introduction to mos 2285 trevor hunter king’s university college

Introduction to MOS 2285

Trevor HunterKing’s University College

King's University College 2

Trevor Hunter

Office: FB 303Phone: ext. 4338E-mail: [email protected]: http://thunter.kingsfaculty.ca/

MOS 2285

mailto:[email protected]


Course Materials

Textbook: The International Business Environment 2nd edition Hamilton & Webster (available at UWO bookstore)

MOS 2285

MOS 1020 and MOS 2285

• If you have taken MOS 1020 you CANNOT take MOS 2285 and must drop it immediately

• The courses are anitrequisites which means that they cannot both be counted toward completing your degree.

• If you take them both you will be 0.5 credit short of completing your program and ineligible to graduate!!!!

King's University College MOS 2285 4


Purpose

• To teach you how to decide whether a given country is a good place for you to enter

• Understand the meaning of a national comparative advantage as it relates to your firm’s needs

• Understand how “why” you are internationalizing determines “where” you should go

MOS 2285


Objectives

• To make you aware and understand the macro forces that shape a country’s relative comparative advantage

• To teach you how to recognize why a given country may or may not be a good fit with your firm’s needs

• To teach you practical analytical tools that can be used in your career

MOS 2285


What We Will Discuss

• How to determine whether a given country has a relative comparative advantage

• Answer to the question “where should we go?”

MOS 2285

Question 1: Should we internationalize?

Strategic: MOS 4410

Question 2: Where is the

best place to go?

Analysis: MOS 2285

Question 3:How should we go?

Action:MOS 4404


Teaching Methodology

• Lectures and readings • Students should look over the lecture slides in

advance and summarize the key points – easier to study for the exams

• Each class will have assigned readings but they will mainly be for reference – most testing will be based on lectures – attendance is VERY IMPORTANT!!

MOS 2285


Evaluation

• Two Tests:– In-class 30% each (not cumulative)

• One Final Exam– In-class 40%

MOS 2285

Why Do Firms Internationalize?



The Nature of Businesses

• Corporations are separate legal entities• Obligated to their:

1. Owners (shareholders)2. Customers3. Employees4. Community

• Legally required to make as much money as physically and legally possible

MOS 2285


The Nature of Businesses

• Increase profit to maximize shareholder wealth• Profit is earned two ways: – Lowering costs

• More efficient operations• Procurement of less expensive raw materials

– Increasing revenues• Innovation – New products or features that create more sales or

higher sales prices• Creating new markets for entire industry• Taking share from competitors

MOS 2285


Increasing Profit: Increasing Revenues Through Innovation

Revenues$100 000

Profit – 25%

Costs – 75%

Product A

MOS 2285


Increasing Profit: Increasing Revenues Through Innovation

Revenues$100 000

Profit – 25%

Costs – 75%

Product A

Revenues$125 000

Profit – 25%

Costs – 75%

New and Improved Product A or Product B

MOS 2285


Increasing Profit: Adding Market Share

13%

17%

57%

13%

Market Size Year 1$10 000 000

MOS 2285


Increasing Profit: Adding Market Share

13%

17%

57%

13%


MOS 2285

13%

17%

57%

13%



Increasing Profit: Stealing Market Share

13%

17%

57%

13%

Market Share Year 1

MOS 2285


Increasing Profit: Stealing Market Share

13%

17%

57%

13%

Market Share Year 1

32%

11%44%

13%

Market Share Year 2

MOS 2285


Increasing Profit: Decreasing Costs Without Increasing Revenues

Revenues$100 000

Profit – 25%

Costs – 75%

Year 1

MOS 2285


Increasing Profit: Decreasing Costs Without Increasing Revenues

Revenues$100 000

Profit – 25%

Costs – 75%

Year 1

Revenues$100 000

Profit – 40%

Costs – 60%

Year 2

MOS 2285


What Drives Globalization

• Efficiency Drivers – make more money be lowering costs– Increased competition– Investor expectations

• Market Expansion Drivers – make more money by selling more stuff to more people– Saturated domestic markets– Product characteristics that are transferable across borders– Innovation

MOS 2285


Globalizing – It’s Not So Easy

• Local conditions are still relevant• What works in one country may not work

in another – it goes beyond products–What is “service?”–What is “quality?”–How do different perceptions effect costs?

MOS 2285


What Facilitates Globalization?

1. The decline of barriers of movement of goods, services, investment, skills, etc.

2. Technology: computers, transportation, communications, etc.

MOS 2285


The Business Environment

• Businesses operate in a complex environment, often full of uncertainty and turmoil

• Uncertainty makes it difficult to operate efficiently

• Three main aspects of the global business environment which differ and create uncertainty and complexity:– Social Systems– Political Systems– Economic Systems– Legal Systems

MOS 2285


Social Systems

• The system of shared beliefs, values, customs and behaviours - culture

• Different cultures have different perspectives toward many different issues– Religion– Human rights– Role of business

MOS 2285


Political Systems

• The system of national or regional governance• Collectivism vs. Individualism– Socialism and Communism– Individualism

• Democracy vs. Totalitarianism– Freedom and repression?

MOS 2285


Economic Systems

• The system in which commerce is conducted• Market Economy– The Invisible Hand

• Command Economy– The Visible Hand

• Mixed Economy– The Gentle Hand

MOS 2285


Legal Systems

• The system through which government enforces its regulations

• Different Legal Systems– Common, Civil and Theocratic

• Rule of law or personal whim affects:– Contracts– Property Rights– Intellectual Property– Product Safety and Liability

MOS 2285


Implications for Businesses

• Operating an international business is a tricky thing – there are no guarantees

• You have to understand the business environment into which you are entering very well if you are going to succeed, but, you still might fail.

• Knowledge, understanding and patience are key.

MOS 2285


Why do businesses “go global?”

• It’s a bit of a long story . . .• Firms seek to increase profits through

international production and sales• Two general strategies

1. Efficiency: Producing at a lower cost to provide more value to consumers than competitors

2. Market expansion: Added value products so consumers will pay more for it, or more consumers will buy it



• Efficiency Drivers – make more money be lowering costs– Forced to be efficient by:

• Increased competition• Investor expectations

• Market Expansion Drivers – make more money by selling more stuff to more people– Sell to other countries when:

• Domestic markets are saturated• Product characteristics that are transferable across borders• Seeking innovation from other sources

MOS 2285


• Firms can become more efficient or expand their markets by exploiting their own or another country’s National Comparative Advantage– Different resource endowments or competencies

or cost advantages that are prevalent within and relatively unique to a given country or society.



National Comparative AdvantageIdentifying a Nation’s Comparative Advantage

Related &SupportingIndustries

FactorEndowments

DemandConditions

Strategy,Structure &

Rivalry

Source: M. Porter


National Comparative Advantage

• Examples of National Comparative Advantages:– India – software development, IT services– Germany – product engineering, chemicals– Japan – micro electronics, automobiles– Switzerland – banking, pharmaceuticals– Mexico – auto parts– Canada - ?


• Depending upon what makes up a country’s national comparative advantage, it may be a good or bad place for a firm to internationalize

• Whether the country “fits” the firm’s needs depends upon what the firm needs to compete – a strategic decision




• Outsourcing: Refers to the tendency among many firms to source goods and services from different locations around the globe

• Firms evaluate the costs of production in different regions and move facilities around if the costs rise in one area vs. another (portfolio perspective)

MOS 2285


• If there is a fit, a country’s national comparative advantage can provide benefits in terms of either improved efficiency or increased market share or both through:– Location Economies– Economies of Scale



Location Economies

• Operating internationally allows firms to gain greater efficiencies by capturing Location Economies: – Locating different value chain activities in the

optimal location (regardless of which country it is) to capitalize on lower factor costs (labour, raw materials, transportation, regulatory compliance etc.)

– Differentiation by locating in a country to access or capitalize on a specialized skill or reputation associated with an activity or product.


Location Economies

• The firm as a value chain– a series of distinct value creation activities

• Two types of activities– Primary: what the firm does to create, market,

deliver and service the product– Support: activities that support the primary

activities


Location Economies

• Examples of Primary Activities:– Smelting– Auto manufacturing– Software design

• Examples of Support Activities:– IT support– Inventory distribution– Human resource practices


Location Economies

• The efficiency of the primary and support value chain activities affect the profitability of the firm

• Doing what you do best – ie. Your “core competence” is a more efficient use of money

• Higher efficiency = Higher profit


Location Economies

• Firms tend to maximize efficiency by doing what gives them their competitive advantage (primary activities) themselves and what they have to do to support what they do (support activities) to places that can do them more efficiently (ie. cheaper)– Primary: Apple manufacturing iphones in China– Secondary: IT services, customer support centres

to India


Location Economies

• Normally, people will buy cheaper goods of the same quality

• Competition pushes firms to provide the best product/service at the lowest price (efficiency)

• The lowest price cannot always be achieved producing in or buying raw materials in the home market

MOS 2285


Location Economies

• Other countries may have lower factor costs• The Two Major Factor Costs:

1. Labour2. Raw Materials

• To stay competitive and maintain efficiency, firms may have to move production off-shore or purchase products produced elsewhere

• Think about what you have that is made in China – Now, think about how much it would have cost if it were made in Canada!

MOS 2285


Location Economies – Factor Costs

• Capturing location economies lowers the cost of value creation by capitalizing on low factor costs allowing greater efficiencies

• Efficient operations with the same or expanding revenues increase profits meaning shareholder wealth is maximized– This is management’s primary responsibility –

investor expectations drive the search for efficiency!


Location Economies – Factor Costs

• If the firm passes on the low costs to its customers its products will be more attractive than its competitors providing it with a competitive advantage allowing it to expand its market share and gain more sales and profits

Location Economies – Differentiation

• Firms can differentiate product offerings by capitalizing on the particular competency prevalent in that country – Knowing that a diamond comes from NWT or

that a car has “German engineering” has some “value” to the consumer

• Allows firms to maximize revenues by increasing market share or increasing prices



Economies of Scale

• Firms may have saturated their home market with their products to a point where further profit growth is limited.

• There may be other markets in the world where they can sell their products.

• The more firms can sell of the same thing the more efficient (profitable) they will be


Economies of Scale

• If you are able to sell more of the same products, you have to make more and the more you make the lower your cost per unit through Economies of Scale: – Reduction in unit costs by producing large

numbers. Cost reduction comes from more efficient use of equipment and experience.


Economies of Scale

Accumulated Output

UnitCosts

A

B

The Experience Curve


Investor Expectations• The drive for economies is based upon the

NEED to increase profits. Competition drives firms to internationalize in an attempt to secure existing profits and hopefully increase them.

• Profits are returned to shareholders – the investors in/owners of the firms• More than any other reason, firms

internationalize to meet the wealth maximization expectations of their investors

MOS 2285


Investor Expectations• Time perspective – businesses must plan and

strategize– The planning horizon for businesses has decreased over

the last 20 years – Shorter time perspective requires quick fixes and efficiency

• Quarterly rather than annual results– Every quarter pension funds, institutional investors and

private equity funds demand double-digit growth in EPS, Profits, Sales

• Business decisions are made by people –people are boundedly rational and self interested

MOS 2285


Investor Expectations• Realities of factor costs for business in North America

and Western Europe make meeting investor expectations through by operating domestically impossible

• The only way to meet profit expectations is to move operations off-shore to a developing country and exploit lower factor costs – if you don’t meet expectations you can lose your job

• Investor expectations create a one-way street that must end in exploitation– Keep in mind the investors are not just big institutions,

they are you, your families and me too

MOS 2285

Is Globalization Good or Bad



General Arguments – FOR Globalization

• People like stuff (food, clothing, etc). And they like it cheap.

• Globalization is one way of making stuff more efficiently (therefore more cheaply)– Canada can’t grow bananas. So we make

something else and trade with Costa Rica (we do what WE are good at)

– Comparative advantage



• Worldwide wealth has grown (and therefore standards of living are up)– GDP: The total value of all goods and services produced in

a given year (ie. What value was created in terms of goods/services)

– 1955 – $414.4 billion (2000 USD, globally)– 1989 – $20 550 billion– 1999 – $39 081billion– 2013 - $74.9 trillion: 180 times bigger in 59 years!(source:

http://www.imf.org/external/pubs/ft/weo/2010/02/weodata/index.aspx)



• Longevity and health– Developed world life expectancy: 77 for men, 83

for women http://wdi.worldbank.org/table/2.21

– Infant mortality: 7 out of 1000 births (prob of not reaching 5 yrs.) http://wdi.worldbank.org/table/2.21

– There is more opportunity to live better



• Spread the risk of producing something by doing it around the world– Therefore if one area stops, somewhere else can

pick it up– Can secure investment and return better to

maximize shareholder wealth (businesses’ legal role)



• Globalization is a form of economic/ political openness

• Allows all players access to a bigger opportunity (bigger markets = bigger chances of success)

• An open economy spurs innovation with fresh ideas from elsewhere



• Global competition and cheap imports keep prices down, so inflation (the price of goods going up) isn’t as drastic

• Global competition gives jobs and technology to areas that normally might not have them (lifting standards in poorer countries)


General Arguments – AGAINST Globalization • Not all people are seeing the increase in wealth

and prosperity:2010 GDP (USD)

http://www.imf.org/external/pubs/ft/weo/2010/02/weodata/weoselser.aspx?a=1&c=110%2c200&t=2

% of Global GDP

GDP per head 2011 (USD) http://mdgs.un.org/unsd/mdg/Host.aspx?Content=Data/Trends.htm

Population http://esa.un.org/unpd/wpp/unpp/p2k0data.asp

% of Global Population

Developed 44.303,236 trn 64% 64,319 1,235,900 18%

Developing 24.821,798 trn 36% 13,077 5,659,989 82%

Total 69.125,034 trn 100% 22,668 6 895 889 100%


General Arguments – AGAINST Globalization • Not all people are seeing the increase in wealth

and prosperity:Wealth Range Number of

Adults% of World Population

Total Wealth % of World

> USD 1 million

24.2 million 0.5 % USD 69.2 trillion

35.6%

USD 100,000 – 1 million

334 million 7.5 % USD 85 trillion 43.7%

USD 10,000 – 100,000

1.045 billion 23.5 % USD 32.1 trillion

16.5 %

< USD 10, 000 3.038 billion 68.4% USD 8.2 trillion

4.2%

Source: https://www.credit-suisse.com/news/doc/credit_suisse_global_wealth_databook.pdf


General Arguments – AGAINST Globalization

• Longevity and health– Developing world life expectancy: 54 for males,

and in many countries doesn’t reach 45 (42 for Zimbabwe)

– Infant mortality more than 118 out of 1000 births – 136 if female (257 in Afghanistan)

• There is less opportunity to live better if you are poor



• International policies and decision-making powers aren’t in the hands of the people– Should we tie our laws and social norms to economic

concerns?• Pandering to corporations “at all costs”• WTO, IMF, World Bank aren’t entirely

“accountable” to the public and are secretive



• Globalization is actually CREATING poverty and keeping them poor– Sweatshops for Reebok, Nike, The Gap, Liz

Claiborne, Wal-Mart, etc.– Many countries keep labour standards low to keep

firms there (or they go somewhere else)– Unequal distribution of wealth and ownership



• The environment isn’t on the agenda– Many countries have different environmental laws

(lower, higher standards)– Helps attract manufacturing but doesn’t help the

people or environment



• Causes a lot difficulties during transition (it’s happens but it’s too quick)– As manufacturing leaves high cost areas, the

people left behind are in trouble– When economic and political systems chance

rapidly in countries that are not socially prepared major problems can arise. (Russia)


What should the Role of Globalization and MNCs in Society Be?

• Profit at all cost?• Employment• Maximize shareholder wealth• Make the world a better place through

innovation, charity etc.• Regardless of what you think of business it has

an IMPORTANT role!


There are two sides here.

• There are definitely good and bad aspects.• As a citizen of the world and consumer must

realize that:You will influence and create change.

The better understanding you have of the problems the easier it is to make it better.

introduction to mos 2285 trevor hunter king’s university college

Documents

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