IBUS 480

1. Channels of distribution

*know that the process is manufacturer > import agent > customer (the process doesn't start at import agent)

Essential Control Techniques

1. Accounting systems: International firms must develop accounting systems to control and monitor the performance of the overall firm and each division, operating unit, or subsidiary. They enable managers to keep abreast of the financial performance of every part of the firm. 2. Procedures: Policies, standard operating procedures, rules, and regulations all help managers carry out the control function. They help guide plant managers in making purchasing decisions and allocations. 3. Performance ratios: This is a numerical index of performance that the firm wants to maintain. A common performance ratio used by many firms is inventory turnover.

Four phases of acculturation

1. Honeymoon- For the first few days, or months, the new culture seems exotic and stimulating. Excitement of working in new environment makes employee overestimate the ease of adjusting. 2. Disillusionment- Differences between new and old environments are blown out of proportion. As employee and family face challenges of everyday living differences become magnified. Many transplanted employees remain stuck in this phase. 3. Adaptation- With time employee begins to understand patterns of new culture, gains language competence, and adjusts to everyday living. 4. Biculturalism- Anxiety has ended as transplanted employee gains confidence in ability to function productivity in new culture. iii. Repatriation- Bringing a manager back home after foreign assignment has been completed.

Joint management considerations

1. Shared management: It is a part of someone's job. Both parties (from each company) actively manage the alliance 2. Assigned management: One company is assigned to manage the deal. a. Ex. Boeing may manage because their risk and investment is higher than the other partner 3. Delegated management: This is exclusively for joint ventures. The two partners hire someone from outside of the company to manage the deal. Someone from inside one of the company's can control the JV, but he/she has to leave the respective company.

Product policy

1. Standardization vs customization: Firms must decide if products should be standardized across markets or customized within individual markets. a. Ex. Toyota has adopted a blend of custom and standard and continues to produce high-quality products but customizes by the market.

Ethnocentric

A company markets its goods internationally the same way it does domestically. 1. This method typically happens when a company is just moving into an international market through an inquiry from a company. The goods are sold for the same price as the home market.

2. It is easy to adapt and avoids the expense of developing new market techniques. 3. The 4p's are all the same as home market (home replication). ii. Polycentric

A company tailors its price to each company it enters (multi-domestic).

4. Letters of Credit

A document that is issued by a bank and contains its promised to pay the exporter on receiving proof that the exporter has fulfilled all requirement specified in the document. The importer's bank may demand more information before funding the letter.

5. Credit cards

A firm may tap into the well-established credit card network to facilitate international transactions, subject to the normal limitations of these cards.

Customer design

A firm serves different customers/customer groups each with specific needs calling for special expertise or attention. Ex. Kodak

2. International division

A firm will create this division as its international operations grow. Made to facilitate coordination and communication between domestic and international operations.

Culture shock

A psychological phenomenon that may lead to feelings of fear, helplessness, irritability, and disorientation.

Joint Venture

A special type of strategic alliance in which two or more firms join together to create a new business entity that is legally separate and distinct from its partners.

International division

Allows a firm to concentrate resources and create specialized programs targeted on international business activity while simultaneously keeping that activity segregated from firms ongoing domestic activities. Its own are that solely handles all international practices.

Three types of Knowledge that organization design must deal with

Area knowledge, Product knowledge, and Functional Knowledge

Global product design

Assigns worldwide responsibility for specific products or product groups to separate operating divisions within a firm. 1. Ex. Samsung with almost 80 affiliates in Korea unrelated diversification.

Net present value

Based on a basic precept of finance theory that a dollar today is worth more than a dollar in the future. 1. Risk Adjustment: The amount of risk should reflect the degree of riskiness of operating in the country in question. Ex. Little, if any, risk adjustment is needed for Germany because of its political stability. 2. Choice of Currency: The determination in which part the project should be evaluated depends on the nature of the investment. If the project is an integral part of the business of an overseas subsidiary, use of the foreign currency is appropriate. 3. Who's Perspective: Parent's or Project's? Internal rate of return: First, the cash flows generated by each project in calculated, as the net present value analysis. Then, the interest rate- called the internal rate of return- that makes the NPV of the project just equal 0. The project's internal rate of return is compared with the minimum rate of return the firm finds acceptable (hurdle rate). Payback period: The number of years it will take the firm to recover, or pay back, the original cash investment from the project's earnings.

Minimize working capital balances

Both domestic and international firms must hold working capital for two reasons: to facilitate day-to-day transactions and to cover the firm against unexpected demands for cash. Firm's need to balance the need for cash against the opportunity cost of holding the firm's financial assets in such low-yielding forms. 1. One technique to minimize: A centralized cash manager typically a member of the MNC's corporate treasury staff, coordinated the MNC's worldwide cash flows. The expertise of the centralized cash manager's staff can be used to seek out the best short-term investment opportunities available.

3. Culture influences

Companies must adapt their products to meet consumer needs and this can be as simple as changing the label on the product to the local language. a. Gerber customizes its baby food to the local market after doing research that told it that local mothers won't buy mashed bananas because they're seen as an expensive luxury. b. In Japan, a car is more seen as a status symbol than a mode of transportation. The looks of the car is more important than the way it looks. c. Firms may need to adjust the packaging in certain countries to ensure it's well kept before reaching the consumer. Flour in India needs to be packaged in plastic versus paper, so it doesn't get moist.

Compare performance against standards

Compare measured performance (from step 2) against the original control standard (from step 1)

d. Scope of strategic alliances

Comprehensive alliances, Functional alliances, Production Alliance, Marketing Alliance, Financial alliance, and R&D alliance.

c.Three phases of organization development of a domestic company as it begins to work internationally

Corollary approach, export department, and international division

f. Switching arrangements

Countertrade obligations are transferred from one firm to another. A variety of firms (many headquartered in London or Vienna) is available to provide financing, marketing, and legal services needed by international businesses engaging in switching arrangements.

Measure actual performance

Develop a valid measure of the performance component being controlled.

a. Barter

Each party simultaneously swaps its products for the products of the other.

4. Public relations

Efforts aimed at enhancing a firm's reputation and image with the general public, as opposed to touting the specific advantages of an individual product or service. a. Savvy international firms realize that money spent on PR is money well spent.

1. Centralization

Employ home country managers a. International division

2. Decentralized

Employ host country managers a. Multidomestic companies

Set control standards for performance

Establish a desired level of performance for which managers are held accountable. They help provide a roadmap for managers involved in opening and running the new plant.

Minimize Foreign Exchange risks

Financial officers will typically adjust the mix of currencies that make up the firm's working capital to minimize foreign exchange risk. 1. Firm's will use leads and lags strategy to try to increase their net holdings of currencies that are expected to rise in value and to decrease their net holdings of currencies that are expected to fall in value.

Global functional design

Firm creates department/divisions that have worldwide responsibility for common organizational functions: finance, operations, and marketing. This is used in a company with narrow/similar product lines like airlines.

Loss of autonomy

Firms share control, thereby limiting what each can do. 1. Ex. Partners must talk about new products/services they want to introduce with partners before introducing them.

3. Financial alliance

Firms that want to reduce the financial risks associated with a product- chip in money for a product a. Ex. Making Hollywood movies because those are high risk, high investment

Minimize currency conversion costs

Foreign subsidiary's may continually buy and sell parts and finished goods among themselves. 1. These costs can be cut by engaging in bilateral netting in which two subsidiaries net out their mutual invoices. Further conversion costs can be cut through multilateral netting, which is done among three or more business units.

Six common forms of Global Organization Design

Global product design, global area design, global function design, customer design, Matrix design, and hybrid global design.

2. Open account

Goods are shipped by the exporter and received by the importer before payment. The exporter then bills the importer for the goods, stipulating the amount, form, and time at which payment is expected.

Organizational control

How international business designs its overall organization in response to changes in environmental or its strategy

Operations control

How international business focuses operational systems within the organization, as well as, within individual subsidiaries and operation units, administration, and distribution centers, manufacturing facilities, etc.

Pitfalls of strategic alliances

Incompatibility of partners, Access to information, distribution of earning, Loss of autonomy, , and changing circumstances.

Incompatibility of partners

It could lead to outright conflict, although typically it merely leads to poor performance of the alliance. It's the primary cause of arrangements failures.

Strategic control

It monitors how well international business formulates and implements a strategy. 1. Ex. Daimler-Benz bought Chrysler, decision seemed logical- ended up being poor strategic decision

6. Counter trade

It occurs when a firm accepts something other than money as payment for its goods or services.

iii. Geocentric staffing model

It puts PCNs, HCNs, and TCNs on an equal footing. Firms that adopt this approach want to hire the best person available, regardless of where that individual comes from.

3. Sales promotion

It's comprised of specialized marketing efforts such as coupons, in-store promotions, sampling, direct-mail campaigns, cooperative advertising, and trade fair attendance. a. Sales promotions based on wholesalers: Designed to increase the number and commitment of these intermediaries working with the firm. b. Sales promotions targeting consumers: Designed to fit local customs and circumstances.

2. Legal forces

Laws and regulations of host countries may affect the product policies adopted by international firms. Some countries have imposed detailed labeling requirements and health standards on consumer products that firms, both foreign and domestic must follow strictly. a. Ex. Grupo Modelo SA (corona manufacturer) had to reduce nitrosamine levels of the beer it sells in Germany, Austria, and Switzerland.

3. Documentary collection

Local banks serve as agents to facilitate the payment process. a. To initiate this method, the exporter draws up a document called a draft (or bill of exchange), in which the payment is demanded from the buyer at a specified time. After it ships, it gives draft to local banker.

Product knowledge

Managers must comprehend such factors as technological trends, customer needs, and competitive forces affecting the goods the firm produces and sells.

Functional knowledge

Managers must have access to coworkers with expertise in basic business functions such as production, marketing, finance, accounting, human resource management, and IT.

Area knowledge

Managers must understand the cultural, commercial, social, and economic conditions in each host country market in which a firm does business.

Hybrid global design

Most common design. Taking a combo of the other ones to make the perfect plan.

Access to information

Not having enough information before the deal can be a major drawback. The firms must provide each other with information that they prefer to keep secret.

c. Buy back

One firm sells capital goods to a second firm and is compensated in the form of output generated as a result of their use. i. Ex. Japan's Fukusuke Corp sold 10 knitting machines and raw materials to Chinatex in exchange for one million pairs of underwear to be produced on the knitting machines.

b. Counter purchase/parallel barter

One firm sells its products to another at one point in time and is compensated in the form of the other's products at some future time. (most common) i. Boeing has used this method to sell aircrafts for Saudi Arabia in return for oil

Global area design

Organizes activities around specific areas/regions 1. Adecco has 10 basic divisions representing a different area. This allows firm to develop local market expertise.

d. Off-set purchases

Part of the cost of an exported good is offset by production in the importing country. These are particularly important in sales to foreign governments of expensive military equipment such as fighter jets or tanks. i. Ex. UAE requires joint ventures to be created with local companies that will cumulatively generate profits to offset 60% of the contract's cost within 7 years.

4. R&D alliance

Partners agree to undertake joint research to develop new products/services. High risk, share risk, and cost of research development a. Ex. In tech or pharmaceuticals market

5. Brand names

Popular, international firms often like to standardize the brand name of the product. This allows it to reduce its packaging, design, and ad costs. Firms may also alter the name based on how consumers may perceive the product. a. Ex. Coca-Cola markets the low-calorie drink diet coke in weight-conscious markets and Coca-Cola light in other.

Host country nationals (HCN's)

Residents of the host country, commonly used by international business to fill middle-level and lower-level jobs but may also appear in managerial and professional positions. a. Adv: i. HCNs already understand the local laws, culture, and economic conditions ii. The firm avoids the expenses associated with expatriate managers, such as relocation costs, supplemental wages paid for foreign service, and private schooling for children. b. Disadv: i. They may be unfamiliar with the firm's business culture and practices, thus limiting the effectiveness of the HCNs

Parent country nationals (PCN's)

Residents of the international business's home country. a. Adv: i. They facilitate communication and coordination with corporate headquarters. ii. Best able to graft new technologies or business techniques to a host country setting b. Disadv: i. Lack knowledge of the host country's laws, culture, economic conditions, social structure, and political processes. ii. Training to overcome these knowledge gaps is expensive iii. Expensive to relocate and maintain in the host market. iv. Many host countries restrict the number of foreign employees who can be transferred in and/or mandate that a certain percentage of an international firm's payroll must be paid to employees from the host country.

Respond to deviations

Respond to outcomes that result from comparing the control standard to actual performance.

Establishing international control systems

Set control standards, Measure actual performance, Compare performance against standards, and respond to deviations

Distribution of earnings

Since the partners share risk and costs, they share profits. The partners need to agree on the distribution of earnings that will be distributed to themselves as opposed to being re-invested into the business.

Three levels of International Business Control

Strategic control, Organizational control, and operations control

Matrix design

Superimposing 1 form of organization design on top of an existing, different form. It promotes organizational flexibility.

iii. Geocentric

The company does everything one way, but it might not be the same as the home market. 1. It is made possible by de-centralized management and goes hand-in-hand with market pricing policy. 2. When a company uses this pricing strategy, it typically gives local marketing managers a price corridor, and the marketing managers pick a price based on the local culture.

4. Economic factors

The company's economic level may affect the desired attributes of a product. Consumers in richer countries often favor products loaded with extra features. Price-sensitive consumers in poor countries typically opt for stripped-down products. a. Ex. Consumers in India only buy small packets of shampoo and conditioner because they don't have enough expendable income to buy a whole bottle at once.

1. Export department

The department that manages international activities. The manager reports to an existing company executive such as the vice president of marketing.

e. Clearinghouse accounts

The exporting firm incurs a counter purchase obligation of an equivalent value, which is recorded in its clearinghouse account. When the exporting firm eventually buys goods from its partner, its clearinghouse obligation is reduced.

International Marketing

The extension of these activities across national boundaries. An internal firm accustomed to promoting stuff on TV will have to change when entering less-developed market. Ad regulations can also differ.

Corollary approach

The firm delegates responsibility for processing such orders to individual within an existing department. (ex. Marketing). 1. Firm uses existing domestic organizational design and it's typical of a firm that has small level of international activity.

2. Two-tiered pricing policy

The firm sets one price for its domestic sales and one price for its international sales. The international sales price is usually the domestic price increased by a certain percent. a. This is usually used by firms just starting to internationalize. It's not suitable for a long-run pricing strategy. These firms are susceptible to charges of dumping.

Translation exposure

The impact on the firm's consolidated financial statements of a foreign subsidiary are denominated in a foreign currency rather than the firm's home currency. 1. Strategy for managing translation exposure: a. Balance sheet hedge: It's created when international firm matches its assets denominated in a given currency with its liabilities denominated in that same currency. This balancing occurs on a currency-by-currency basis, not on a subsidiary-by-subsidiary basis.

Economic exposure

The impact on the value of a firm's operations of unanticipated exchange rate changes. 1. Strategy for managing economic exposure: a. Operational hedge: When you match revenues in a given currency with an equivalent flow of costs. i. Ex. Sony has tried to cut their economic exposure to exchange rate fluctuations by localizing their manufacturing, r&d, and parts procurement to better match their revenue flows and cost flows by country.

Definition of Organization Design

The overall pattern of structural components and configurations used to manage the total organization.

Comprehensive alliances

The participating firm agree to perform together multiple stages of the process by which goods/services are brought to market. Because of the broad scope of such alliances, the firms must establish procedures for meshing areas. This helps grow synergy. 1. Ex. GM and Nestle bringing cereal to European market.

Transfer pricing

The price paid for goods and services involved in intracorporate transactions between subsidiary and other branches of the corporate family. i. Basis for calculating transfer prices: 1. Market based: Uses prices determined in the open market to transfer goods between units of the same corporate parent. 2. Nonmarket (negotiation) based: Prices may be set by negotiations between the buying and selling units or on the basis of cost-based rules of thumb such as production costs plus a fixed markup.

Definition of Control

The process of monitoring ongoing performance and making necessary changes to keep the organization moving towards its performance goals.

1. Payment in advance

The safest method of payment from the exporter's perspective. The exporter receives the money before shipping the goods. a. Adv: Risk is reduced, and payment is received fast.

Definition of Human Resource Management (HRM)

The set of activities directed at attracting, developing, and maintaining the effective workforce necessary to achieve a firm's objectives.

Third country nationals (TCN's)

They are not citizens of the firm's home country or of the host country. Most likely to be used in upper-level and/or technical positions. They are consciously being employed by some firms to firms to promote a global outlook through their operations.

Export department

They take responsibility for overseeing international operations, marketing products, processing orders, working with foreign distributors, and arranging financing when necessary. Originally, export head may report to senior marketer or finance executive, but as company grows export head may equal with finance, marketing, etc.

Changing circumstances

Things may change after the deal is created like technology or economic circumstances.

3. Global organization

This assembles a team of managers that have the expertise to produce, finance, and market its products worldwide while simultaneously coordinating its activities to achieve global production, financing, and marketing economies and synergies. They must have knowledge in the following: a. Product line: Be aware of the latest manufacturing techniques, R&D, and competitors' strategies. b. Functional skills: Necessary skills to ensure global competitiveness (accounting, logistics, marketing, manufacturing management) c. Individual country markets: They must understand such factors such as local laws, culture, competitors, distribution systems, and ad media. d. Global strategy: High-level executives at corporate headquarters must formulate a global strategy for the firm to control and coordinate activities.

Choice of currency

This comes into play when deciding the currency to use to settle a transaction in international business. Usually the importer and exporter have conflicting ideas.

ii. Credit checking

This concerns the reliability and trustworthiness of the buyer. 1. Importer is financially reliable: Exporter may choose to simplify the payment by extending credit to the importer. 2. Importer is financially troubled: Exporter may demand a form of payment that reduce its risk. 3. In America, firms will typically ask for credit references or contact established sources of countries.

1. Advertising

This is the most important element. Three main factors must be considered: a. The message it wants to convey b. The media available for conveying the message c. The extent to which the firm wants to globalize its advertising costs

1. Production alliance

Two plus firms each manufacture products or provide services in a shared or common facility. a. Ex. BMW and Chrysler both get small engines (for smaller 3 series and vans) from manufacturer in Latin America

2. Marketing alliance

Two plus firms share marketing services or expertise (one partner introduces its products or services into a market in which the other partner already has presence) a. Ex. You'll market my product in your market and I'll market yours, co-op on marketing. Lion Kind and Burger King alliance.

i. Ethnocentric staffing model

When a firm primarily uses a PCN to staff higher-level foreign positions. Based off the assumption that home office perspectives should take precedence over local perspectives and that expatriate PCNs will be most effective in representing the views of the home office in the foreign operation.

2. Personal selling

When an employee goes door-to-door. This is the best way to receive local knowledge and build close, personal relationships with employees. The best way to learn what consumers want.

ii. Polycentric staffing model

When firms emphasize the use of HCNs in the belief that HCNs know the local market best.

Transaction exposure

When the financial benefits and costs of an international transaction can be affected by exchange rate movements that occur after the firm is legally obligated to complete the transaction.

3. Market pricing policy

When the market is analyzed, and an appropriate price is determined for that market. Although it is ideal, it is very complex and decentralized control is needed. a. Risks: i. Pissed off customers: They don't understand it can be cheaper to do business in another country over theirs (inputs costs, labor, transportation, tariffs) ii. Arbitrage: A smugglers buys cheaper in one country to sell it higher in another country. iii. Gray Market and Black Market

1. Standard price policy

You price your product the same in every market. Firms selling goods that are easily tradeable and transportable often adopt this strategy. a. This means you may earn more in one and less in another.

1. Resistance to control

a. Overcontrol: The firm tries to exert more control over individuals than they think is appropriate. i. Ex. Disney Paris attempting to enforce the same grooming standards that are in the US b. It may be inappropriately focused. i. A firm places so much emphasis on lowering costs that quality is compromised. c. People may resist control because control increases their accountability.

2. Overcoming resistance to control

a. Promote Participation b. Create a control system that has a clear appropriate focus and that creates reasonable accountability without overcontrolling c. Providing a diagnostic mechanism for addressing unacceptable deviations d. Account for cultural factors

Benefits of strategic alliances

i. Ease of market entry: Helps to rapidly enter while keeping costs down and over come local competition. This can also help with learning about government regulations. 1. Ex. IMAX targeted Wanda cinema line in China (largest theatre chain) to JV and speed entry to build 75 IMAC theatres. ii. Shared risks/costs: Gives the ability to share risk and costs 1. Ex. By Kodak bringing Fuji in, it reduced its potential profits and sustainability reduced its risk iii. Shared knowledge/expertise: The idea of worldwide learning. They learn the local way of doing things by gaining insight. 1. Ex. Partnership of Nestle and general mills iv. Synergy and competitive advantage: Your partnership with a foreign company will hopefully make you stronger than just you as a solo company. 1. Ex. UBER partnering with DD in China to allow users to use the same UBER app in China and the US

Three possible forms of JV management

i. Firms may jointly share management with each appointing key personnel who report back to officers of the parent ii. One parent may assume primary responsibility iii. An independent team of managers may be hired to run it 1. This approach is often preferred because independent managers focus on what's best for the JV rather than attempting to placate bosses from founding firms.

Four things that firms do through Organization Design

i. It allocates organizational resources ii. It assigns tasks to its employees iii. It informs those employees about the firm's rules, procedures, and expectations about the employee's job performances. iv. It collects and transmits information necessary for problem solving, decision making, and effective organizational control.

e. Strategic alliance implementation

i. Selecting partners- 1. Compatibility- A partner it can trust and work effectively with. 2. Nature of potential partner's products and services- Before entering in a partnership, it's important to get an idea of what their products/services look like. It is believed to be best when you partner with a company that compliments not competes with your product. a. Ex. PepsiCo and Lipton 3. Safety of alliance: Gather as much information as possible about a potential partner before entering into a strategic alliance. a. Strengths/Weaknesses b. What they hope to gain from agreement 4. Learning potential of the alliance: Assess the potential to learn from each other. Look at how the company's previous deals have worked out.