international business ftmba- lec 1

8/8/2019 International Business FTMBA- Lec 1

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Lecture No. 1 - 2


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Lecture No. 1 - 2

Presentation

Domestic v/s International Business

Motives for International Business

Orientations to International Business Operations

Matrix of marketing Ingredients

Quotable Quotes

International Trade Theories


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International Business

T R A D E F A C T S:Growing faster than most national economies

Barriers are shrinking

Many countries target export growth

Increasingly important to national economies

Increasingly important for firms to Increase MarketTodays firms encounter global competition compete with productsmanufactured in India by foreign firm and imports besides competitionfrom domestic firms.

Liberalization has led to global sourcing of technology, materials,finance, human resources etc.

No country can live in economic isolation or afford to keep out of theglobal economy except at its own risk

No country is self sufficient with regards to its needs and requirement,not can it consume all that it produces and thus cannot insulate itselffrom EXTERNAL INFLUENCES. [SEA- Rubber]


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It is the performance of business activities designed to plan, promote and direct the

flow of a companys goods and services to consumers or users in more than one

nation for profit.

Growing flow of commodities. Movements of goods and services become more

Responsive / elastic to differences between variables.

TYPES OF INTERTNATIONAL BUSINESS:

Trading [import export trading houses]

Manufacturing and Marketing MNCs

Sourcing and marketing [outsourcing products]

Global sourcing for products. Global sourcing of raw materials / intermediaries. [FORD MEMORANDUM THE HARBINGER OF AMERICAN BUSINESS TOCOME. 1919 to 1960: If its cheaper abroad, get it abroad.]

Services like IT, transportation, banking, insurance.

Investments FDIs


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SIMPLY PUT: Marketing mix decisions across national boundaries.

- OR

- WITH COMPLEXITY: It involves the firm in establishing manufacturing

facilities overseas and coordinating marketing strategies across theglobe.

- International Marketing is the multinational process of PLANNING andexecuting the conception, pricing, promotion, and distribution of ideas,

goods, and services to create exchanges that satisfy individual andorganizational objectives.

-


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International Business - Facets

Intangible dimensions birth control / aids - UN programs

- Applies not only to market or business transactions but alsoInternational non-profit marketing.

- Modified product for overseas market - recognizes that it is improper fora firm to create a product first and then look for a place to sell it

- acknowledges that place ( distribution ) is just part of the marketingmix, and that distance between markets makes it neither more nor less

important than the other parts of the mix

- Integration / Coordination of the 4 Ps across countries in order to bringabout the most effective marketing mix.


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International Business- Benefits

- Survival sufficient economies of scale.- Growth and better earning prospects

- Sales and profits larger turnovers and operating profits.

- Diversification to counter for cyclical factors recession and seasonalfactors like climate.

- Inflation and Price Moderation.- for domestic firms.- Employment improved GNP and enhanced opportunity in general for

al nations.

- Improved Standard of living.

- Understanding of market process more openness in International

trade.- Healthy Competition advantage to the end consumer.

- Intangible benefits like diffusion of benefits across nationalboundaries and free flow of innovative ideas across trading nations.


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DIFFERENCES IN INTL and DOMESTIC BUSINESSThe environment within which the marketing plans must beimplemented.

Uniqueness also come from unfamiliar problems and differentlevels of uncertainties.[COKE 1977 FORMULA]

Challenge to mould controllables 4ps within the framework ofuncontrollables. [competition/consumer behavior/ slept]

Two levels of uncontrollable uncertainties.

What also plays havoc are:

CURRENCYSELF REFERENCE CRITERION CULTURAL CONDITIONING

9/10 ths OF THE ICEBERG UNKNOWN.

[impedes the ability to assess a foreign market in its true light confront facts with our own assimilated knowledge / experience.]


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DOMESTIC INTERNATIONAL

Activities are limited tolength and breadth of thecountry.

Involves across country transactions oracross the country production orprovision of services.

Transactions are inter firm. Transactions are intra-firm. RM may flowbetween the parent and the subsidiary oramong different subsidiaries of the samefirm.

Relatively lessercomplexities.

Transactions carried out in unfamiliarconditions prevailing in host country.

Work in multi environment conditions.

-USA child labor is not allowed.

-Mc Donald's does not serve beef

burgers in India.


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Obstacles to

Uniformitywithin Intlbusiness

PRODUCT PRICE PLACE PROMOTION

Economicfactors

VariedIncome

levels

Variedincome

levels

Differentretail

structures

MediaAvailability

and spread.Cultural Consumer

tastes andhabits.

Pricenegotiatinghabits.

Shoppinghabits.

Languageand attitudedifference.

Competitive Nature of

existingproducts

Competitors

cost andprice

Competitors

monopoly ofchannels

Competitors

budget andappeal.

Legal Factors Productregulations

PriceControls

Restrictionson

distribution

Advertisingand media

restrictions.


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Competing on International Basis.

What are the Key Organizational

Challenges for Firms Competing onInternational Basis ?


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International Business Orientations to

International Marketing Operations.

Domestic MarketExtension Concept Multi Domestic MarketConcept Global MarketingConcept

Internationaloperations are viewedas secondary and anextension. The primarymotive is market theexcess domesticproduction.

Believes that countrymarkets are vastlydifferent and successrequires almostdifferent program foreach country.

Market coverage is theworld efficiencies ofscale, standardizedproduct, dependablequality with reasonableprice to global market.

If it can sell in homecountry it can sell

anywhere. Thusminimal efforts aremade to adapt to themarketing mix toforeign markets.

ETHNOCENTRIC

Subsidiaries operateindependently of one

another in establishingmarketing objectives.

Separate mix for eachwith little interactionamong them.

POLYCENTRIC

World markets arebeing driven to a

convergingcommonality.Standardization wherever it isculturally effective only.

GEO / REGIO

CENTRIC.


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Competing on International Basis.

What is Basis of Resource Allocations ?

How to Manage Balance of Authority between Central Office and Business

Units.

Choice between Centralization / De-Centralization

Degree to Which Products & Services need to be customized

Integration of the Corporate Structure is it possible ?

Can issue of empowerment be tamed to infact become a source of

Specialized Innovation ?

Is close cooperation and interdependence among HQ, Operations,

International subsidiaries possible ?


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Key Philosophy andCharacteristics of a

TransnationalPhilosophy:

Adaptation to Environmental Situations & Achieving Flexibility by

Capitalizing on Knowledge Flows thru Two way communication.

Characteristics:

Differentiated Contributions by all units to by all its units to integrated

worldwide operations.

A joint innovation by headquarters and by some of the overseas units

leads to the development of relatively standardized and yet flexibleproducts and services that can capture several local markets.

Decision making and knowledge generation are distributed among the

units of a transnational organization.


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Transnational

The combination of mechanisms needed is somewhat contradictory,because the structure need be.

a) centralized and decentralized,

b) integrated and nonintegrated, and

c) formalized and nonformalized.

Transnational companies often enter into strategic alliances with their

customers, suppliers, and other business partners to save time and capital as,

These alliances may bring to the firm specialized competencies.

This may result in a virtual corporation, consisting of several independent

firms that collaborate to bring products or services to the market.


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TransnationalTransnational firms have higher degrees of coordination with low control

dispersed throughout the organization. The five implementation tacticsused for implementing the transnational model are:

a) mass customization-synergies through global research and development

(e.g., American Express, Time Warner, Frito-Lay)

b) global sourcing and logistics (e.g., Benetton, Citicorp)

c) global intelligence and information resources (e.g., Andersen Consulting,

McKinsey Consulting)

d) global customer service (e.g., American Express)

e) global alliances (e.g., British Airways and US Air; KLM and Northwest)


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Transnational

King and Sethi (1999) define a comprehensive taxonomy of transnationalstrategy with the following five important dimensions of transnational

strategy:

1) the configuration of value-chain activities, which refers to the

geographic dispersal of a firm's value-chain components;2) the coordination of value-chain activities;

3) centralization;

4) strategic alliances; and

5) market integration, which refers to the extent to which the parent

corporation views the international market as a single competitive arena.


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Transnational

Nestl CEO Peter Brabeck recently questioned the idea of a so-called

global consumer. The firm appears to be successfully implementing a

transnational strategy by making centralization decisions based partly on

whether value-chain activities are upstream or downstream.

According to Brabeck: "The closer we come to the consumer, in branding,

pricing, communication, and product adaptation, the more we decentralize.

The more we are dealing with production, logistics, and supply-chain

management, the more centralized decision making becomes.

After all, we

want to leverage Nestl's size, not be hampered by it" (Wetlaufer, 2001).


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International Business - Motives

1] PULL FACTORS:Companies are motivated to internationalize because of

attractiveness of the foreign market. [profit and growth prospects.]

2] PUSH FACTORS:

Refer to the compulsions of the domestic market say saturation. ofreactive nature. COST QUANTITY CURVE.

3] GROWTH OPPORTUNITIES:

Take advantage of NICs. East Europe and Peoples republic of China.[9700jvs in Poland/ Hungary and Czech 1989 after collapse of communism.]

4] DOMESTIC MARKET CONSTRAINTS:

TV sets in USA, Phillips in Holland 8%, Nestle in Switzerland only

contributes 2%


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International Business - Motives

5] COMPETITION:Strategy of country competition and impede cash flow which limits

production. IBM taking on Hitachi [national semi conductors] and

Fujiitsu [trw]

6] GOVERNMENT POLICIES ANS REGULATIONS:Benefits, Subsidies, Tax holidays, Export promotion zones etc.

7] MONOPOLY POWER:

Monopolization of certain resources Australia and China COKE,

Patent Rights - Indian Basmati, Pharma etc.

8] SPIN OFF BENEFITS:

Improve image of the company, help earn foreign exchange for the

country.


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QUOTABLE QUOTES:

From American Economists:

Every American company is international at least to the extent that its

business performance is conditioned in part by the events that occur

abroad / world wide.

Foreign is foreign to CNN / Coca Cola.


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International Business Trade Theories

Which is preferable: balanced trade or a higher standard of living?Is it better to have relative wealth or absolute wealth?

Which is more desirable: profits for India-Inc or good jobs forIndians ?

What are the relative costs and benefits?

How does a country come out ahead?Trade theories seek to

Explain observed trade patterns

Influence government policy

Trade theory >govt policy>business opportunities and threats


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International Business Trade Theories

INTERNATIONALTRADE

National Competitive

Advantage

International Product

Life Cycle

Factor Endowments

Mercantilism

Comparative Advantage

Absolute Advantage

W.O.N.


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International Business Theories

International trade- RATIONALE:

provides the opportunity for less endowed countries toacquire goods and products that are either not available orin short supply within the local economy

Generally traced to: Adam Smiths Wealth of Nations

Based On: Principles of AbsoluteAdvantage


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PERIOD APPROACH

2000 BC Greece and Mesopotamia trade forNational Independence

1776 Adam in his Wealth OF Nationsemphasized the importance of specializationas a source of increased output and treatedinternational trade as a particular instance of

specialization. FOR GAINING ABSOLUTEADVANTAGE.

The Historical Journey.


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PERIOD APPROACH

2000 BC Greece and Mesopotamia trade forNational Independence

1969 -Michinton West European Focus on EconomicActivity

Divergence in factor endowments ofterritories created new opportunities forcomparative advantage.

MERCANTILISM: Welfare of nations thruincreased exports, ban imports and reservein GOLD

The Historical Journey.


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The impetus for the trade theories stems from the knowledgethat although most nations may have a sufficient variety ofproductive factors to produce almost everything every kindof good and product, they are unable to produce somekind of good or service with same level of effectiveness.

Theories.

- May not be definitely conclusive

- However do have effect on formulation of trade policies bythe national government.

International Business Theories


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Theory of MERCANTILISM

GOLD AND SILVER ARE THE MAIN STAYS OF NATIONALWEALTH AND ESSENTIALS TO RIGOROUS COMMERCE.

- The earliest attempt to explain the role of international trade.

- Basic Belief = Existing correlation between national wealth, power and

security.

- Focus of Mercantilist approach = ACQUIRE GOLD

- Nation can demonstrate Power + Influence by accumulation of wealth preferably in GOLD.

- FUNDAMENTALLY NATIONALISTIC APPROACH

- All other export proceeds also convert in GOLD. Increase trade (predominantly exports ) at any / all costs to other nations

- Total Prohibition on Imports.


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Theory of MERCANTILISM

Doctrine ofMercantilism:

Zero Sum Game wherein one gains by loss of others, however it should

be positive sum game in which all countries can benefit.

Export as much as possible to gain as much gold Payment currencybased on Gold Standard.

DISADVANTAGES:

- Winner and loser concept

- Accumulation of gold synonymous with accumulation of wealth.


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Theory of ABSOLUTE ADVANTAGE

- Anti- Mercantilist school of thought.- Reaction from English School ofClassical Economics.

- Founded by ADAM SMITH (1723 1790 )

PRINCIPLE: Intl Trade should be based on primarily cost considerationsand not on Nationalism.

- Wealth Of Nations- Goods can be obtained more cheaply than bydomestic manufacture.- W.O.N.

- Each Nation possesses absolute advantage in the production ofcertain goods and should specialize in these goods as it isparticularly well equipped to produce.


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Theory of ABSOLUTE ADVANTAGE

Incentive to trade is based on each country having an absolute

advantage in a product.

- Exchange of English Textile with the French Wine.- Attempt to move from zero sum game to positive game.

DISADVANTAGES / CRITICISM:

- Suppose a country did not have absolute advantage in any product ?

- Suppose a country had absolute advantage in producing all goods ?


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THEORY OF COMPARATIVE ADVANTAGE.which argues that if acountry could produce all goods more efficiently than another, itshould specialize in export that product in which it was comparativelymore efficient.

Arrives out of complication in the W.O.N. theory if both the countrieshave absolute advantage in production of goods.

Look at apparent advantage and disadvantage with the RELATIVE

ASPECT and thus arrive at a +ve + ve sum game.

Theory of COMPARATIVE ADVANTAGE


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THEORY OF COMPARATIVE ADVANTAGE

Countries will trade without having to have an absolute advantage theyonly need a comparative.

Trade happens because of difference in Relative cost of doing businessis different in different countries.

"there may still be global efficiency gains from trade if a countryspecializes in those products that it can produce more efficiently than

other products - regardless of whether other countries can producethose same products even more efficiently



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a) Comparative Differences in Cost:

Country A:Marginal cost of producing wheat = Rs 70 / quintalMarginal cost of producing cotton = Rs. 140 / quintal

Country B:Marginal cost of producing cotton = Rs 70 / quintalMarginal cost of producing wheat = Rs. 50 / quintal

- B can produce both cotton and wheat cheaper than A but comparative advantage is higher incotton than wheat

- A has comparative disadvantage in in both but disadvantage is lower for wheat than for cotton

Thus.Country A: 1 quintal of wheat =1/2 of cotton ; 1:2 cost ratio andCountry B: 1 quintal of wheat = 5/7 or 0.71 of cotton i.e. 1: 2/5 cost ratio.

THEREFORE IT WILL PAY COUNTRY B TO SPECIALIZE IN COTTON PRODUCTION AND A INWHEAT PRODUCTION.



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b) Gain with Comparative Differences in Cost:

Trade without Specialization:

A = 1 quintal of wheat + 0.5 quintal of cottonB = 1 quintal of wheat + 0.71 quintal of cotton

A + B = 2 quintal of wheat + 1.21 quintal of cotton = 3.21 as total produce.

Trade with Specialization:

A producing only wheat and B producing only cotton

A = 2 quintals of wheatB = 1.42 quintals of cotton

A + B = 2 quintals of wheat + 1.42 quintals of cotton = 3.42 as total produce.

THUSA GAINOFOVERALL TRADEOF 0.21 QUINTALSOF COTTON



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Disadvantages:

- Loss to industry / nation which produces goods with comparativedisadvantage and comparative higher costs.

- Simplistic assumptions regarding the distribution of loss / gain in

producing / trading.



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FACTOR ENDOWMENT / HECKSCHER OHLIN THEORY:- Tried to explain why differences in productivity exist between

countries and the impact of these differences in international trade

Guiding Principles:

- Countries differ in their relative factor intensities.

In other words

- Countries will have a comparative advantage in producing the goodsusing their abundant factor relatively intensively and each country will

export its abundant factor good in return for the import of the goodwhich uses it scarce factor relatively intensively.

FACTOR ENDOWMENT Theory


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Leontief Pradox. ( to factor endowment theory)

General Assumptions for the US of A.

- Has comparative advantage in production of capital intensive goods.

- Has comparative less advantage in labor intensive goods.

However using 1947 Intl Trade Data he proved that..

- Exports of Capital intensive goods = US $ 14,010.

- Exports of Labor intensive goods = US $ 18,180.

Other economists reaffirmed this data but still H-O theorem provides ananalytical framework for predicting the likely pattern between two

countries.


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International Product Life Cycle

Nations export becomes the main import

Product life cycle theory - as the product matures it becomes more laborintensive and the comparative advantage shifts to different countries.

Step 1] Xerox [USA] exports to Japan and Europe

Assumptions and Facts:A] Japan growing demand

B] Technologically competent

C] Good market potential.

D] No entry barriers

E] Scenario post patent expiry not clear.

Step 2] JVs: Fuji Xerox and Rank Xerox

Step 3] Post e] above other collaborators enter the market eg Cannon andOlivetti.

Step 4] Costs increase therefore decide to shift base to Singapore.


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NationalCompetitive Advantage.

Related and

SupportingIndustries.

Factor Endowments

Firm Strategy

and Rivalry

Demand Condition

The effect of one is contingent with the other.

EXPORT PRODUCTSFROM THOSE COUNTRIESWHEREALL FOUR COMPONENTSOF THE DIAMOND AREFAVOURABLE WHILEIMPORT WHERE PARTSARE

UNFAVOURABLE.


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A nations competitiveness depends on the capacity of its industry to

innovate and upgrade.

Companies gain competitive advantage because of pressure andchallenge. They benefitfrom havingstrong domestic rivals, aggressive

home-based suppliers and demanding local customers.

Differences in national values, culture, economic structures, institutions,and histories all contribute to competitive success


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Doctrine:

Comparative advantage resides in (inherited) factor endowments like land,labor, population.

Nations can however add to and create new advanced factor endowments like

technology, government support, investment and industrialization culture, skillsets etc.

Production factor endowment and creation: local disadvantages and adverseconditions force to innovate which leads to national comparative advantage.

- Human resources, infrastructure, knowledge resources, physical and capitalresources


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Competitive advantage of nations

Domestic demand conditions:More demand leads to national advantage + trendsetting local market helps anticipate global trends.

- Buyer sophistication, anticipatory demand, demand size

Related and supporting industries :Increases efficiency + cost effectiveness.- Competitive, compatible domestic suppliers

Firm strategy, structure, and rivalry:Initially favorable but not in long run.

Local rivalry force firms to look beyond home country & thus innovate + improve.


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Triad CountriesUniversalization Of Needs.

Triad countries (US, Japan, Canada, W/Europe) represent approximately14% of the population and 70% of the world gross product.

Why are Triad Patterns universally accepted ?

- Mecca for Product Innovations

- Consumers as opinion leader and mold formers.

- Consumer rights, demand and pattern.

- High Purchasing power , High Education level

- Superior technological and transportation infrastructure.

- TV = 94% penetration , CNC tools, Computers = 90% usage in Triad.A COMPANY THAT IGNORES THE MARKET POTENTIAL OF THE

TRIAD, DOES SO AT ITS OWN PERIL.


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Major Decisions in International Marketing

Deciding whether to go abroad

Deciding which markets to enter

Deciding how to enter the market

Deciding on the marketing program

Deciding on the marketing organization


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Deciding whether to go abroad.

Assumption at stage 1)

potential risks have been weighed- foreign customer preferences have been understood

- Proper Understanding of the forex regulations / commerciallaws

- Proper understanding of the SLEPT-factors

Also look at factors like:

- huge foreign indebtedness

- Unstable governments

- Tariffs and trade barriers

- Technological pirating- High cost of communication and adaptation.


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Deciding which markets to enter.

- Define its international marketing objectives and strategies.

- Define what proportion of foreign to total sales will it seek ?

- Decide whether to market in a few countries or many countries

- (market entry and control costs are high / product &communication costs / population and income size and growth /dominant foreign firms can establish high barriers to entry.)

- DECISION VARIABLE:-

- Index points on the MARKET ATTRACTIVENESS vis--visCOMPETITIVE ADVANTAGE grid.


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Deciding which markets to enter.

Five steps in estimating the probable rate of return on investment:

a) Estimate of the current market potential

b) Forecast of future market potential and risk

c) Forecast of the Sales potentiald) Forecasts of Costs and Profits

e) Estimates of rate of ROI


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Deciding How to enter the market.

- An entry strategy should reflect an analysis of market potential,company stabilities and the degree of marketing involvement andthe commitment the management is prepared to make.

- Approaches could either require minimal investment and be

limited to infrequent exporting or large investments of capital andmanagement effort to capture and maintain a permanent,specific share of world markets. BOTH APPROACHES CANBE PROFITABLE.

Look at factors of commitment, risk, control and profit potential.


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Deciding How to enter the market.

Some of the common entry strategies are:- Indirect Exporting

- Direct Exporting

- Licensing

- Joint Ventures

- Direct Investments

- Franchising

- Consortia

- Contract Manufacturing

What will be the direction of the C-R-C-P


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Entry Strategies Criteria for Selection

- Speed ofMarket Entry Desired:

Setting up a WOS vis--vis Agent / Distributor to ensure quick /

effective distribution in the foreign market.

- Costs (to include direct as well as indirect):

Indirect like inland freights, strikes, disruptions to output, lack of

power supply, irregularity of raw materials.

- Flexibility Required:

Appointment of agent / distributor required only where it is deemed

unlikely that there will be much future expansion by the companydirectly into that market.


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Entry Strategies Criteria for Selection

- Risk Factors:

Risk may be diminished by minimizing the investment stake in the

company by accepting local joint venture partner etc. Also important

are third country risks boycotts (Arab world for Israel )

- Investment Payback Period:

Short term pay back realized from licensing and franchising deals

whereas joint ventures or wholly owned subsidiaries will tie up

capital for a number of years.

- Long-term profit Objectives:

Related to the growth envisaged in that market for the years ahead.


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Entry Strategies Outward Manifestations of a Company

The main features of the alternative modes of foreign market entry:

FEATURE CHARACTERISTIC

Ethnocentric Perceived as being closely related to its

country of origin

Polycentric Based in a few countries with no conspicuousimage

Regiocentric Overall image identifiable not with a country

but a region.P&G in Europe

Geocentric Globally coordinated with their own complex

global sourcing, management reporting

systems etc Pepsi, IBM, Coca-Cola

National

Responsiveness

Unilever in India


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DirectExporting

- from home country

- This means is the easiest and most common

- Risks and financial losses can be minimized ( over indirectexporting )

- Early motives are to skim the cream form the market or gainbusiness to absorb overheads.

Forms:

- A) export department

- B) overseas sales branch or subsidiary

- C) Traveling representative- D) Foreign based distributors / agents who would buy the

goods and own it might be given exclusive rights to representthe manufacturer.


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Licensing

Means of establishing foothold in foreign markets without large

capital outlays

- Patented rights / trademark rights and rights to use technologicalprocesses are granted in foreign licenses

- Confers only a right to use a company specific and paten-

protected process in manufacturing.

- Right is conveyed in the transferal of original blueprints anddesigns.

- In its simplest form, it may involve the transmittal of originaldesigns.

- Important criteria = KNOW HOW agreements.


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Licensing - Advantages

Advantageous when / Advantages:

- capital is scarce

- import restrictions forbid other means of entry

- a country is sensitive to foreign ownership or

- when it is necessary to protect patents and trademarks against

cancellation or non use.- Increases the income on products developed as a result of

expensive research.

- To retain a market to which export is no longer viable cos ofimport prohibitions, quotas, duties, transportation costs, lack ofproduction facilities etc.

- To make possible the rapid exploitation of new ideas on worldmarkets before competitors get into the act.

- For the licensor it becomes easier to handle more export marketsthis way.

- Licensing is a viable option where manufacture near to the

customers base is required.


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Licensing - Disadvantages

Potential Disadvantage:

- the firm has less control over the licensee than if they were to setup their own facility.

- The danger of fostering competition

- The fact that there is often a ceiling to licensing income perproduct, sometimes about 5% on the selling price.innovatingproducts at least could rate higher rewards if marketed in otherways.

- The licensee may prove less competent than expected atmarketing or other management activities, hence the licensor

may find his commitment is greater than expected. Eventuallycosts may grow faster than income.

- Negotiations with licensee and or the local govt are costly andoften protracted.


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Joint Ventures

- One of the more important types of collaborative relationships

- Provide less risky way to enter markets that pose legal andcultural barriers than would be the case in an acquisition of anexisting company.

- ( eg in mid 90s USA acquired 225 Eu firms and entered into67 JVs , however in Asia, they acquired only 27 existingcompanies but formed 97 JVs )

- A JV is differentiated from other types of SAs or Collaborative

relationships in that a JV is a partnership of two or moreparticipating companies that have joined forces to create aseparate legal entity. JVs are classified as SAs but not all SAaare in the strictest sense a JV.


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Joint Ventures

- Can be defined as The commitment for more than a shortduration of funds, facilities and services by two or more legallyseparate interests to an enterprise for their mutual benefit

- JVs go deeper than mere trade relationships since it

concentrates on the deliberate alliance of resources betweentwo independent organizations in order to mutually improvetheir market growth potential.

- JVs are of TWO TYPES:

a) Joint Equity Venture

b) Contractual joint Venture.


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Joint Ventures

Joint Equity Venture

- Wherein each of the respective partners contributes a sumeither in equity or technological know-how in return for a givenstake in the operation of a joint venture.

- Are open ended and not fixed.

- Suffer in that the absorption of local equity capital from theforeign market will dilute the company / country equity base.


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Joint Ventures

Four factors associated with JVs:

- 1) are established , separate legal entities

- 2) they acknowledge intent by the partners to share in themanagement of the JV

- 3) they are partnerships between legally incorporated entitiessuch as companies , chartered organizations or governments

- 4) equity positions are held by each of the partners.


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Joint Ventures

POSSIBLE DRAWBACKS:

- The partners might disagree over investment , marketing , andother policies

- Can hamper a MNC from carrying out specific manufacturing andmarketing policies on a worldwide basis.

- Difficulty of integrating into a global strategy with cross-bordertrading.

- Operational conflicts of interests eg as in pricing of a singlesource input or raw material.

- Conflict in tax interests between the partners particularly whereone may represent the local government interests.


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- FRANCHISING:

- Is a rapidly growing form of licensing in which the franchisorprovides a standard package of products, systems andmanagement services and the franchisee provides market

knowledge, capital and personal involvement in management.

- Potentially the franchise system provides an effective blending ofskill centralization and operational decentralization

- In England for eg annual franchised sales of fast foods isnearly 2 Billion US $ , which accounts for 30% of all foods eatenoutside the home.

- - eg Beijing KFC has the highest sales volumes of any KFCstore in the world.


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- TYPES OF FRANCHISE AGREEMENTS:

- A) master franchise gives the franchisee the rights to a specificarea with the authority to sell or establish sub franchises.

- ( eg McDonalds)

- B) LICENSING franchise right to use a product / good / serviceor any other asset for a fee

- ( eg Coco Cola licenses local bottlers in a an area or region tomanufacture and market Coco Cola using syrup sold by CocoCola. Rental car companies often enter foreign market bylicensing a local franchisee to operate a rental system under atrade mark of the parent company. )


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- CONSORTIA:

Are developed for pooling financial and managerial resources andto lessen risks.- eg for huge construction projects.

Similar to a JV except for the following two characteristics:

- 1) they typically involve a large number of participants

- 2) they frequently operate in a country or market in which none ofthe participants is currently active.


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Deciding on the Marketing program

StraightExtension

PRODUCT

Dual AdaptationCommunicationAdaptation

Product Adaptation Product

invention

P

R

O

M

OT

I

O

N

Do not change Adapt Product Develop new product

Adapt Promotion


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Straight Line Extension:

- Find customers for the product as it is [after finding usage]- eg Cameras, consumer electronics, machine tools.

Product Adaptation:

- altering the product to meet local conditions.

- eg- general foods coffee blends - British with more milk, French black coffee, no frills packaging in India, nokia higher volume ringtones, Hyatt fen-shui in Singapore etc.

Product Invention: [backward / forward]

- theory of IPLC.- eg National Cash Register: Crank operated in Latin America.

Promotion:

KFC [artificial, mechanical, unhealthy] in Japanese households.- My oldKentucky household.


74/78


Straight Line Extension:

- Find customers for the product as it is [after finding usage]- eg Cameras, consumer electronics, machine tools.

Product Adaptation:

- altering the product to meet local conditions.

- eg- general foods coffee blends - British with more milk, French black coffee, no frills packaging in India, nokia higher volume ringtones, Hyatt fen-shui in Singapore etc.

Product Invention: [backward / forward]

- theory of IPLC.- eg National Cash Register: Crank operated in Latin America.

Promotion:

KFC [artificial, mechanical, unhealthy] in Japanese households.- My oldKentucky household.


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international business ftmba- lec 1

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