Chapter 4 Mini Sim Exercise: Going Global

Decision Point: International Market Analysis You've done a considerable amount of research and have determined the following: Approximately 75% of the population in Ethiopia does not have electricity. Approximately 55% of the population in Nigeria does not have electricity. Nearly 40% of the population in Bangladesh does not have electricity. Nearly 25% of the population in Indonesia does not have electricity. Approximately 25% of the population in India does not have electricity. You recognize, however, that it would be wise to consider the population of those countries before determining which market(s) would have the greatest potential for your products, so you obtain that information as well. Your research reveals the following population estimates: Population of Ethiopia: 102,000,000 Population of Nigeria: 187,000,000 Population of Bangladesh: 163,000,000 Population of Indonesia: 260,000,000 Population of India: 1,327,000,000 Based on the information presented above, calculate the number of people in each country who do not have access to electricity.

ETHIOPIA: 102000000 X 77= 78540000 NIGERIA: 187000000 X 55= 102850000 BANGLADESH: 163000000 X 40= 652000000 INDONESIA: 260000000 X 25= 65000000 INDIA: 1327000000 X 25= 331750000

Decision Point: Levels of International Involvement You've made the decision to go global with your solar kits, and it appears that India presents the best potential market for your products. It's time to jump into the pool, but you need to decide whether you're going to jump into the shallow end or the deep end. Consider the following levels of international involvement. Type the letter representing the level of international involvement into the correct circle on the continuum. Each correct answer is worth three points.

IN THIS ORDER: C. Exporter/ ImporterB. International firmA. Multinational firm

Decision Point: Why You Wouldn't Use a Licensing Agreement You're considering licensing your business to a firm in India. Which of the following factors would make you reconsider your decision?

India is ranked near the bottom of the World Bank's Doing Business report, which measures business regulations in areas such as starting a business, dealing with construction permits, getting electricity, registering property, and so on. This was the best choice. Layers of bureaucracy can suffocate a business venture with red tape, delays in getting permits, and cost overruns. Having a local licensee should help facilitate navigating through the processes, but it is still a consideration.

Decision Point: Your International Organizational Structure You've determined that India presents the greatest potential for your solar kits. Now it's time to decide the best approach for launching your solar kits internationally. You recognize that there are different types of organizational strategies available to you to introduce your solar kits in India. You want to go slowly and enter this new market with minimal risk and expense. Of the following, which approach will you use? Select an option from the choices below and click Submit.

Licensing agreement. That was a good choice, although it requires a higher level of involvement on your company's part than utilizing an independent agent. A licensing arrangement is a contract under which you would allow a company in India to use your brand name, operating procedures, and proprietary technology. You would give this foreign company exclusive rights to manufacture or market your products in that market. In return, you would receive a fee plus ongoing payments (royalties) based on a percentage of the license holder's sales.

Decision Point: How Local Content Laws Will Affect Your Sales You have decided to continue on with licensing your business to a firm in India. Much to your surprise, the Indian government has announced that it intends to enact local content law requirements. How will this impact the production of your products?

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Mentoring Moment: International Organization Structures Going global isn't an "all or nothing" game. Businesses can break into international markets in a variety of ways. Independent Agents Independent agents are individuals or organizations that represent your business in a foreign market. They sell your products and collect payment. This is a low-cost option because agents work on commission, but it's also low control, because they represent multiple firms and don't specialize in a particular product or market. Licensing Arrangement Under a licensing arrangement, you give a firm in the country where you want to do business the right or resources to manufacture and market your products. Resources might include your brand, patents, copyrights, technology, or operating procedures. In return, the licensee pays you a fee plus royalties based on a percentage of sales. For example, Phillips-Van Heusen licenses its IZOD brand name in India, as well as many countries in the Middle East. Strategic Alliance In a strategic alliance, each party invests resources and capital into a new business or the parties cooperate in some mutually beneficial way, and the new business, owned by the partners, divides its profits. For example, Starbucks and Tata Coffee, Asia's largest coffee plantation company, signed a strategic alliance agreement a few years ago to build Starbucks' brand in India. Foreign Direct Investment Foreign direct investment (FDI) involves making a physical investment in buildings, machinery, and equipment in another country. FDI doesn't flow in just one direction -- from the U.S. to other countries. Foreign-owned companies also invest in the U.S., such as when German automaker BMW announced a $1 billion investment in its plant in South Carolina.

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Strong dollar? Weak dollar? Which is good? Which is bad? Let's start with a couple of quick definitions: The exchange rate is the rate at which the currency of one country can be exchanged for that of another. A strong dollar can purchase more foreign currency. For example, if the dollar strengthened against the Indian rupee, you would be able to buy more rupees. If the exchange rate yesterday was 66.90 rupees for $1, and today it is 68.90 rupees for $1, you can buy more rupees for that same dollar. A weak dollar can purchase less foreign currency. For example, if the dollar weakened against the Indian rupee, you would be able to buy less rupees. If the exchange rate yesterday was 66.90 rupees for $1, and today it is 63.40 rupees for $1, you can buy fewer rupees for that same dollar. But before you start thinking that strong dollar = good and weak dollar = bad, let's look at the effect on exports and imports. A strong dollar means U.S. consumers pay less for imports. Let's say that a pair of shoes from India costs 3,300 rupees. If the exchange rate was 66.90 rupees for $1, you'd pay about $49.33. However, if it were 68.90 rupees for $1, those same shoes would cost only $47.89. That may not seem like a lot of savings, but if you're a large retailer and you're buying thousands of pairs, that can add up in a hurry. What if you're exporting goods to India? A strong dollar means Indian consumers will pay more -- and that may not be good news for you. Let's say that you're exporting California wine to India. Yesterday, a bottle of Merlot cost $48.99, or 3,277 rupees. Today, when the dollar strengthened, that same bottle costs 3,375 rupees. Once again, if you're buying only one bottle that's probably not a huge deal, but if you're a commercial importer of thousands of bottles, that "strong dollar" may sting a bit. Click Next to continue.

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Decision Point: Ordering Light Bulbs Your licensee has set up operations in India, and soon he sends you an email. From: M. Patel Subject: Order We need to place a large order for bulbs for our solar kit. As you know, we purchase these bulbs from a supplier in the U.S. I have been watching the exchange rate between the U.S. dollar and the Indian rupee very carefully. The current exchange rate is $1 to 66.96 rupees. However, sources tell me that the exchange rate is expected to be $1 to 58.40 very soon. Please advise if you want me to place the order now or if you want me to wait until the anticipated change in the exchange rate takes place. I look forward to your prompt direction. What will you tell your licensee to do?

Place the order now. That was the best choice. Let's assume that the bulbs now cost 890 rupees. At an exchange rate of $1 to 66.96 rupees, the bulbs cost $13.29 each (890 ÷ 66.96). However, if the exchange rate changes as expected, those same bulbs will cost $15.24 (890 ÷ 58.40). Buy now, before the price goes up!

Decision Point: How Local Content Laws Will Affect Your Sales You have decided to continue on with licensing your business to a firm in India. Much to your surprise, the Indian government has announced that it intends to enact local content law requirements. How will this impact the production of your products?

Tariff - Japan announces an import tax of 15% on U.S.-made vehicles. - Every wristwatch imported into Mexico is subject to a tax of 45 pesos. Quota - Vietnam restricts the import of rice to 350,000 metric tons per year. - The U.S. allows the import of no more than 1.23 million tons of sugar each year. Embargo - Russia places a complete restriction on the importation of fish from Norway. Subsidy - The government of Haiti supplements the income of farmers of agricultural commodities such as wheat, grain, and cotton. Local Content Law - The Federal Highway Administration requires that steel and iron products used in highway construction projects must be sourced from U.S. companies. Business Practice Law - Companies wishing to import cheese into France must comply with lengthy customs procedures and provide additional trade documents such as Certificates of Origin and Certificates of Authenticity.

Decision Point: Choosing an International Market On the basis of population, it would appear that India has the greatest potential for your solar kits. However, you realize that this is a huge decision, so you decide to do more research before finalizing your decision. Which of the following factors, if true, would make you less inclined to enter the Indian market? Select an option from the choices below and click Submit.

The U.S. dollar has skyrocketed in value against the Indian Rupee. That was the best choice. This isn't a good sign. If the U.S. dollar is strong relative to the Indian currency (the rupee), your solar kits will be more expensive for Indian consumers, which could negatively impact your sales.

Decision Point: The Exchange Rate and Your Company Now that you're actively involved in international markets, you check the currency exchange rates on a daily basis. On Tuesday, the exchange rate between the dollar and the Indian rupee was $1 to 66.76 rupees. Today, the rate is $1 to 68.79 rupees. Is the dollar strengthening or weakening against the rupee?

The dollar is strengthening against the rupee. The U.S. dollar is strengthening against the rupee. A strengthening dollar means that it has increased in value compared to another currency. This means that the U.S. dollar now buys more of the other currency than it did before.