Global Business Management(MGT380)

Lecture #32

Revision

Global Monetary System

The international monetary system refers to the institutional arrangements that countries adopt to govern exchange rates

A floating exchange rate system exists when a country allows the foreign exchange market to determine the relative value of a currency

A pegged exchange rate system exists when a country fixes the value of its currency relative to a reference currency

many Gulf states peg their currencies to the U.S. dollar A dirty float exists when a country tries to hold the value of

its currency within some range of a reference currency such as the U.S. dollar

The gold standard refers to a system in which countries peg currencies to gold and guarantee their convertibility

in the 1880s, most nations followed the gold standard $1 = 23.22 grains of “fine” (pure) gold

the gold par value refers to the amount of a currency needed to purchase one ounce of gold

In 1944, representatives from 44 countries met at Bretton Woods, New Hampshire, to design a new international monetary system that would facilitate postwar economic growth. Under the new agreement a fixed exchange rate system was established all currencies were fixed to gold, but only the U.S. dollar

was directly convertible to gold devaluations could not to be used for competitive

purposes a country could not devalue its currency by more than

10% without IMF approval IMF and World bank

The Bretton Woods system could not work if its key currency, the US dollars, was under speculative attacks. It works well only as long as US inflation rate remained low and US did not run balance-of-payment deficit.

A new exchange rate system was established in 1976 at a meeting in Jamaica The rules that were agreed on then are still in place today; Under

the Jamaican agreement; floating rates were declared acceptable; gold was abandoned as a reserve asset; total annual IMF quotas - the amount member countries contribute to the IMF - were increased to $41 billion – today they are about $300 billion

Which one is better: Floating exchange rates provide

1. Monetary policy autonomy removing the obligation to maintain exchange rate

parity restores monetary control to a government

2. Automatic trade balance adjustments But, a fixed exchange rate system 1. Provides monetary discipline: ensures that governments

do not expand their money supplies at inflationary rates2. Minimizes speculation3. Reduces uncertainty

A country following a pegged exchange rate system pegs the value of its currency to that of another major currency

Countries using a currency board commit to converting their domestic currency on demand into another currency at a fixed exchange rate

There are three main types of financial crises which IMF tackles:

1. Currency crisis

2. Banking crisis

3. Foreign debt crisis

Currency crises: occurs when a speculative attack on the exchange value of a currency results in a sharp depreciation in the value of the currency, or forces authorities to expend large volumes of international currency reserves and sharply increase interest rates in order to defend prevailing exchange rates

A banking crisis refers to a situation in which a loss of confidence in the banking system leads to a run on the banks, as individuals and companies withdraw their deposits

A foreign debt crisis is a situation in which a country cannot service its foreign debt obligations, whether private sector or government debt

The Mexican currency crisis of 1995 was a result of high Mexican debts and a pegged exchange rate that did not allow for a natural adjustment of prices. To keep Mexico from defaulting on its debt, the IMF created a $50 billion aid package

By mid-1997, several key Thai financial institutions were on the verge of default because of speculation against the baht. Thailand abandoned the baht peg and allowed the currency to float

All IMF loan packages require tight macroeconomic and monetary policy

However, critics worry the “one-size-fits-all” approach to macroeconomic policy

is inappropriate for many countries the IMF is exacerbating moral hazard - when people

behave recklessly because they know they will be saved if things go wrong

the IMF has become too powerful for an institution without any real mechanism for accountability

Currency management, Business strategy, Bus-Gov relations

Global strategy

A firm’s strategy refers to the actions that managers take to attain the goals of the firm

Profitability can be defined as the rate of return the firm makes on its invested capital

Profit growth is the percentage increase in net profits over time

Expanding internationally can boost profitability and profit growth

It is measured by a firm is measured by the difference between V (the price that the firm can charge for that product given competitive pressures) and C (the costs of producing that product)

The higher the value customers place on a firm’s products, the higher the price the firm can charge for those products, and the greater the profitability of the firm

Profits can be increased by: adding value to a product so that customers are willing to

pay more for it – a differentiation strategy ------lowering costs – a low cost strategy

Michael Porter argues that superior profitability goes to firms that create superior value by lowering the cost structure of the business and/or differentiating the product so that a premium price can be charged

To maximize long run return on invested capital, firms must: pick a viable position on the efficiency frontier configure internal operations to support that position have the right organization structure in place to execute

the strategy

Value creation activities can be categorized as primary activities (R&D, production, marketing and sales, customer service) and support activities (information systems, logistics, human resources)

International firms can: expand the market for their domestic product offerings by

selling those products in international markets realize location economies by dispersing individual value

creation activities to locations around the globe where they can be performed most efficiently and effectively

realize greater cost economies from experience effects by serving an expanded global market from a central location, thereby reducing the costs of value creation

earn a greater return by leveraging any valuable skills developed in foreign operations and transferring them to other entities within the firm’s global network of operations

Firms can increase growth by selling goods or services developed at home internationally; The success of firms that expand internationally depends on the goods or services they sell, and on their core competencies (skills within the firm that competitors cannot easily match or imitate); Core competencies enable the firm to reduce the costs of value creation and/or to create perceived value in such a way that premium pricing is possible

When firms base each value creation activity at that location where economic, political, and cultural conditions, including relative factor costs, are most conducive to the performance of that activity, they realize location economies (the economies that arise from performing a value creation activity in the optimal location for that activity, wherever in the world that might be) i) By achieving location economies, firms can: lower the costs of value creation and achieve a low cost position; and differentiate their product offering

Firms that take advantage of location economies in different parts of the world, create a global web of value creation activities; value chain are dispersed to those locations around the globe where perceived value is maximized or where the costs of value creation are minimized

A caveat: transportation costs, trade barriers, and political risks complicate this picture

Experience effect: The experience curve refers to the systematic reductions in production costs that have been observed to occur over the life of a product; Learning effects are cost savings that come from learning by doing. So, when labor productivity increases, individuals learn the most efficient ways to perform particular tasks, and management learns how to manage the new operation more efficiently

Economies of scale refer to the reductions in unit cost achieved by producing a large volume of a product; Sources of economies of scale include: spreading fixed costs over a large volume utilizing production facilities more intensively increasing bargaining power with suppliers

Firms that compete in the global marketplace typically face two types of competitive pressures: pressures for cost reductions; and pressures to be locally responsive Pressures for cost reductions force the firm to lower unit costs, but pressure for local responsiveness require the firm to adapt its product to meet local demands in each market—a strategy that raises costs

Pressures for local responsiveness arise from: differences in consumer tastes and preferences - strong pressures

for local responsiveness emerge when consumer tastes and preferences differ significantly between countries. Pick-up trucks

differences in traditional practices and infrastructure - pressures for local responsiveness emerge when there are differences in infrastructure and/or traditional practices between countries; EU 240-volt system, UK 110-volt;

differences in distribution channels - a firm's marketing strategies needs to be responsive to differences in distribution channels between countries. Detergents retails control 65% in Germany while in Italy it is 2%. Doctors

host government demands - economic and political demands imposed by host country governments may necessitate a degree of local responsiveness. Drug stores should be dispersed to meet local demands. Threat of protectionism. To sell railcars in Germany you must manufacture it in Germany.

There are four basic strategies to compete in the international environment:

global standardization; 2) localization 3) transnational 4) International

Summary of the lecture

There are four basic strategies to compete in the international environment: global standardization localization transnational International

Strategic alliances refer to cooperative agreements between potential or actual competitors range from formal joint ventures to short-term

contractual agreements the number of strategic alliances has exploded

in recent decades

Strategic alliances are attractive because they facilitate entry into a foreign market; e.g., Motorola

initially finds it difficult to enter in Japan- so joined Toshiba

allow firms to share the fixed costs and risks of developing new products or processes (Both above firms contributed $1 billion)

bring together complementary skills and assets that neither partner could easily develop on its own; French Thomson (core is access to EU market) and Japanese JVC(technology)

help a firm establish technological standards for the industry that will benefit the firm Partner selection

A good partner helps the firm achieve its strategic goals and has the

capabilities the firm lacks and that it values shares the firm’s vision for the purpose of the alliance will not exploit the alliance for its own ends

2. Alliance structure The alliance should

make it difficult to transfer technology not meant to be transferred

have contractual safeguards to guard against the risk of opportunism by a partner

allow for skills and technology swaps with equitable gains

minimize the risk of opportunism by an alliance partner

3. The manner in which the alliance is managed

Requires interpersonal relationships between managers learning from alliance partners Building trust

Entering Foreign Markets

Several factors affect the choice of entry mode including transport costs; trade barriers; political risks;

economic risksCosts; firm strategy

The choice of foreign markets will depend on their long run profit potential

Favorable markets: are politically stable; have free market systems; have relatively low inflation rates ; have low private sector debt

Less desirable markets: are politically unstable ; have mixed or command economies; have excessive levels of borrowing

Markets are also more attractive when the product in question is not widely available and satisfies an unmet need

Timing of Entry: Entry is early when the firm enters a foreign market before other foreign firms--Entry is late when the firm enters the market after firms have already established themselves in the market

First mover advantages: the ability to pre-empt rivals by establishing a strong brand name; the ability to build up sales volume and ride down the experience curve; the ability to create

After choosing which market to enter and the timing of entry, firms need to decide on the scale of market entry entering a foreign market on a significant scale is a major strategic commitment that changes the competitive playing field

Firms that enter a market on a significant scale make a strategic commitment to the market - the decision has a long term impact and is difficult to reverse

These are six different ways to enter a foreign market

When a firm’s competitive advantage is based on proprietary technological know-how, the firm should avoid licensing and joint venture arrangements unless it believes its technological advantage is only transitory, or that it can establish its technology as the dominant design in the industry

When a firm’s competitive advantage is based on management know-how, the risk of losing control over the management skills is not high, and the benefits from getting greater use of brand names is significant

Firms can establish a wholly owned subsidiary in a country by: Using a greenfield strategy - building a subsidiary from the

ground up Using an acquisition strategy

Acquisitions are attractive because: they are quick to execute; they enable firms to preempt their competitors; acquisitions may be less risky than greenfield ventures

Acquisitions can fail when: the acquiring firm overpays for the acquired firm ii) the cultures of the acquiring and acquired firm clash iii) attempts to realize synergies run into roadblocks and take much longer than forecast; iv)there is inadequate pre-acquisition screening

The main advantage of a greenfield venture is that it gives the firm a greater ability to build the kind of subsidiary company that it wants. However, greenfield ventures are slower to establish; Greenfield ventures are also risky

Acquisition may be better when the market already has well-established competitors or when global competitors are interested in building a market presence; A greenfield venture may be better when the firm needs to transfer organizationally embedded competencies, skills, routines, and culture

Choice of strategic partner; structure, and managing

Global Marketing and Product Development

Globalization seems to be the exception rather than the rule in many consumer goods markets and industrial markets.

The marketing mix (the choices the firm offers to its targeted market) is comprised of Product attributes, Distribution strategy, Communication strategy, Pricing strategy

Market segmentation - identifying distinct groups of consumers whose purchasing behavior differs from others in important ways. Markets can be segmented by geography, demography, socio-cultural factors, psychological factors

Two key market segmentation issues: The differences between countries in the structure of market segments may have to develop a unique marketing mix to appeal to a certain segment in a given country

(ii) The existence of segments that transcend national borders when segments transcend national borders, a global strategy is possible

Culture: tradition, social structure, language, religion, education For example: Findus frozen food division of Nestle the Swiss food giant, market frozen fish cakes and fingers in UK, beef bourguignon in France, bravilio in Italy.

Level of economic development: consumers in highly developed countries tend to demand a lot of extra performance attributes in Product. price is not a factor due to high income level

Product and technical standards: national differences can force firms to customize the marketing mix

Distribution strategy: the means the firm chooses for delivering

There are four main differences in distribution systems

1. Retail concentration – concentrated or fragmented

Channel length - the number of intermediaries between the producer and the consumer

Channel exclusivity – how difficult it is for outsiders to access

Channel quality - the expertise, competencies, and skills of established retailers in a nation, and their ability to sell and support the products of international businesses

The effectiveness of a firm's international communication can be jeopardized by Cultural barriers - it can be difficult to communicate messages across cultures. Source and country of origin effects – source effects

country of origin effects and Noise effect

The effectiveness of a firm's international communication can be jeopardized by

1. Cultural barriers - it can be difficult to communicate messages across cultures

2. Source and country of origin effects – source effects occur when the receiver of the

message evaluates the message on the basis of status or image of the sender. Can counter negative source effects by deemphasizing their foreign origins, Examples: French wines, Italian clothes, and German luxury cars

country of origin effects - the extent to which the place of manufacturing influences product evaluations anti-Japan wave in US in 1990’s

Noise levels - the amount of other messages competing for a potential consumer’s attention

Firms have to choose between two types of communication strategies

1. A push strategy emphasizes personnel selling

2. A pull strategy emphasizes mass media advertising The choice between strategies depends on1. Product type and consumer sophistication

a pull strategy works well for firms in consumer goods selling to a large market segment

a push strategy works well for industrial products

2. Channel length a pull strategy works better with longer

distribution channels3. Media availability

In general, a push strategy is better for industrial products and/or complex new

products when distribution channels are short when few print or electronic media are

available A pull strategy is better

for consumer goods products when distribution channels are long when sufficient print and electronic media are

available to carry the marketing message Price discrimination - occurs when firms charge

consumers in different countries different prices for the same product

Strategic pricing has three aspects

1. Predatory pricing - use profit gained in one market to support aggressive pricing designed to drive competitors out in another market

2. Multi-point pricing - a firm’s pricing strategy in one market may have an impact on a rival’s pricing strategy in another market

3. Experience curve pricing - price low worldwide in an attempt to build global sales volume as rapidly as possible, even if this means taking large losses initially

A firm’s ability to set prices may be limited by Antidumping regulations –

Dumping and Competition policy Why Is New Product Development Important? Product innovation

should be a strategic priority today, competition is as much about technological innovation as anything else; The pace of technological change is faster than ever and product life cycles are often very short; new innovations can make existing products obsolete, but at the same time, open the door to a host of new opportunities; Firms need close links between R&D, marketing, and manufacturing

The rate of new product development is greater in countries where more money is spent on basic and applied research and

development demand is strong; consumers are affluent; competition is

intense Why Cross-functional team is important? Team integration

is facilitated by cross-functional product development teams. Effective cross functional teams should (i) Be led by a heavyweight project manager with status in the organization ii) include members from all the critical functional areas iii)have members located together (iv) establish clear goals (v)develop an effective conflict resolution process

Building global capabilities: To adequately commercialize new technologies, firms need to integrate R&D and marketing. To successfully commercialize new technologies, firms may need to develop different versions for different countries

Strategy, Production, And Logistics: Firms need to identify how production and logistics can be conducted internationally to: lower the costs of value creation (ii) add value by better serving customer needs

Production refers to activities involved in creating a product

Logistics refers to the procurement and physical transmission of material through the supply chain, from suppliers to customers

To lower costs, firms can: disperse production to those locations where activities can be performed most efficiently(ii) manage the global supply chain efficiently to better match supply and demand

To improve quality, firms can: (i) eliminate defective products from the supply chain and the manufacturing process (ii) Improved quality will also reduce costs

To increase product quality, most firms today use the Six Sigma program which aims to reduce defects, boost productivity, eliminate waste, and cut costs throughout a company- a part of total quality management (TQM). In the European Union, firms must meet the standards set forth by ISO 9000.

Global Production, Outsourcing and Logistics

Three factors are important when making location decisions:

1. country factors 2. technological factors 3. product factors

Three characteristics of a manufacturing technology are of interest:

1. the level of fixed costs 2. the minimum efficient scale[(the minimum efficient scale is defined as the lowest production point at which long-run total average costs are minimized) of a plant, the more likely centralized production in a single location or a limited number of locations makes sense] 3. the flexibility of the technology [ is a systematic method for the elimination of waste within a manufacturing process. Lean also takes into account waste created through overburden and waste created through unevenness in work loads. Essentially, lean is centered on making obvious what adds value by reducing everything else. Lean manufacturing is a management philosophy derived mostly from the Toyota Production System]

Firms using flexible manufacturing technologies can produce a wide variety of end products at a unit cost that at one time could only be achieved through the mass production of a standardized output

Mass customization (Production of personalized or custom-tailored goods or services to meet consumers' diverse and changing needs at near mass production prices. Enabled by technologies such as computerization, internet, product modularization, and lean production, it portends the ultimate stage in market segmentation where every customer can have exactly what he or she wants) implies that a firm may be able to customize its product range to meet the demands of local markets yet still control costs

Technological factors: Concentrating production at a few choice locations makes sense when: i) fixed costs are substantial ii) the minimum efficient scale of production is high iii) flexible manufacturing technologies are available

Two product factors impact location decisions:1. the product's value-to-weight ratio. 2. Does product serves universal needs: When products serve universal needs, the need for local responsiveness falls, central location preferred

There are two basic strategies for locating manufacturing facilities: 1. concentrating them in the optimal location and serving the world market from there 2. decentralizing them in various regional or national locations that are close to major markets

Improvement in a facility comes from two sources: 1. pressure to lower costs or respond to local markets 2. an increase in the availability of advanced factors of production

A major aspect of a transnational strategy is a belief in global learning, or the idea that valuable knowledge does not reside just in a firm’s domestic operations, it may also be found in its foreign subsidiaries

Make-or-buy decisions are important factors in many firms' manufacturing strategies

Advantages of make: lower costs; facilitate investments in highly specialized assets ; protect proprietary technology; facilitate the scheduling of adjacent processes

Global HRM

Human resource management (HRM) - the activities an organization carries out to utilize its human resources effectively

These activities include i) determining human resource strategy ii) staffing performance evaluation iii) management development iv) compensation labor relations v) Firms need to ensure there is a fit between their human resources practices and strategy

HRM can help the firm reduce the costs of value creation and add value by better serving customer needs

HRM must also determine when to use expatriate managers i)citizens of one country working abroad ii) who should be sent on foreign assignments iii) how they should be compensated iv) how they should be trained v) how they should be reoriented when they return home

Staffing policy is concerned with the selection of employees who have the skills required to perform a particular job can be a tool for developing an promoting the firm’s

corporate culture the organization’s norms and value system; a strong corporate culture can help the firm implement its strategy

Three main approaches to staffing policy 1. The ethnocentric approach - fill key management

positions with parent-country nationals2. The polycentric approach recruit host country nationals

to manage subsidiaries in their own country, and parent country nationals for positions at headquarters

3. The geocentric approach seek the best people, regardless of nationality for key jobs

Firms using an ethnocentric or geocentric staffing strategy will have expatriate managers Expatriate failure is the premature return of an expatriate manager to the home country

The main reasons for U.S. expatriate failure are i) the inability of an expatriate's spouse to adapt ii) the manager’s inability to adjust iii) other family-related reasons iv) the manager’s personal or emotional maturity v) the manager’s inability to cope with larger overseas responsibilities

A global mindset may be the fundamental attribute of a global manager cognitive complexity cosmopolitan outlook

After selecting a manager for a position, training and development programs should be implemented

Training focuses upon preparing the manager for a specific job

Management development is concerned with developing the skills of the manager over time

Cultural training - fosters an appreciation for the host country's culture

Language training - an exclusive reliance on English diminishes an expatriate's ability to interact with host country nationals

Practical training - helps the expatriate and her family ease themselves into day-to-day life in the host country

But, studies show only about 30% of managers sent on one- to five-year expatriate assignments received training before their departure

A global mindset may be the fundamental attribute of a global manager

i)cognitive complexity ii) cosmopolitan outlook A global mindset is often acquired early in life from

i) a family that is bicultural ii) living in foreign countries iii) learning foreign languages as a regular part of family life

Training focuses upon preparing the manager for a specific job

Management development is concerned with developing the skills of the manager over time ---gives the manager a skill set and reinforces organizational culture

Cultural training - fosters an appreciation for the host country's culture

Language training - an exclusive reliance on English diminishes an expatriate's ability to interact with host country nationals

Practical training - helps the expatriate and her family ease themselves into day-to-day life in the host country

But, studies show only about 30% of managers sent on one- to five-year expatriate assignments received training before their departure

Management development programs increase the overall skill levels of managers through

i) ongoing management education ii)rotations of managers through jobs within the firm to give them varied experiences

Evaluating expatriates can be especially complex typically, both host nation managers and home office

managers evaluate the performance of expatriate managers

But, both types of managers are subject to unintentional bias

i) home country managers tend to rely on hard data when evaluating expatriates ii) host country managers can be biased towards their own frame of reference

To reduce bias in performance appraisal

i) more weight should be given to an on-site manager's appraisal than to an off-site manager's appraisal ii)a former expatriate who has served in the same location should be involved in the process

Two key issues on compensation1. How to adjust compensation to reflect differences in economic

circumstances and compensation practices

2. How to pay expatriate managers A compensation package has five components 1. Base salary - normally in the same range as the base

salary for a similar position in the home country-can be paid either in the home currency

2. Foreign service premium - extra pay the expatriate receives for working outside his country of origin

3. Various allowances - hardship, housing, cost-of-living, education

4. Tax differentials - may have to pay income tax to both the home country and the host-country governments no reciprocal tax treaty exists

company usually covers extra tax assessments

5. Benefits – many firms provide the same level of medical and pension benefits abroad that employees receive at home

Ethics in IB

Ethics - accepted principles of right or wrong that govern the conduct of a person, the members of a profession, or the actions of an organization

Business ethics are the accepted principles of right or wrong governing the conduct of business people

Ethical strategy is a strategy, or course of action, that does not violate these accepted principles

The most common ethical issues in business involve

i) employment practices ii) human rights iii) environmental regulations iv) corruption v) the moral obligation of multinational companies

Basic human rights taken for granted in the developed world such as freedom of association, freedom of speech, freedom of assembly, freedom of movement, and so on, are not universally accepted

Corruption: In the United States, the Foreign Corrupt Practices Act outlawed the practice of paying bribes to foreign government officials in order to gain business

The Convention on Combating Bribery of Foreign Public Officials in International Business Transactions adopted by the Organization for Economic Cooperation and Development (OECD) obliges member states to make the bribery of foreign public officials a criminal offense

Managers often face situations where the appropriate course of action is not clear

Ethical dilemmas - situations in which none of the available alternatives seems ethically acceptable they exist because real world decisions are complex,

difficult to frame, and involve various consequences that are difficult to quantify

Business ethics reflect personal ethics (the generally accepted principles of right and wrong governing the conduct of individuals)

Expatriates may face pressure to violate their personal ethics because

Organizational Culture

There are several approaches to business ethics including Straw men

the Friedman doctrine; cultural relativism; the righteous moralist; the naïve immoralist

Utilitarian and Kantian Rights theories Justice Theories

Implication for managers: Managers should i) favor hiring and promoting people with a well grounded

sense of personal ethics ii) build an organizational culture that places a high value on ethical behavior iii) make sure that leaders within the business not only articulate the rhetoric of ethical behavior, but also act in manner that is consistent with that rhetoric iv)put decision making processes in place that require people to consider the ethical dimension of business decisions v) develop moral courage

Organization Culture and Leadership Businesses need to build an organization culture that

places a high value on ethical behavior the business must explicitly articulate values that place

a strong emphasis on ethical behavior -----code of ethics - a formal statement of the ethical priorities a business adheres to

A five-step process can also help managers think through ethical issues

1) How would a decision affect stakeholders - the individuals or groups who have an interest, stake, or claim in the actions and overall performance of a company . 2) Managers need to determine whether a proposed decision would violate the fundamental rights of any stakeholders 3) Managers need to establish moral intent - the business must resolve to place moral concerns ahead of other concerns in cases where either the fundamental rights of stakeholders or key moral principles have been violated 4)The company should then engage in ethical behavior 5) The business must audit its decisions, reviewing them to make sure that they were consistent with ethical principles

Thank you