im535 international operations management · 2019-02-16 · •movie was an international hit as it...

IM535 – International Operations Management

Module OneInternational Business: An Overview

Chapter Objectives

• Define international business and how it differs from domestic business

• Explain why companies engage in international business

• Introduce different international business models companies use

• Illustrate the role social science plays in understanding international business

• Provide an overview of patterns for international expansion

IM535 – International Operations Management Department of Industrial and Management Engineering

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Case: Star Wars

• Star Wars Series includes 7 movies

• It is the second highest gross making movie series of all times

• To date the seven movies grossed $8.5 Billion worldwide with an average of $630 million per movie


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Rank SeriesTotal worldwide

box officeNo. of films

Average of films Highest-grossing film

1MARVEL CINEMATIC UNIVERSE

$15,482,764,918 20 $774,138,245 The Avengers ($1,519,479,547)

2 Star Wars $8,926,772,232 9 $991,863,581Star Wars Episode I: The Phantom Menace ($1,027,044,427)

3 Harry Potter $8,532,684,345 8 $1.066,585,543Harry Potter and the Deathly Hallows – Part 2 ($1,328,111,219)

4 James Bond $7,077,929,291 26 $272,228,049 Skyfall ($1,108,058,404)

4 Tolkien's Middle-Earth $5,895,804,182 6 $982,634,030The Lord of the Rings: The Return of the King ($1,141,403,341)

http://en.wikipedia.org/wiki/Star_Wars

http://en.wikipedia.org/wiki/Harry_Potter_(film_series)

http://en.wikipedia.org/wiki/List_of_James_Bond_films

http://en.wikipedia.org/wiki/Middle-earth_in_film

Different production locations all over the world

• Australia: low cost of technicians.

• Italy: shooting of garden scenes.

• Tunisia: shooting of desert scenes.


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Case: Star Wars

• Multinational cast and crew.

• Collection of revenues from countries using currencies other than USD.


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Case: Star Wars

• Movie was an international hit as it portraits a universal theme.

• Different versions in different countries to maximize attendance.

• Different formats to suite different movie houses.

• Similar logos in different languages.


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Case: Star Wars

• English version of the movie was subtitled in six different languages.

• Dubbing of film into 18 foreign languages.

• Hired native-speaking actors in about 30 countries.

• Hired sound technicians to tweak words to fit mouth movements.


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Case: Star Wars

• Film released on the same day in 9 different countries to reduce the risk of piracy.

– Taiwan: website.

– Afghanistan: video stores.

• Sale of rights of producing and selling products with characters and scenes from the movie.


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Globalization?

• Globalization refers to:

– Set of interdependent relationships among people from different parts of a world.

– Also, integration of world economies through the reduction of barriers to the movement of trade, capital, technology, and people.

• Globalization concept has been around hundreds of years ago this has expanded human contacts over ever-wider geographic areas have expanded the variety of available resources, products, services, and markets.


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International Business?

• Globalization enables us to get more variety, better quality, or lower prices goods and services from anywhere in the world!

• International business enables us to acquire such products and includes all commercial transactions (sales, investments, and transportation) between two or more countries

– Private for profit.

– Governmental for profit or political reasons.


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Studying International Business?

• Most companies either are international or compete with international companies.

• Modes of operations may differ from those used domestically.

• The best way of conducting business may differ by country.

• An understanding helps you make better career decisions.

• An understanding helps you decide what governmental policies to support.


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Forces Driving Globalization

• Measuring globalization, especially for historical comparisons, is problematic.

– First, a country’s interdependence must be measured indirectly.

– Second, when national boundaries shift, domestic business transactions can become international transactions or vice versa.

• Yet, various reliable indicators assure us that globalization has been increasing.

– Currently, about 25 percent of world production is sold outside its country of origin, as opposed to about 7 percent in 1950.

– Restrictions on imports have generally been decreasing.

– Output from foreign-owned investments as a percentage of world production has been increasing.


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Foreign Policy Globalization Index

• International trade and investment

Economic

• Internet connectivity

Technological

• International travel and tourism

• International telephone traffic

• Personal transfers of funds internationally

Personal contact

• Participation in international organizations and government monetary transfers

Political


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Foreign Policy Globalization Index, 2007

• Countries such as Singapore and the Netherlands lack natural resources.

• Countries like Denmark and Ireland can’t rely on their limited domestic markets.

• To be globally competitive, these countries have no choice but to open up and attract trade and foreign investment.

• Six of the tiny globalizers also ranked in the top 10 on the personal dimension of globalization, which measures international phone calls, travel…


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• Jordan, ranks first on the index’s measure of political engagement, due to its participation in treaties and U.N. peacekeeping missions.

• More-globalized countries tend to have more international Internet bandwidth. The United States leads the way in the amount of international cyber traffic it can handle.

Global Cities Index


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Business activity

Human Capital

Information Exchange

Cultural Experience

Political Engagement

• A.T. Kearney’s Global Cities Index ranks cities across 25 metrics across five main dimensions that are weighted as shown in the pie chart.

• For more information check the pdf file on the website.

A.T. Kearney Global Cities Index, 2012

New York, London, Paris, and Tokyo remain today's leading cities, but an analysis of key trends in emerging cities suggests that Beijing and Shanghai may rival them in 10 to 20 years.


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Factors in Increased Globalization

Increase in and

expansion of technology

Liberalization of cross-

border trade and resource movements

Development of services

that support international

business

Growing consumer pressures

Increased global

competition

Changing political

situations

Expanded cross-

national cooperation


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Factors in Increased GlobalizationIncrease in and expansion of technology

• Advances in technology helped in developing efficient means of production. More units can be produced and at a lower cost!

• People now can purchase more products in a smaller time.

• Advances in “cheap” communications can help in reaching global suppliers and customers at a low cost.

• Improved modes of transportation allows more countries to compete for sales in any given market.


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Factors in Increased GlobalizationLiberalization of cross-border trade and resource movements

• Countries usually restrict the movements of goods, services, and even resources across their borders to protect its own industries or due to other political reasons.

• However, most governments have reduced such restrictions primarily for three reasons:

– Their citizens want a greater variety of goods and services at lower prices.

– Competition forces domestic producers to become more efficient.

– They hope to develop relationships with other countries so as to lower their barriers in turn.


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Factors in Increased GlobalizationDevelopment of services that support international business

• Governments and companies develop several services that supports the conduct of international business.

• Financial services that eases payments for goods and services in any foreign currency.

• Insurance policies that protects customers and suppliers against loss of shipments or damage.


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Factors in Increased GlobalizationGrowing consumer pressures

• Due to the breakthroughs in communications and technology, customers are now more aware of products and services available in other countries.

• Not only do customers know of such products, but also have access to purchase those products.

• Also, customers are looking for new, better, and tailored products.

• Although these demands differ from country to another even customer demands differ within the same country; however, more and more companies are responding to these demands… simply because customers will look for and be able to obtain their products from other countries.


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Factors in Increased GlobalizationIncreased global competition

• In recent years, many companies have merged or acquired firms to gain operating efficiencies that enable them to compete with or become global leaders.

• The pressures, both present and potential, of increased foreign competition can persuade companies to buy or sell abroad.

• Several companies locate in areas where there are many competitors and suppliers… a situation known as

– For example, they might introduce products into markets where competitors are already gaining sales or seek supplies where competitors are getting cheaper or more attractive products or the means to produce them.


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Regardless of industry, firms have to become more global to compete; in today’s business environment, failure to do so can be catastrophic.


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Factors in Increased GlobalizationChanging political situations

• Willingness of governments to support programs such as improving airport and seaport facilities have improved speed and cost efficiencies for delivering goods internationally.

• Governments now provide an array of services to help domestic companies sell more abroad, such as

– Collecting information about foreign markets.

– Furnishing contacts with potential buyers abroad.

– Offering insurance against nonpayment in the home-country currency.


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Factors in Increased GlobalizationExpanded cross-national cooperation

• Governments are more involved in international cooperation by means of treaties, agreements, and consultation.

• Treaties and agreements are for a variety of commercial activities, such as transportation and trade.

– Can be either bilateral (involving only two countries) or multilateral (involving a few or many).

– Can also include reciprocal reductions of import restrictions, use of certain seaports and airports, and protection of property, such as foreign-owned investments, patents, trademarks, and copyrights.

• Multinational Problem Solving; where countries handle problems jointly that one country acting alone cannot solve due to lack of resources for example.


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Threats to National Sovereignty

• A nation’s sovereignty is, a nation’s freedom to “act locally” and without externally imposed restrictions.

• Countries seek to fulfill their citizens’ economic, political, and social objectives by setting rules reflecting national priorities.

– However, some argue that individual countries’ priorities are weakened by opening borders to trade.

• Globalization can affect products, companies, work methods, social structures, and even language, thus damaging the cultural foundation of sovereignty.

– Fundamentally, many critics feel helpless when it comes to stopping foreign incursion by such means as satellite television, print media, and Internet sites.


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Economic Growth and Environmental Stress

• Globalization revolves around issues of economic growth; however, this means more air pollution from factories and vehicles emissions for example that can affect weather and climate.

• According to one argument, as globalization brings growth, it consumes more nonrenewable natural resources and increases environmental damage.


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Growing Income Inequality and Personal Stress

• Income Inequality

– By various measurements, income inequality has been growing in a number of countries.

– Globalization creates access to a greater supply of low-skilled and low-cost labor and speeding competition that leads to winners and losers.

• Personal Stress

– There are also certain repercussions of globalization that we can’t measure in strictly economic terms.

– There is in fact some evidence that the growth in globalization goes hand in hand with increased insecurity about job and social status.


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Factors in International Business Operations

The complex set of relationships among conditions and operations that may occur when a firm decides to conduct some of its business on an international scale.


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Objectives… Why Engage in International Business?Sales expansion

• Number of people and the amount of their purchasing power is higher in the world as a whole than any single country… thus, international business and operations will lead to more potential customers and sales.

• More sales enables companies to increase their production volumes and will thus decrease the unit production cost

– For example fixed R&D costs will be distributed over more units of production and will thus result in lower unit production cost.

• Reducing production costs will result in lower prices… leading to even more sales!


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Objectives… Why Engage in International Business?Resource acquisition

• Producers and distributors seek out products, services, resources, and components from foreign countries.

– Domestic supplies may be inadequate or unavailable.

– They’re also looking for anything that will give them a competitive advantage.

• This may mean acquiring a resource that cuts costs.

• Acquiring a resource that improves their product’s quality.

• Even acquiring resource that differentiates their products, for example by hiring designers as in the case of automobile manufacturers.


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Objectives… Why Engage in International Business?Risk minimization

• Fact: sales decrease or grow more slowly in a country that’s in a recession and increase or grow more rapidly in one that’s expanding economically.

– Operating in countries with different business cycles can minimize swings in sales and profits.

– In 2008, General Motors’ U.S. sales fell 21%, but this was offset by its sales growth of 30% in Russia, 10% in Brazil, and 9% in India.

• Also, having different suppliers of products or components from different countries in overcoming the impact of price changes or shortages in any one country.


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Modes of International Operations

• Merchandise Imports and exports

• Service Imports and exports– Tourism and transportation

– Performance of services

– Licensing and franchising

• Investments– Direct investment.

• Control

• Access to foreign markets

• Access to foreign resources

• Partial ownership (sometimes)

– Portfolio investment.• Non control of a foreign operation

• Financial benefit (for example, loans)


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Modes of International OperationsMerchandise imports and exports

• Merchandise (tangible products/goods) exporting and importing are the most popular modes of international operations.

– Merchandise exports goods that are sent out of a country

– Merchandise imports are goods brought into a country.

• Sometimes called “visible” exports and imports because we can actually see these goods as they leave and enter the country.

• For most countries, the export and import of goods are the major sources of international revenues and expenditures.


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Modes of International OperationsService imports and exports

• Export and import often apply to services as well.

– The company or individual that provides the service and receives payment makes a service export; the company or individual that receives and pays for it makes a service import.

• Currently, services constitute the fastest growth sector in international trade.

• Examples of services are travel, transportation, banking, insurance, and the use of assets such as trademarks, patents, and copyrights.


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• Tourism and Transportation

– Tourism and transportation are important sources of revenue for airlines, shipping companies, travel agencies, and hotels.

– The economies of some countries depend heavily on revenue from these sectors.

• In Greece and Norway, for example, a significant amount of employment and foreign- exchange earnings comes from foreign cargo carried by Greek and Norwegian shipping lines.

• Tourism earnings are more important to the Bahamian economy than earnings from export merchandise.


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• Service Performance

– Includes banking, insurance, rental, engineering, and management services.

– Companies receive earnings in the form of fees, which are payments for the performance of those services.

– Companies may pay fees for engineering services provided as so-called turnkey operations, such as construction projects performed under contract and transferred to owners when they’re operational.

• The U.S. company Bechtel currently has a turnkey contract in Egypt to build a nuclear plant to generate electricity (claims in 2009!).

– Companies also pay fees for management contracts; where, one company provides personnel to perform general or specialized management functions for another.


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• Asset Use

– When one company allows another to use its assets—such as trademarks, patents, copyrights, or expertise—under contracts known as licensing agreements, they receive earnings called royalties.

• For example, Adidas pays a royalty for the use of the Real Madrid football team’s logo on hooded jackets it sells.

– Franchising is a mode of business in which one party (the franchisor) allows another (the franchisee) to use a trademark as an essential asset of the franchisee’s business again for royalties payable to the franchisor.

• As a rule, the franchisor (say, McDonald’s) also assists continuously in the operation of the franchisee’s business, perhaps by providing supplies, management services, or technology.


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Modes of International OperationsInvestments

• Foreign investment means ownership of foreign property in exchange for a financial return, such as interest and dividends.

• Foreign direct investment (FDI) is a direct investment into production or business in a country by a company in another country, either by buying a company in the target country or by expanding operations of an existing business in that country.

• Portfolio investment is an investment in securities (stocks, bonds…) that is intended for financial gain only and does not create a lasting interest in or effective management control over an enterprise.


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• Direct Investment

– In foreign direct investment (FDI), sometimes referred to simply as direct investment, the investor takes a controlling interest in a foreign company.

– FDIs includes mergers, acquisitions, building new facilities…

– Control need not be a 100 percent (or even a 50 percent) interest… it depends on the number of companies involved in the investment.

– Control mainly refers to decisions making related to operations.

– When two or more companies share ownership of an FDI, the operation is a joint venture.

– In 2008, about 79,000 companies worldwide control about 790,000 FDIs in all industries.


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• Portfolio Investment

– A portfolio investment is a non-controlling financial interest in another entity.

– An investment portfolio is a mixture of investment types all held simultaneously, and is a method of decreasing or limiting the risk associated with investing.

– Portfolio investment is investment made by investors who are not particularly interested in involvement in the management of a company.

– They’re used primarily for short-term financial gain and as a relatively safe means of earning more money on a firm’s investment.


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Influences on International Business

• Geographic Influences

– The location, quantity, quality, and availability of the world’s resources, as well as the best way to exploit them.

• Political Policies

– A nation’s political policies influence the ways in which international business takes place within its borders.

• Legal Policies

– Domestic and international laws play a big role in determining how a company can operate overseas.


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Influences on International Business

• Behavioral Factors

– The related disciplines of anthropology, psychology, and sociology can help managers better understand values, attitudes, and beliefs in a foreign environment.

• Economic Forces

– Economics explains country differences in costs, currency values, and market size.


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Competitive Environment

• Advantage in price, marketing, innovation

• Number and comparative capabilities

• Countries competitive differences

• Dependent on products, strategies, and countries in which the business operates


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Levels/Terms of International Companies

• Multinational Enterprise (MNE): global approach to markets and production– Multinational Corporation (MNC)

– Transnational Company (TNC)

• Depending on the degree of integration among company operations in different countries an MNE can be:– A global company or globally integrated company.

– A multidomestic company or locally responsive company.

• Globally integrated company: integrated operations located in different countries.

• Multidomestic company: multinational companies that allow local responsiveness.


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National Operations for International Companies

• Multi-domestic strategy: countries operate separately.

• Global strategy: integrate various country operations into an international headquarters control.

• Transnational strategy: integrate various country operations while dispersing the location of control.


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im535 international operations management · 2019-02-16 · •movie was an international hit as it...

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