McGraw-Hill/IrwinInternational Management

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

International ManagementPhatak, Bhagat, and Kashlak

McGraw-Hill/IrwinInternational Management

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Chapter 1

An Introduction to International Management

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Chapter Objectives

Define the concepts of international business and international management.Examine the transnationality of countries and companiesDistinguish among the various types of international mindsets observed in international firms.Discuss the stages of development of an international company.Define and understand the strategic, marketing and economic motives of firms seeking to expand internationally.Explain the strategic objectives and sources of competitive advantage for an international firm.

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Chapter Topics

The International Management SettingWhat is International BusinessWhat is International Management International Companies and International MindsetsThe Evolution of an International EnterpriseWhy Firms Seek to Engage in International BusinessStrategic Objectives and Sources of Competitive AdvantageThe Environment of International Management

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Fig. 1-1: Managing in the International Environment

Section I: The Macro-Environment(Economics, Politics, Infrastructure Laws, Culture)

Section II: Firm-Level Initiatives(Strategy, Structure, Implementation, Control)

Section III: Manager Responses(Communication, Motivation, Leadership,

Negotiations, Responsibility

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Definition of International Management

International management is defined as a process of accomplishing the global objectives of a firm by:

effectively coordinating the procurement, allocation, and utilization of the human, financial, intellectual, and physical resources of the firm and across national boundaries, and

effectively charting the path towards the desired organizational goals by navigating the firm through a global environment that is not only dynamic but often very hostile to the firm’s very survival.

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Domain of International Management

Why, when, and how does a business firm (as an organization) decide to “go international” including the expansion and reduction of such internalization?

Why, when, and how is its organizational behavior – a broad term covering mission, objectives, strategies, structures, staff, and processes [particularly, decision-making] internal, and external transactions and relations, performance, impact, etc. – altered by internationalization.

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An International Company

… is an enterprise that has operations in two or more countries. If it has operations in several countries then it may have a network of wholly or partially (jointly with one or more foreign partners) owned producing and marketing foreign affiliates or subsidiaries. The foreign affiliates may be linked with the parent company and with each other by ties of common ownership and by a common global strategy to which each affiliate is responsive and committed. The parent company may control the foreign affiliates via resources that it allocates to each affiliate – capital, technology, trademarks, patents, and manpower – and through the right to approve each affiliate’s long- and short-range plans and budgets.

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Table 1-1: Largest International Companies(Selected)

Global Rank

Company 2002 Revenues ($ millions)

1

2

3

4

5

Wal-Mart Stores

Exxon Mobil

General Motors

BP

Ford Motor

219,812.0

191,581.0

177,260.0

174,218.0

162,412.0

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Table 1-3: Labor Productivity of Foreign Affiliates and Domestic Firms in Manufacturing in Selected Economies

Country Foreign Affiliates

Domestic Firms

Ratio Foreign: Domestic

U.S.A 103818 71006 1.46

U.K. 79402 51885 1.53

Netherlands 105793 69477 1.52

Ireland 268272 24571 10.9

China 7199 2633 2.73

France 75970 101732 0.75

Sweden 68845 77417 0.89

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International Mindsets

Specific pressures will affect competition in industries and firms that cross national boundaries causing1. international or home replication: a firm utilizes the core competency or firm-specific advantage it developed at home as its main competitive weapon in foreign markets

2.a global orientation : view the world as a single market and has its primary goal the creation of standardized goods or services that will address the need of customers worldwide.

.

1-12International Mindsets(contd.)

3. a multidomestic orientation that responds to individual country opportunities and constraints

Increasingly, there are pressures for international companies to be both globally efficient and locally responsive. These pressures derive from environmental changes such as new technologies, unanticipated competition, and the convergence of industry boundaries. In such situations, firms exhibit a transnational mindset to simultaneously gain efficiency and local market benefits.

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Foreign Market Entry Modes

Exporting Counter-trade Contract manufacturing Licensing Franchising Turnkey projects Non-equity strategic alliances Equity-based ventures such as wholly-owned

subsidiaries and equity joint ventures

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Fig. 1-2: Motives to Go International

The Historically Indigenous Firm

Cost-ReductionMotives

StrategicMotives

Market-SeekingMotives

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Market Seeking Motives :Theory of Comparative Advantage

When a country specializes in some products, it may not produce other products, so trade between countries is essential. This is the argument made by the classical theory of comparative advantage.

Comparative advantages allow firms to penetrate foreign markets.

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Market Seeking Motives : Imperfect Markets Theory

If each country’s markets were closed from all other countries, there would be no international business.

At the other extreme, if markets were perfect so that the factors of production (such as labor) were easily transferable, then labor and other resources would flow wherever they were in demand.

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Market Seeking Motives : Imperfect Markets Theory

The unrestricted mobility of factors would create equality in costs and returns and remove the comparative cost advantage, the rationale for international trade and investment.

The real world suffers from imperfect market conditions where factors of production are somewhat immobile.

Imperfect markets provide an incentive for firms to seek out foreign opportunities.

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Market Seeking Motives : Product Cycle Theory

A firm is likely to establish itself first in its home country a result of some perceived advantage over existing competitors.

Foreign demand for the firm’s product will initially be accommodated by exporting.

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Insert chart page 7 Exhibit 1.2

International Product Life Cycles

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Evolutionary Stages

Stage 1: Foreign Inquiry

Stage 2: Export Manager

Stage 3: Export Department and Direct Sales

Stage 4: Sales Branches and Subsidiaries

Stage 5: Assembly Abroad

Stage 6: Production Abroad

Stage 7: Integration of Foreign Affiliates

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Evolution of Service Firms into Global Enterprise

Do not necessary go through various evolutionary stages

After establishing franchise system at home enter foreign markets by establishing franchise in foreign countries by wholly owned parent company or jointly owned with host country.

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Cost Reduction Motives:

Venture overseas for cost reductionCheap labor is the strongest incentiveEliminate or reduce high transportation costFavorable host govt incentives and inducementsAllocate funds for research to ;look foreign markets.

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Strategic Motives:

Follow major customers:

Bandwagon Effect when firms venture abroad to follow their major competitors

Cross-subsidisation: Using profits generated in one market to compete in another market

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Strategic Objectives and Sources Of Competitive Advantage

Global firms pursue three ObjectivesAchieving EfficiencyManaging RisksInnovation and LearningSources f competitive advantageNational DifferencesScale EconomiesScope Economies

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Ex. 1-2: Global Strategy: An Organizing Framework

Strategic Objectives

National Differences

Scale Economies Scope Economies

Achieving efficiency in current operations

Benefiting from differences in factor costs – wages and cost of capital.

Expanding and exploiting potential scale economies in each activity.

Sharing investments and costs across products, markets, and businesses.

Managing risks Managing different kinds of risks arising from market or policy-induced changes in comparative advantage of different countries.

Balancing scale with strategic and operational flexibility.

Portfolio diversification of risks and creation of options and side-bets.

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Ex. 1-2 (contd.)

Strategic Objectives

National Differences

Scale Economies Scope Economies

Innovation, learning, and adapting.

Learning from societal differences in organizational and managerial processes and systems.

Benefiting from experience – cost reduction and innovation.

Sharing learning across organizational components in different products, markets, or businesses.

Sources of Competitive Advantage

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Fig. 1-3: The International Environment

Economic:Trade Agreements

Trading BlocsGNP/Wages

Inflation

Legal:International LawHost Country Laws

Home LawsInternational Piracy

Infrastructure:Communications

InternetTransportation

Technology

Cultural: Customs

ValuesLanguageReligion

Political:Governments

IdeologyStability

Civil Strife

TheInternational

Company

1-28Fig. 1-4: Fundamentals of International Management: A Model of International Management

InternationalEnvironmental

Analysis

Economic Environment& Infrastructure

(Chapter 2)

PoliticalEnvironment(Chapter 3)

CulturalEnvironment(Chapter 5)

InternationalStrategicInitiatives

Strategies forInt’l Competition

(Chapter 6)

Foreign ModesOf Entry

(Chapter 7)

Int’l JVs andAlliances

(Chapter 8)

Organizing Int’l Operations (Chapter 9)

Controlling Int’l Operations (Chapter 10)

Int’l Human Resource Mgmt (Chapter 12)

Work Motivation (Chapter 13)

Leadership (Chapter 14)

Communications (Chapter 15)

Ethics and Social Responsibility(Chapter 17)

LegalEnvironment(Chapter 4)

Management/Implementation of International Initiatives

Managing Technology and Knowledge(Chapter 11)

Negotiations andDecision-Making (Chapter 16)

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Key Terms and Concepts

Foreign Direct Investment (FDI)

Definition of International Business

Definition of International Management

Definition of International Company

Transnationality Index

International Mindsets Global orientation Multidomestic orientation Transnational orientation

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Key Terms and Concepts(contd.)

Evolution of an International Enterprise

Evolution of Service Firms

Motives for International Expansion Market seeking Cost reduction Strategic

Global Strategy