic. Answer is well laid out, well presented (use of headings, illustrations, tables, etc) and well written (legible, grammatically correct and effective style of writing).

ABE

Analysing the Case Study and the Examination

219

Grade

Knowledge and Comprehension Quotes appropriate theoretical knowledge e.g. theories (correctly attributed), principles and techniques. Demonstrates adequate comprehension of knowledge, e.g. by use of illustrative examples, analogy or explanation.

Analysis and Application Application of theories/principles shows some weaknesses, e.g. failure to recognise all limitations or to use all evidence available. Alternative solutions are not fully evaluated, even if the 'right' solution is reached.

Communication Skills

2 (Very good pass)

Logical structuring of the entire answer. Analysis and evaluation are developed comprehensively, i.e. no faults or gaps in the logic. Answer is well laid out, well presented (use of headings, illustrations, tables etc) and well written (legible, grammatically correct and effective style of writing). Answer is adequately presented, given the limitations of analysis and application. Structure is poor, although knowledge is reasonably clear. Grammar is at a marginal level.

4 (Marginal fail)

Shows a reasonable grasp of basic theories/principles but some elements appear to be lacking. Comprehension is not fully proven, e.g. basic facts are quoted (correctly) but not explained, no illustrative examples used.

Circumstances inadequately analysed and hence fails to recognise major issues which need to be considered. Does not demonstrate the ability to apply knowledge which he/she obviously has in a practical way (these are common faults, often demonstrated by mere repetition of material from the case study). Poor analysis of circumstances. Applications totally unsatisfactory due to a lack of knowledge and comprehension.

5 (Clear fail)

Answer reveals fundamental gaps or misunderstandings in basic knowledge, and fails to reveal adequate comprehension even of correct theories and principles.

Answer very poorly presented, and difficult to follow.

ABE

220

Analysing the Case Study and the Examination

PRACTICAL ACTIVITIES
Select one recent case study which you have not looked at already, using the on-line examination papers on the ABE website. 1. Read it through and, without looking at the questions at this stage, prepare your initial analysis of the information supplied. Write brief notes which could be used at a later point in the tackling the questions. Now look at the questions that were asked and prepare outline answers to each. Finally. look at the suggested answers and compare your own outline answers. Then look at the relevant examiners comments. Make a note of any differences in your own answers or in the approaches you adopted. Think about how and why your answers/approach were different and make notes on how you could improve your analysis and preparation for answering the questions. Now select another case study from the ABE's website and repeat the whole process. See if you have improved.

2. 3.

Good luck with your studies and we hope that you find the case study interesting and challenging.

ABE