GURU GOBIND SINGH INDRAPRASTHA UNIVERSITY, DELHI

MASTER OF BUSINESS ADMINISTRATION (MBA)

MANAGEMENT OF INTERNATIONAL BUSINESS

Objectives: The objective of this course is to enable the students to manage

business when the Organizations are exposed to international business environment.

Course Contents:

1. Nature and Scope of International Management: Introduction to

International Business; Concept and Definition of International Management;

Reasons for Going International, International Entry Modes, Their Advantages and

Disadvantages, Strategy in the Internationalization of Business, Global

Challenges; Entry Barriers, India’s Attractiveness for International Business. (14

Hours)

2. Environment Facing Business: Cultural Environment facing Business,

Managing Diversity within and Across Culture, Hofstede Study, Edward T Hall

Study, Cultural Adaptation through Sensitivity Training, Political, Legal, Economic,

Ecological and Technological Facing Business and their Management. (14 Hours)

3. Formulating Strategy for International Management: Strategy as a

Concept, Implementing Global Strategy, Emerging Models of Strategic

Management in International Context, Achieving and Sustaining International

Competitive Advantage; International Strategic Alliances, Global Mergers and

Acquisition. (14 Hours)

4. Organizing and Controlling for International Competitiveness:

International Human Resource Management-concept and Dimensions, Human

Resource Issues in Developing and Maintaining an Effective Work Force,

Leadership Issues; Motivation; Basic Models for Organization Design in Context of

Global Dimensions; Future of International Management in the East, Global

Operations Management. (14 Hours)

PART I

NATURE AND SCOPE OF INTERNATIONAL

MANAGEMENT

I. INTRODUCTION TO INTERNATIONAL BUSINESS

MEANING AND CONCEPT

International business includes all business transactions involving two or more

countries. These business relationships may be between private individuals,

companies, groups of companies, non-profit organizations or government

agencies. In some ways, international business is an extension of domestic

business, but it is different for two reasons. The first reason is that international

business objectives are likely to be different from domestic business objectives;

the second and more significant is that the environmental conditions in which

international business is conducted are usually of greater complexity than is the

case with domestic business. These complexities arise from, amongst other things,

differences in culture, currencies, legal systems and the endowment of national

resources. Developments in communication and transportation technology

facilitate trade worldwide, leading to the cliché that 'all business is now

international business'; thus people working in maritime industries are inevitably

involved in international business.

International business can be defined as set of those business activities that

involves the crossing of national boundaries. The set of activities includes: -

Import and export of commodities and manufactured goods

Investment of capital in manufacturing, extractive, agricultural,

transportation and communication assets

Supervision of employees in different countries

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Investment in international services like banking, advertising,

tourism, retailing and construction

Transactions involving copyrights, patents, trademarks and process

technology.

International business covers all business transactions involving two or more

countries.

Vernon (1964) defined the field of international business in terms of dealing with:

(1) "operating within foreign economies"; (2) "the problems of the movements of

goods and capital across boundaries," and (3) "the problems of surveying and

integrating from headquarters the operations of entities existing in more than one

country."

EVOLUTION OF INTERNATIONAL BUSINESS

The business across the borders of the countries had been carried on since times

immemorial. But, the business had been limited to the international trade until the

recent past. The post World War II period witnessed an unexpected expansion of

national companies into international or multinational companies. The post 1990s

period has given greater fillip to international business. In fact, the term international

business was not in existence before two decades. The term international business has

emerged from the term international marketing, which in turn, emerged from the term

‘export marketing’.

International Trade to International Marketing: Originally, the producers used to

export their products to the nearby countries and gradually extended the exports to

far-off countries. Gradually, the companies extended the operations beyond trade. For

example, India used to export raw cotton, raw jute and iron ore during the early

1900s. The massive industrialization in the country enabled us to export jute products,

cotton garments and steel during 1960s. India, during 1980s could create markets for

its products, in addition to mere exporting. The export marketing efforts include

creation of demand for Indian products like textiles, electronics, leather products, tea,

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coffee etc., arranging for appropriate distribution channels, attractive package,

product development, pricing etc. This process is true not only with India, but also

with almost all developed and developing economies.

International Marketing to International Business: The multinational companies

which were producing the products in their home countries and Marketing them in

various foreign countries before 1980s, started locating their plants and other

manufacturing facilities in foreign/host countries. Later, they started producing in one

foreign country and marketing in other foreign countries. For example, Unilever

established its subsidiary company in India, i.e., Hindustan Lever Limited (HLL).

HLL produces its products in India and markets them in Bangladesh, Sri Lanka,

Nepal etc. Thus, the scope of the international trade is expanded into international

marketing and international marketing is expanded into international business.

NATURE OF INTERNATIONAL BUSINESS

International business houses need accurate information to make an appropriate

decision. Europe was the most opportunistic market for leather goods and

particularly for shoes. Bata based on the accurate data could make appropriate

decision to enter various European countries.

International business houses need not only accurate but timely information.

CocaCola could enter the European market based on the timely information,

whereas Pepsi entered later. Another example is the timely entrance of Indian

software companies into the US market compared to those of other countries.

Indian software companies also made timely decision in the case of’ Europe.

The size of the international business should be large in order to have impact on

the foreign Economies. Most of the multinational companies are significantly

large in size. In fact, the Capital of some of the MNCs is more than our annual

budget and GDPs of the some of the African Countries.

Most of the international business houses segment their markets based on the

geographic market segmentation. Daewoo segmented its market as North

America, Europe, Africa, Indian subcontinent and Pacific markets.

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International markets present more potentials than the domestic markets. This is

due to the fact that international markets wide in scope, varied in consumer tastes,

preferences and Purchasing abilities, size of the population etc. For example, the

IBM’s sales are more in foreign countries than in USA. Similarly, Coca-Cola’s

sales, Procter and Gamble’s sales and Satyam Computer’s sales are more in

foreign countries than in their respective home countries. The population for the

year 2000 indicates that: USA’s population would be 300 million, Mexico’s 126

million, Brazil’s 205 million, Indonesia’s 223 million, Pakistan’s 138 million,

Nigeria’s 154 million and Bangladesh’s 146 million. The size of the population,

sometimes, may not determine the size of the market. This is due to the

backwardness of the economy and low purchasing power of the people, In fact,

the size of Eritrea an African country is roughly equal to that of the United

Kingdom in terms of land area and size of the population. But, in terms of per

capita income it is one of the poorest countries in the world with estimated per

capita income of US $ 150 per annum. Therefore, the international business

houses should consider the consumers’ willingness to buy and also ability to buy

the products In fact, most of the multinational companies, which entered Indian

market after 1991, failed in this respect. They viewed that almost the entire Indian

population would be the customers. Therefore, they estimated that the demand for

consumer durable goods would be increasing in India after globalisation. And

they entered the Indian market. The heavy inflow of these goods and decline in

the size of Indian middle class resulted in a slump in the demand for consumer

durable goods.

Wider Scope : Foreign trade refers to the flow of goods across national political

borders. Therefore, it refers to exporting and importing by international marketing

companies plus creation of demand, promotion, pricing etc. As stated earlier,

international business is much broader in scope. It involves international

marketing, international investments, management of foreign exchange, procuring

international finance from IMF, IBRD, IFC, IDA etc., management of

international human resources, management of cultural diversity, international

marketing, management of international production and logistics, international

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strategic management and the like. Thus, international business is broader in

scope and covers all aspects of the system.

Inter-country Comparative Study : International business studies the business

opportunities, threats, consumers’ preferences, behavior, cultures of the societies,

employees, business environmental factors, manufacturing locations, management

styles, inputs and human resource management practices in various countries.

International business seeks to identify, classify and interpret the similarities and

dissimilarities among the systems used to anticipate demand and market

products’. The system presents inter-country comparison and intercontinental

comparison/comparative analysis helps the management to evaluate the markets,

finances, human resources, consumers etc. of various countries. The comparative

study also helps the management to evaluate the market potentials of various

countries. The study also indicates the degree of consumer acceptance of the

product, product changes and developments in different countries. Managements

of international business houses can group the countries with similar features and

design the same products, fix similar price and formulate the same marketing

strategies. For example, Prentice Hall grouped India, Nepal, Pakistan Bangladesh,

Sri Lanka etc. into one category based on the customers’ ability to pay and

designed the same quality product and sell them at the same price in all these

countries. Similarly, Dr. Reddy’s Lab does the same for its products to sell in the

African countries.

STAGES OF INTERNATIONALIZATION

The internationalization process generally includes five stages, viz., domestic

company, international Company, multinational company, global company and

transnational company. Now, we will study stage of internationalization in detail.

Stage 1: Domestic Company

Domestic company limits its operations, mission and vision to the national political

boundaries. These companies focus its view on the domestic market opportunities,

domestic suppliers, domestic financial companies, domestic customers etc. These

companies analyze the national environment of the country, formulate the strategies

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to exploit the opportunities offered by the environment. The domestic Companies’

unconscious motto is that, “if it’s not happening in the home country, it is not

happening”. The domestic company never thinks of growing globally. If it grows,

beyond its present capacity, the company selects the diversification strategy of

entering into new domestic markets, new products, technology etc. The domestic

company does not select the strategy of expansion/penetrating into the international

markets.

Stage 2: International Company

Some of the domestic companies, which grow beyond their production and/or

domestic marketing capacities, think of internationalizing their operations. Those

companies who decide to exploit the opportunities outside the domestic country are

the stage two companies. These companies remain ethnocentric or domestic country

oriented. These companies believe that the practices adopted in domestic business,

the people and products of domestic business are superior to those of other countries.

The focus of these companies is domestic but extends the wings to the foreign

countries. Markets and extend the same domestic operations into foreign markets. In

other words, these companies extend the domestic product, domestic price, promotion

and other business practices to the foreign markets. Normally internationalization

process of most of the global companies starts with this stage. Most of the companies

follow this strategy due to limited resources and also to learn from the foreign

markets gradually before becoming a global company without much risk. The

international company holds the marketing mix constant and extends the operations to

new countries. Thus the international company extends the domestic country

marketing mix and business model and practices to foreign countries.

Stage: 3 Multinational Company

Sooner or later, the international companies learn that the extension strategy (i.e.,

extending the domestic product, price and promotion to foreign markets) will not

work.

This statue of multinational company is also referred to as multi-domestic. Multi-

domestic company formulates different strategies for different markets; thus, the

orientation shifts from ethnocentric to polycentric. Under polycentric orientation the

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offices /branches/subsidiaries of a multinational company work like domestic

company in each country where they operate with distinct policies and strategies

suitable to that country concerned. Thus they operate like a domestic company of the

country concerned in each of their markets.

Philips of Netherlands was a multi-domestic company of this stage during 1960s. It

used to have autonomous national organizations and formulate the strategies

separately for each country. Its strategy did work effectively until the Japanese

companies and Matsushita started competing with this company based oil global

strategy. Global strategy was based on focusing the company resources to serve tile

world market. Philips strategy was to work like a domestic company, and produce a

number of models of the product consequently it increased the cost of production and

price of the product. But the Matsushita’s strategy was to give the value, quality,

design and low price to the customer. Philips lost its market share as Matsushita

offered more value to the customer Consequently Philips changed its strategy and

created “industry main groups” in Netherlands which are responsible for formulating

a global strategy for producing, marketing and R & D.

Stage 4: Global Company

A global company is the one, which has either global marketing strategy or a global

strategy. Global company either produces in home country or in a single country and

focuses on marketing these products globally, or produces the products globally and

focuses on marketing these products domestically.

Harley designs and produces super heavy weight motorcycles in USA and markets in

the global market. Similarly, Dr. Reddy’s Lab designs and produces drugs in India

and markets globally. Thus Harley and Dr. Reddy’s Lab are examples of global

marketing focus. Gap procures products in the global countries and markets the

products in its retail organization in USA. Thus gap is an example for global sourcing

company. Harley Davidson designs and produces in USA and gains competitive

advantage as Mercedes in Germany. The Gap understands the US consumer and got

competitive advantage.

Stage 5:Transnational Company

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Transnational company produces, markets, invests and operates across the world. It is

an integrated global enterprise, which links global resources with global markets at

profit. There is no pure transnational corporation. However, most of the transnational

companies satisfy many of the characteristics of a global corporation.

Characteristics of a Transnational Company

(i)Geocentric Orientation: A transnational company is geocentric in its orientation.

This company thinks globally and acts locally. This company adopts global strategy

but allows value addition to the customer of a domestic country. This company allows

adaptation to add value to its global offer. The assets of a transnational company are

distributed throughout the world, independent and specialized. The R & D facilities of

a transnational company are spread in many countries, but specialized in each

Country based on the local needs and integrated in world R & D project. Similarly,

the production facilities are spread but specialized and integrated. Units of the

transnational corporation in different countries create and develop the knowledge in

all functions and share among them. Thus knowledge and experience is shared

jointly. It gains power and competitive advantage by developing and sharing

knowledge and experience.

(ii) Scanning or information Acquisition: Transnational companies collect the data

and information worldwide. These companies scan the environmental information

regarding economic environment, political environment, social and cultural

environment and technological environment. These companies collect and scan the

information regardless geographical and national boundaries.

(iii) Vision and Aspirations: The vision and aspiration of transnational companies are

global, global markets, global customers and grow ahead of other global/transnational

companies.

(iv)Geographic Scope: The transnational companies scan the global data and

information. By doing so, they analyze the global opportunities regarding the

availability of resources, customers, markets, technology, research and development

etc. Similarly, they also analyze the global challenge and threats like competition

from the other global companies, local companies of host countries, political

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uncertainties and the like. They formulate global strategy. Thus the geographic scope

of a transnational company is not limited to certain countries in analyzing

opportunities, threats and formulating strategies.

(v) Operating Style: Key operations of a transnational are globalize. The transnational

companies globalize the functions like R & D, product development, placing key

human resources, Procurement of high valued material etc. For example, the R &D

activity of Proctor & Gamble, and key human resource activity of Colgate are the

joint and shared activity of the units of these companies in various countries.

(vi) Adaptation: Global and transnational companies adapt their products, marketing

strategic and other functional strategies to the environmental factors of the market

concerned, For example, Mercedes Benz is a super luxury car in North America,

luxury automobile in Germany, standard taxi in Europe.

(vii) Extensions: Some products do not require any change when they are marketed

in other countries. Their market is just extension. For example, Casio calculators of

Japan.

(viii) Creation through Extension: Transnational companies create the global brand

through extending the product to the new market. Rothmans Cigarette extended its

product to many European countries and African countries and created it as global

and national basis.

(ix) Human Resource Management Policy: The transnational company’s human

resource policy is not restricted by national political or legal constraints. It selects the

best human resources and develops them regardless of nationality, ethnic group etc.

But the international company reserves the top and key positions for nationals.

(x) Purchasing: Transnational Company procures world-class material from the best

source across the globe.

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INTERNATIOANL BUSINESS APPROACHES

Douglas Wind and Pelmutter advocated four approaches of international business.

They are:

1. Ethnocentric Approach

The domestic companies normally formulate their strategies, their product design

and their operations towards the national markets, customers and competitors.

But, the excessive production more than the demand for the product, either due to

competition or due to changes in customer preferences push the company to

export the excessive production to foreign countries. The domestic company

continues the exports to the foreign countries and views the foreign markets as an

extension to the domestic markets just like a new region. The executives at the

head office of the company make the decisions relating to exports and, the

marketing personnel of the domestic company

monitor the export operations with the help of an export department. The

company exports the same product designed for domestic markets to foreign

countries under this approach. Thus, maintenance of domestic approach towards

international business is called ethnocentric approach.

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Managing Director

ManagerR& D

Manager Finance

Manager Production

Manager Human

Resources

ManagerMarketing

Assistant Manager

North India

Assistant Manager

South India

AssistantManagerExports

This approach is suitable to the companies during the early days of internationalization

and also to the smaller companies.

2. Polycentric Approach

The domestic companies, which are exporting to foreign countries using the

ethnocentric approach, find at the latter stage that the foreign markets need an

altogether different approach. Then, the company establishes a foreign subsidiary

company and decentralists all the operations and delegates decision making and

policy-making authority to its executives. In fact, the company appoints

executives and personnel including a chief executive who reports directly to the

Managing Director of the company. Company appoints the key personnel from

the home country and the people of the host country fill all other vacancies.

3. Regiocentric Approach

The company after operating successfully in a foreign country, thinks of exporting

to the neighboring countries of the host country. At this stage, the foreign

subsidiary considers the regions environment (for example, Asian environment

like laws, culture, policies etc.) for formulating policies and strategies. However,

it markets more or less the same product designed under polycentric approach in

other countries of the region, but with different market strategies.

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4. Geocentric approach

Under this approach, the entire world is just like a single country for the company.

They select the employees from the entire globe and operate with a number of

subsidiaries. The head quarter coordinates the activities of the subsidiaries. Each

subsidiary functions like an independent and autonomous company in formulating

policies, strategies, product design, human resource policies, operations etc.

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II. CONCEPT AND DEFINITION OF INTERNATIONAL

MANAGEMENT

- The study of international management is gaining importance as firms expand

their operations to various countries. International management deals with the

processes of planning, organizing, staffing, leading and controlling organizations

engaged in international business. Companies go international for various reasons:

gain access to new markets, to increase profits, or to acquire products for the

home market. These are called aggressive reasons for going international.

- International Management and International Business are two separate concepts.

While IB is transactions devised and carried out across international borders to

satisfy corporations and individuals, IM deals with managing such transactions

within a boundary set by corporate strategy.

- The maintenance and development of an organization's production or market

interests across national borders with either local or expatriate staff

- The process of running a multinational business made up of formerly independent

organizations

- The body of skills, knowledge, and understanding required to manage cross-

cultural operations

- Took and Beeman define international management as the determination and

completion of actions and transactions conducted in and/or with foreign countries

in support of organization policy. Czinkotra and Grosse and Kojawa define

international business as transactions devised and carried out across international

borders to satisfy corporations and individuals. International management by

these definitions is viewed as a subset of international business. The focus of

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international business is on international transactions, whereas international

management deals with managing such transactions with in the boundary set by

corporate strategy. Thus, when a company decides to enter a foreign market, that

decision incorporates planning to establish the ways by which business functions-

marketing, accounting, human resource management, and so on-are to be

managed in that distinct location. Managing the various functions and

coordinating them with the parent’s company’s overall strategy is the task of

international management.

III. REASONS FOR GOING INTERNATIONAL

The primary reason for going international is –there is money to be made by going

abroad. U.S. giants like Mc Donald’s have made massive penetration into foreign

markets. In 1994, Mc Donald’s experienced a 6% gains in its domestic sales, but its

foreign sales accounted for half of its overall volume. With the recent advent of

technological innovation and the emergence of the newly industrialized countries

(NICs), a convergence has occurred among nation in terms of rates and preferences,

financial systems, and organization design. These convergences along with

complimentary developments are forcing organizations to “borderless” terms. Their

thinking revolves around the following issues: -

1. Where the value-adding activities should be performed?

2. Where are the most cost-effective markets for new capital and labor?

3. Can products be designed in one market and then be sold in other countries

without adding further costs?

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Reasons for Going International

I. To Achieve Higher Rate of Profits : As we have discussed in various

courses/subjects like Principles and Practice of Management, Managerial

Economics and Financial Management that the basic objective of the business

firms is to earn profits. When the domestic markets do not promise a higher rate

of profits, business firms search for foreign markets, which promise for higher

rate of profits. For example, Hewlett Packard earned 85.4% of its profits from the

foreign markets compared to that of domestic markets in 1994. Apple earned US

$ 390 million as net profit from the foreign markets and only US $ 310 millions as

net profit from its domestic market in 1994. Further in certain cases, international

business can help increase the profitability of the domestic business.

II. Expanding the Production Capacities beyond the Demand of the Domestic

Country: Some of the domestic companies expanded their production capacities

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Convergence in:>Tastes and Preferences>Organization Design>Financial System

Complementary Development

>NIC Purchasing Power>Developing Countries’ Ability to Purchase Good Quality Products

Removal of Trade Barriers Resulting in

Meeting Global Consumer DemandsLower PriceBetter Value

Sustainable Competitive Advantage

more than the demand for the product in the domestic countries. These

companies, in such cases, are forced to sell their excess production in foreign

developed countries.

III. Growth Opportunities: An important reason for going international is to take

advantage of the opportunities in other countries. MNCs are getting increasingly

interested in a number of developing countries as the income and population are

rapidly rising in these countries. Foreign markets both developed and developing

countries provide enormous growth opportunities for the developing country

firms too.

IV. Government Policies and Regulations: Government policies and regulations

may also motivate internationalization. There are both positive and negative

factors, which could cause internationalization. Many governments give a number

of incentives and other positive support to domestic companies to export and

invest in foreign countries. Similarly, several countries give a lot of importance to

import development and foreign investment. Sometimes, (as was the case in

India) companies may be obliged to earn foreign exchange to finance their

imports and to meet certain other foreign exchange requirements like payment of

royalty dividend etc.

V. Monopoly Power: in some cases, international business is a corollary of the

monopoly power, which a firm enjoys internationally. Monopoly power may arise

from such factors as monopolization of certain resources, patent rights,

technological advantage, product differentiation etc. Such monopoly power need

not necessarily be an absolute one but even a dominant position may facilitate

internationalization. Similarly, exclusive market information (which includes

knowledge about foreign customers, market places, or market situations not

widely shared by other firms) is another proactive stimulus.

VI. Severe Competition in the Home Country : The countries oriented towards

market economies since 1960s had severe competition from other business firms

in the home countries. The weak companies, which could not meet the

competition of the strong companies in the domestic country, started entering the

markets of the developing countries. Moreover a protected market does not

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normally motivate companies to seek business outside the home market. For

example Indian economy was a highly protected market before liberalization in

1991. Not only the domestic producers were protected from foreign competition

but also domestic competition was restricted by several policy induced entry

barriers, operated by such measures as industrial licensing etc. After

liberalization, competition increased from foreign as well as domestic firms.

Many Indian companies are now systematically planning to go international in a

big way.

VII. Limited Home Market : When the size of the home market is limited either due

to the smaller size of the population or due to lower purchasing power of the

people or both, the companies internationalize their operations. For example, most

of the Japanese automobile and electronic firms entered US, Europe and even

African markets due to the smaller size of the home market. ITC entered the

European market due to the lower purchasing power of the Indians with regard to

high quality cigarettes. Similarly, the mere six million population of Switzerland

is the reason for Ciba Geigy to internationalize its operations. In fact, this

company was forced to concentrate on global market and establish manufacturing

facilities in foreign countries.

VIII. Political Stability vs. Political Instability : Political stability does not simply

mean that continuation of the same party in power, but it does mean the

continuation of the same policies of the Government for a quite longer period. It

is viewed that USA is a politically stable country. Similarly, UK, France,

Germany, Italy and Japan are also politically stable countries. Most of the African

countries and some of the Asian countries like Malaysia, Indonesia, Pakistan and

India are politically instable countries. Business firms prefer to enter the

politically stable countries and are restrained from locating their business

operations in politically instable countries. In fact, business firms shift their

operations from politically instable countries into politically stable countries.

IX. Availability of Technology and Managerial Competence: Availability of

advanced technology and managerial competence in some countries act as pulling

factors for business firms from the home country. The developed countries due to

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these reasons attract companies from the developing world. In fact, American

companies, in recent years, depend on Japanese companies for technology and

management expertise.

X. High Cost of Transportation : Initially companies enter foreign countries

through their marketing operations. At this stage, the companies realize the

challenge from the domestic companies. Added to this, the home companies enjoy

higher profit margins whereas the foreign firms suffer from lower profit margins.

The major factor for this situation is the cost of transportation of the products.

Under such conditions, the foreign companies are inclined to increase their profit

margin by locating -their manufacturing facilities in foreign countries where there

is enough demand either in one country or in a group of neighboring countries.

XI. Nearness to Raw Materials : The source of highly qualitative raw materials and

bulk raw materials is a major factor for attracting the companies from various

foreign countries. Most of the US based and European based companies located

their manufacturing facilities in Saudi Arabia, Bahrain, Qatar, Oman, Iran and

other Middle East countries due to the availability of petroleum. These

companies, thus, reduced the cost of transportation.

XII. Availability of Quality Human Resources at Less Cost : This is a major factor,

in recent times, for software, high technology and telecommunication companies

to locate their operations in India. India is a major source for high quality and low

cost human resources unlike USA, developed European countries and Japan.

Importing human resources from India by these firms is costly rather than locating

their operations in India. Hence these companies started their operations in India

and other similar countries.

XIII. To Avoid Tariffs and Import Quotas : It was quite common before globalization

that governments imposed tariffs or duty on imports to protect the domestic

company. Sometimes Government also fixes import quotas in order to reduce the

competition to the domestic companies from the competent foreign companies.

These practices are prevalent not only in developing countries but also in

advanced countries. For example, Japanese companies are competent competitors

to the US companies. USA imposed tariffs and quotas regarding import of

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automobiles and electronics from Japan. Harley Davidson of USA sought and got

five years of tariffs protection from Japanese imports. Similarly, Japan places

high tariffs on imports of rice and other agricultural goods from USA. To avoid

high tariffs and quotas, companies prefer direct investment to go globally. For

example, companies like Sony, Honda and Toyota preferred direct investment in

various countries by establishing subsidiaries or through joint ventures in various

foreign countries including USA and India. Xerox, Canon, Phillips, Unilever,

Lucky Gold Star, South Korean Electronics Company, Pepsi, Coca Cola, Shell,

Mobil etc. established manufacturing facilities in various foreign countries in

order to avoid tariffs, import duties and quotas.

REASONS PART II

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IV. ENTRY BARRIERS

Tariff Barriers 

Customs duties enforced on imported products (final products or intermediate

products)

Different tariff rates for different countries and different products

May be adjusted by political influence from trade associations

Non-Tariff Barriers 

Non-tariff barriers to trade are trade barriers that restrict imports but are not in the usual

form of a tariff.  These include all other entry barriers, e.g., transportation costs, slow

customs procedures, etc.

They are criticized as a means to evade free trade rules such as those of the World

Trade Organization (WTO), the European Union (EU), or North American Free Trade

Agreement (NAFTA) that restrict tariffs. Some of the common examples are anti-

dumping measures and countervailing duties, which, although they are called "non-

tariff" barriers, have the effect of tariffs but are only imposed under certain

conditions. Their use has risen sharply after the WTO rules led to a very significant

reduction in tariff use.

Non-tariff barriers may also be in the form of manufacturing or production

requirements of goods, such as how an animal is caught or a plant is grown, with an

import ban imposed on products that don't meet the requirements. Examples are the

European Union restrictions on genetically-modified organisms or beef treated with

growth hormones.

Some non-tariff trade barriers are expressly permitted in very limited circumstances,

when they are deemed necessary to protect health, safety, or sanitation, or to protect

diminishing natural resources.

Non-tariff barriers to trade can be:

State subsidies, procurement, trading, state ownership

National regulations on health, safety, employment

Product classification

Quota shares

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Foreign exchange controls and multiplicity

Over-elaborate or inadequate infrastructure

"Buy national" policy.

Intellectual property laws (patents, copyrights)

Bribery and corruption

Unfair customs procedures

Restrictive licenses

Import bans

Seasonal import regimes

Natural Entry Barriers 

Intense competition among several differentiated brands

Strong brand names charging a premium price over generic competitors

Pro-domestic sentiment favoring local brands

Artificial Entry Barriers 

Limited distribution access

Bureaucratic inertia

Government regulations

Limited access to technology

Local monopolies

Tariffs 

Barriers to entry are designed to block potential entrants from entering a market

profitably. They seek to protect the monopoly power of existing (incumbent) firms in

an industry and therefore maintain supernormal (monopoly) profits in the long run.

Barriers to entry have the effect of making a market less contestable

The economist Joseph Stigler defined an entry barrier as "A cost of producing (at

some or every rate of output) which must be borne by a firm which seeks to enter

an industry but is not borne by firms already in the industry". This emphasizes the

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asymmetry in costs between the incumbent firm (already inside the market) and the

potential entrant. If the existing businesses have managed to exploit some of the

economies of scale that are available to firms in a particular industry, they have

developed a cost advantage over potential entrants. They might use this advantage to

cut prices if and when new suppliers enter the market, moving away from short run

profit maximization objectives - but designed to inflict losses on new firms and

protect their market position in the long run.

Examples of barriers to entry

Patents: Giving the firm the legal protection to produce a patented product for a

number of years.

Limit Pricing: Firms may adopt predatory pricing policies by lowering prices to a

level that would force any new entrants to operate at a loss. 

Cost advantages: Lower costs, perhaps through experience of being in the market for

some time, allows the existing monopolist to cut prices and win price wars 

Advertising and marketing: Developing consumer loyalty by establishing branded

products can make successful entry into the market by new firms much more

expensive. This is particularly important in markets such as cosmetics, confectionery

and the car industry.

Research and Development expenditure: Heavy spending on research and

development can act as a strong deterrent to potential entrants to an industry. Clearly

much R&D spending goes on developing new products but there are also important

spill-over effects which allow firms to improve their production processes and reduce

unit costs. This makes the existing firms more competitive in the market and gives

them a structural advantage over potential rival firms.

Presence of sunk costs: Some industries have very high start-up costs or a high ratio

of fixed to variable costs. Some of these costs might be unrecoverable if an entrant

opts to leave the market. This acts as a disincentive to enter the industry.

International trade restrictions: Trade restrictions such as tariffs and quotas should

also be considered as a barrier to the entry of international competition in protected

domestic markets.

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Sunk Costs: Sunk Costs are costs that cannot be recovered if a businesses decides to

leave an industry Examples include: " Capital inputs that are specific to a particular

industry and which have little or no resale value " Money spent on advertising /

marketing / research which cannot be carried forward into another market or industry

When sunk costs are high, a market becomes less contestable. High sunk costs

(including exit costs) act as a barrier to entry of new firms (they risk making huge

losses if they decide to leave a market).

A good example of substantial sunk costs occurred in 2001 when British Telecom

announced it was scrapping its loss-making joint venture with US telecoms firm

AT&T. The closure was estimated to lead to the loss of 2,300 jobs - almost 40% of

Concert's workforce. And, it will cost BT $2bn (£1.4bn) in impairment charges and

restructuring costs, and AT&T $5.3bn.

V. INDIA’S ATTRACTIVENESS FOR INTERNATIONAL

BUSINESS

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VI. INTERNATIONAL ENTRY MODES

Companies deciding to enter the foreign markets, face the dilemma while deciding

the method of entry into a given overseas location. Analyzing the following decision

factors can reduce this dilemma: -

1. Ownership Advantages: Ownership advantages are those designed

by a company by owning resources. These benefits provide

competitive advantage to the company over its competitors. Toronto-

based Inco. Ltd., of rich, nickel-bearing ores allowed the company , to

dominate the production of both primary nickel and nickel-based

metal alloys.' Similarly,, Tata Iron and Steel Company (TISCO) Ltd.,

owned its iron ore mines and coal mines. This ownership grants the

advantage of low cost producer to the company.

2. Location Advantages

Certain location factors grant benefit to the company when the

manufacturing facilities are located in the host country rather than in

the home country. These location factors include:

Customer Needs, Preferences and Tastes

Logistic Requirements

Cheap Land Acquisition Cost

Cheap Labor

Political Stability

Low Cost Raw Materials

Climatic Conditions.

If the company has location advantages, it enters foreign markets

through direct investment. If the location of manufacturing facilities in

home country is advantageous in the host country, the company enters

foreign markets through exporting.

3. Internationalization Advantages

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Internationalization advantages are those benefits that a company gets

by manufacturing goods or rendering services in the host country by

itself rather than through contract arrangements with the companies in

the host country.

Sometimes the cost of negotiating, monitoring and enforcing an

agreement with the host country's company would be difficult and

costly. In such cases the company enters the international markets

through direct investment. Otherwise, if the company thinks that the

transaction costs are low, and the local companies in the host country

can produce efficiently without jeopardising the interest, the company

can enter the foreign markets through contract manufacturing,

franchising or licensing.

Toyota enters foreign markets through direct investment and joint-

ventures us the local companies in foreign countries cannot produce

as efficiently as Toyota.

Companies with low cash reserves normally prefer licensing mode

rather than foreign direct investment (FDI)• Merck entered Israel

by issuing license to Teva Pharmaceutical an Israel company in

order to save the expenses of establishing in Israel. /n contrast,

cash rich firms may prefer FDI. Firms also enter through FDI in

order to take the advantage of economies of scale, and synergies

between their domestic and international operations.

However, the software companies prefer licensing and franchising

mode as they have to respond quickly to the market needs. For

example Microsoft and Compaq. Thus, different firms select different

modes based on the nature of the industry.

The entry mode employed should be consistent with the firm's objectives and the

choice will often involve a trade-off among objectives.

The factors which influence the choice of entry mode are:

o Legal considerations

o The nature of the competition

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o Political factors

o Economic risk

o The nature of the assets to be employed

o The firm's experience.

Firms may use different entry modes in different countries and for different

products. As diversity increases, the task of coordinating the foreign operations

becomes more complex.

Firms usually want complete ownership of foreign operations to guarantee control

and prevent loss of profit. However, host countries usually want a share of the

action and the resources that the MNE will bring into the host country.

Joint ventures are often motivated by the complementary resources firms have at

their disposal, and just as often by governmental preferences.

Turnkey projects usually require high level negotiation skills to deal with host

country government officials.

Management contracts are a means of securing income with little capital outlay.

They are usually used for expropriated properties in LDCs, for new operations,

and for facilities with operating problems. Management contracts involve the sale

of technical or managerial expertise, and one of the responsibilities of the hired

manager is to train local nationals so they will be able to run the business when

the contact expires.

Contracting foreign business does not negate management's responsibility to

ensure that company resources are being optimally employed. This involves

constantly assessing the work of the outsiders such as contract managers and

evaluating new options for their employment.

MODES OF ENTRY

I. EXPORTING

Exporting is the simplest and widely used mode of entering foreign markets. It is

the marketing and selling of domestically produced goods in another country. It is

a traditional and well established method of reaching foreign markets. Since it

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does not require that the goods be produced in the target country, no investment in

foreign facilities is required. Most of the costs associated with exporting take

form of marketing expenses.

The advantages of exporting include:

a. Need for Limited Finance : If the company selects a company in the host

country to distribute, the company can enter international market with no

or less financial resources. Alternatively, if the company chooses to

distribute on its own, it needs to invest financial resources, but this amount

would be quite less compared to that would be necessary under other

modes.

b. Less Risk: Exporting involves less risk as the company understands the

culture, customer and the market of the host country gradually. The

company can enter the host country on a lull scale, if the product is

accepted by the host country's market. British company selected this mode

to export jams to Japan.

c. Motivation for Exporting: Motivations for exporting are proactive and

reactive. Proactive motivations are opportunities available in the host

country. San Antonio's Pace, Inc., producing Tex-Mex food products

exported its products to Mexico as Mexicans relished the taste of its

products. Reactive motivations are those efforts taken by the company to

export the product to a foreign country due to the decline in demand for its

product in the home country. Toto Ltd., of Japan started exporting its

products, i.e., Porcelain bathroom fixtures to China when the Japanese

economy started slowing down in 1990s.

FORMS OF EXPORTING

Forms of exporting include: -

1. Indirect Exporting: Indirect exporting is exporting the products either in

their original form or in the modified form to a foreign country through

another domestic company. Various publishers ill India including Himalaya

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Publishing House, sell their products, i.e., books to UBS publishers of India,

which in turn exports these books to various foreign countries.

2. Direct Exporting: Direct exporting is selling the products in a foreign

country directly through its distribution arrangements or through a host

country's company. Baskin Robbins initially exported its ice-cream to Russia

in 1990 and later opened 74 outlets with Russian partners. Finally in 1995 it

established its ice cream plant in Moscow."

3. Intracorporate Transfers: Intracorporate transfers are selling of products by

a company to its affiliated company in host country (another country). Selling

of products by Hindustan Lever in India to Unilever in USA. This transaction

is treated as exports in India and imports in USA.

FACTORS TO BE CONSIDERED: The company, while exporting, should consider

the following factors:

Government policies like export policies, import policies, export financing,

foreign exchange etc.

Marketing factors like image, distribution networks, responsiveness to the

customer, customer awareness and customer preferences.

Logistical consideration: These factors include physical distribution costs,

warehousing costs, packaging, transporting, inventory carrying costs.

Distribution Issues: These include own distribution networks, networks of host

county's companies. Japanese companies like Sony, Minolta and Hitachi rely On

the distribution networks Of' their subsidiaries in the host country.

Export Intermediaries: Export intermediaries perform a variety of functions and

enable tile small companies to export their goods to foreign countries. Their

functions include: handling transportation, documentation, taking ownership of

foreign-bound goods, assuming total responsibility for exporting and financing. Types

of export intermediaries include:

Export management companies act as export department of the exporting firm (its

client).

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These companies act as commission agents for exports or they take tittle to the

goods.

Cooperative Society: The domestic companies desire to export the goods form a

cooperative society, which undertakes the exporting operations of its members.

International Trading Company: This company is engaged in directly exporting

and importing. It buys the goods from the domestic companies and exports.

Therefore, the companies can export their goods by selling them to the

international trading company.

Manufacturers' Agents: They work on a commission basis. They solicit domestic

orders for foreign manufacturers.

Manufacturers' Export Agents: These agents also work on a commission basis.

They sell the domestic manufacturers' products in the foreign markets and act as

their foreign sales department.

Export and Import Brokers: The brokers bridge the gap between exporters and

importers and bring these two parties together.

Freight Forwarders: Freight forwarders help the domestic manufacturers in

exporting their goods by performing various functions like physical transportation

of goods, arranging customs documents and arranging transportation services.

II. LICENSING

In this mode of entry, the domestic manufacturer leases the right to use its

intellectual property, i.e., technology, work methods, patents, copy rights, brand

names, trademarks etc. to a manufacturer in a foreign country for a fee." Here the

manufacturer in the domestic country is called 'licensor' and the manufacturer in

the foreign country is called `licensee.'

Licensing is a popular method of entering foreign markets. The cost of entering

foreign markets through this mode is less costly. The domestic company need not

invest any capital as it has already developed intellectual property. As such, the

domestic company earns revenue without additional investment. Hence, most of

the companies prefer this mode of foreign entry.

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The domestic company can choose any international location and enjoy the

advantages without -incurring any obligations and responsibilities of ownership,

managerial, investment etc. Kirin Brewery - Japan's largest beer producer entered

Canada by granting license to Molson and British market by granting license to

Charles Wells Brewery.

BASIC ISSUES IN INTERNATIONAL LICENSING:

Companies should consider various factors in deciding negotiations. Each

international licensing is unique and has to be decided separately. However, there

are certain common factors which affect most of the international licenses. They

are: -

o Boundaries of the Agreements: The companies should clearly define the

boundaries of agreements. They determine which rights and privileges are

being conveyed in the agreement. Pepsi-Cola granted license to Heineken of

Netherlands with exclusive rights of producing and selling Pepsi-Cola in

Netherlands. Under this agreement the boundaries are (i) Heineken should

not export Pepsi-Cola to any other country, (ii) Pepsi supplies concentrated

cola syrupand Heineken adds carbonated water to produce beverage and (iii)

Pepsi can grnatclicence, to other companies in Netherlands to produce other

products of' Pepsi like Potatochips.

o Determination of Royalty : The most important factor in deciding the license

is the amount of royalty. It is needless to mention that the licensor expects

high rate of royalty while licensee would be unwilling to par much royalty.

However, both the parties negotiate for a fair royalty for both the sides in

order to implement the contract more

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o Determining; Rights, Privileges and Constraints : Another important factor,

in granting license is determining clearly and specifically the rights, privileges

and constraints. For example, if the Indian licensee of Aiwa TV uses interior

input in order to reduce price, boost up sales and profit, the image of the

Japanese licensor would be damaged.

o Dispute Settlement Mechanism : The licensee and licensor should clearly

mention the mechanism to settle the disputes as disputes are hound to crop up.

This is because, settlement of disputes in courts is costly, time consuming and

hinders business interests.

o Agreement Duration: The two parties of the agreement specify the duration

of the agreement. Licensing cannot he a short-term strategy. Hence, the

duration of the licensing should not be of the short-term. It would always be

appropriate to have long duration of the licensing. Tokyo Disneyland

demanded on a 100-year licensing agreement With The Walt Disney

Company.

ADVANTAGES AND DISADVANTAGES OF LICENSING

Advantages

Licensing mode carries relatively low investment on the part of licensor

Licensing mode carries low financial risk to the licensor.

Licensor can investigate the foreign market without much efforts on his part.

Licensee gets the benefits with less investment on research and development.

Licensee escapes himself from the risk of product failure. For example,

Nintendo game designers have the relatively safety of knowing millions of

game system units.

Disadvantages

Licensing agreements reduce the market opportunities for both the licensor

and licensee.

Pepsi-cola cannot enter Netherlands and Heineken cannot sell Coca-cola.

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Both the parties have the responsibilities to maintain the product quality and

promoting the product. Therefore, one party can affect the other through their

improper acts.

Costly and tedious litigation may crop up and hurt both the parties and the

market.

There is scope for misunderstanding between the parties despite the

effectiveness of the agreement. The best example is Oleg Cassini and Jovan.

There is a problem of leakage of the trade secrets of the licensor.

The licensee may develop his reputation.

The licensee may sell the product outside the agreed territory and after the

expiry of the contract.

III. FRANCHISING

Franchising is a form of licensing. The franchisor can exercise more control over

the franchised compared to that in licensing. International franchising is growing

at a fast rate. Under franchising, an independent organization called the franchisee

operates the business under the name of another company called the franchisor.

Under this agreement the franchisee pays fee to t e franchisor. The franchisor

provides the following services to the franchisee:

Trade marks

Operating systems

Product reputations

Continuous support systems like advertising, employee training, reservation

services, and quality assurance programmes etc.

BASIC ISSUES IN FRANCHISING

The franchisor has been successful in his home country. McDonnell was

successful in USA due to the popular menu and fast and efficient services.

The factors for the success of the McDonald are later transferred to other

countries.

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The franchiser may have the experience in franchising in the home country

before going for international franchising.

Foreign investors should come forward for introducing the product on

franchising basis.

FRANCHISING AGREEMENTS: The franchising agreement should contain

important items as follows: -

Franchisee has to pay a fixed amount and royalty based on the sales to the

franchisor.

Franchisee should agree to adhere to follow the franchisor's requirements like

appearance, financial reporting, operating procedures, customer service etc."

Franchisor helps the franchisee in establishing the manufacturing facilities,

services facilities. provides expertise, advertising, corporate image etc.

Franchisor allows the franchisee some degree of flexibility in order to meet

the local taste-, and preferences. McDonald restaurants in Germany sell beer

also and McDonald restaurants in France sell wine also.

ADVANTAGES AND DISADVANTAGES OF FRANCHISING

ADVANTAGES For franchisors

1. Expansion: Franchising is one of the only means available to access investment

capital without the need to give up control in the process. After their brand and

formula are carefully designed and properly executed, franchisors are able to

expand rapidly across countries and continents using the capital and resources of

their franchisees, and can earn profits commensurate with their contribution to

those societies. Additionally, the franchisor may choose to leverage the franchisee

to build a distribution network.

2. Legal considerations: The franchisor is relieved of many of the mundane duties

necessary to start a new outlet, such as obtaining the necessary licenses and

permits. In some jurisdictions, certain permits (especially liquor licenses) are

more easily obtained by locally based, owner-operator type applicants while

companies based outside the jurisdiction (and especially if they originate in

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another country) find it difficult if not impossible to get such licenses issued to

them directly. For this reason, hotel and restaurant chains that sell liquor often

have no viable option but to franchise if they wish to expand to another state or

province.

3. Operational considerations: Franchisees are said to have a greater incentive than

direct employees to operate their businesses successfully because they have a

direct stake in the operation. The need of franchisors to closely scrutinize the day

to day operations of franchisees (compared to directly-owned outlets) is greatly

reduced.

For franchisees

1. Quick start: As practiced in retailing, franchising offers franchisees the advantage

of starting up a new business quickly based on a proven trademark and formula of

doing business, as opposed to having to build a new business and brand from

scratch (often in the face of aggressive competition from franchise operators). A

well run franchise would offer a turnkey business: from site selection to lease

negotiation, training, mentoring and ongoing support as well as statutory

requirements and troubleshooting.

2. Expansion: With the help of the expertise provided by the franchisers the

franchisees are able to take their franchise business to that level which they

wouldn't have had been able to without the expert guidance of their franchisors.

3. Training: Franchisors often offer franchisees significant training, which is not

available for free to individuals starting their own business. Although training is

not free for franchisees, it is both supported through the traditional franchise fee

that the franchisor collects and tailored to the business that is being started.

DISADVANTAGES f or Franchisors

1. Limited pool of viable franchisees: In any city or region there will be only a

limited pool of people who have both the resources and the desire to set up a

franchise in a certain industry, compared to the pool of individuals who would be

able to competently manage a directly-owned outlet.

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2. Control: Successful franchising necessitates a much more careful vetting process

when evaluating the limited number of potential franchisees than would be

required to hire a direct employee. An incompetent manager of a directly-owned

outlet can easily be replaced, while regardless of the local laws and agreements in

place removing an incompetent franchisee is much more difficult. Incompetent

franchisees can easily damage the public's goodwill towards the franchisor's brand

by providing inferior goods and services. If a franchisee is cited for legal

violations, she will probably face the legal consequences alone but the franchisor's

reputation could still be damaged.

For franchisees

1. Control: For franchisees, the main disadvantage of franchising is a loss of control.

While they gain the use of a system, trademarks, assistance, training, marketing,

the franchisee is required to follow the system and get approval for changes from

the franchisor. For these reasons, franchisees and entrepreneurs are very different.

The United States Office of Advocacy of the SBA indicates that a franchisee "is

merely a temporary business investment where he may be one of several investors

during the lifetime of the franchise. In other words, he is "renting or leasing" the

opportunity, not "buying a business for the purpose of true ownership."

Additionally, a franchise purchase consists of both intrinsic value and time value.

A franchise is a wasting asset due to the finite term, unless the franchisor chooses

to contractually obligate itself it is under no obligation to renew the franchise.

2. Price: Starting and operating a franchise business carries expenses. In choosing to

adopt the standards set by the franchisor, the franchisee often has no further

choice as to signage, shop fitting, uniforms etc. The franchisee may not be

allowed to source less expensive alternatives. Added to that is the franchise fee

and ongoing royalties and advertising contributions. The contract may also bind

the franchisee to such alterations as demanded by the franchisor from time to

time. (As required to be disclosed in the state disclosure document and the

franchise agreement under the FTC Franchise Rule)

3. Conflicts: The franchisor/franchisee relationship can easily cause conflict if either

side is incompetent (or acting in bad faith). An incompetent franchisor can

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destroy its franchisees by failing to promote the brand properly or by squeezing

them too aggressively for profits. Franchise agreements are unilateral contracts or

contracts of adhesion wherein the contract terms generally are advantageous to

the franchisor when there is conflict in the relationship.

OTHER ADVANTAGES

Franchisor can enter global markets with low investment and low risks.

Franchisor can get the information regarding the markets, culture, customs

and environment of the host country.

Franchisor learns more lessons from the experiences of the franchisees.

McDonald benefited from the world wide learning phenomenon. McDonald is

convinced to open a restaurant in inner-city office building in Japan. This

location has become a more successful one. Based on this lesson, McDonald

opened its restaurants in downtown locations in various countries.

Franchisee can early start a business with low risk as he selects an established

and proven product and operating system,

Franchise gets the benefits of R & D with low cost.

Franchisee escapes form the risk of product failure.

OTHER DISADVANTAGES

International franchising may be more complicated than domestic franchising.

McDonald taught the Russian farmers the methods of growing potatoes to

meet its standards.

It is difficult to control the international franchisee. As one of the French

investor did not maintain the stores as per the standards, McDonald did revoke

the franchise.

Franchising agents reduce the market opportunities for both the franchisor and

franchisee.

Both the parties have the responsibilities to maintain product quality and

product promotion.

There is scope for misunderstanding between the parties.

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There is a problem of leakage of trade secrets.

IV. SPECIAL MODES

Some companies cannot make long-term investments or long-term contracts to

enter markets. Therefore, they may use specialized strategies. These specialized

strategies include: -

a. Contract Manufacturing

Some companies outsource their part of or entire production and

concentrate on marketing operations. This practice is called the contract

manufacturing or outsourcing.

Nike has contracted with a number of factories in south-east Asia to

produce its athletic footware and it concentrates on marketing. Bata also

contracted with a number of cobblers in India to produce its footware and

concentrate on marketing. Mega Toys - a Los Angeles based company

contracts with Chinese plants to produce Toys and Mega Toys

concentrates on marketing.

Advantages

International business can focus on the part of the value chain where it has

distinctive -competence.

It 'reduces the cost of production as the host country's companies with

their relative cost advantage produce at low cost.

Small and medium industrial units in the host country can also develop as

most of the production activities take in these units.

The international company gets the location advantages, generated by the

host country's production.

Disadvantages

Host country's companies may take up the marketing activities also,

hindering the interest of the international company.

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Host county's companies may not strictly adhere to the production design,

quality standards etc. These factors result in quality problems, design

problem and other surprises.

The poor working countries in the host country's companies affect the

company's, image. For example, Nike has suffered a string of blows to its

public image, because of reports of unsafe and harsh working conditions

in Vietnamese factories churning our Nike footware.

b. Management Contracts

The companies with low level technology and managerial expertise may

seek tile assistance of a foreign company. Then the foreign company may

agree to provide technical assistance and managerial expertise. This

agreement between these two companies is called the management

contract.

A management contract is an agreement between two companies whereby

one company provides managerial assistance, technical expertise and

specialized services to the second company of the argument for a certain

agreed period in return for monetary compensation. Monetary

Compensation may be in the form of a flat fee or Percentage over sales or

Performance bonus based on profitability, sales growth, production or

quality measures.

Management contracts are mostly due to governmental inventions. The

Government of the Kingdom of Saudi Arabia nationalized Armco and

requested the former owners to manage the company. Exxon and other

former owners of Armco accepted the offer. Delta, Air France and KLM

often provide technical and managerial assistance to the small airlines

companies owned by the Governments.

Advantages

Foreign company earns additional income without any additional

investment, risks and obligations.

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Hilton Hotels provided these seivices to other hotels without additional

investment and earned additional income..

This arrangement and additional income allows the company to

enhance its image in the investors and mobilise the funds for

expansion.

Management contract helps the companies to enter other business

areas in the host country.

The companies can act as dealer for the business of, the host country’s

business in the home country.

Disadvantages

Sometimes the companies allow the companies in the host country

even to use their trademarks and brand name. The host country's

companies spoil the brand name, if they do not keep up the quality of

the product service.

The host country’s companies may leak the secrets of technology

c. Turnkey Project

A turnkey project is a contract under which a firm agrees to fully design,

construct and equip a manufacturing/business/service facility and turn the

project over to the purchaser when it is ready for operation for

remuneration. The forms of remuneration include: -

A fixed price (firm plans to implement the project below this price)

Payment on cost plus basis (i.e., total cost incurred plus profit)

International turnkey projects include nuclear power plants, air ports, oil

refinery, national highways, railway lines etc. Hence, they are large and

multiyear projects. International companies involved in such projects

include: Bechtel, Brown and Root, Hyundai Group, Friedrich Krupp, etc.

The companies normally approach the host country's Governments or

International Finance, Corporation, Export-Import Bank of USA and the

like for financial assistance as the turnkey projects require huge finances.

The recent approach of turnkey projects is Build, Operate and Transfer

(B-O-T). The company builds the manufacturing/services facility,

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operates it for some time and then transfers it to the host country's

Government. In this approach, the contractor will not be paid the

remuneration.

V. FOREIGN DIRECT INVESTMENT WITHOUT ALLIANCES (Greenfields

strategy)

Some companies, enter the foreign markets through exporting, licensing,

franchising etc., get the knowledge and awareness of the foreign markets, culture

of the country, customers' preferences, political situation of the country etc., and

then establish manufacturing facilities by ownership in the foreign countries.

Baskin-Robbins in Russia followed this strategy. In contrast, some other

companies enter the foreign market through ownership and control of assets in

host countries.

Companies which enter the international markets through foreign direct

investment (FDI) invest their money, establish manufacturing and marketing,

facilities through ownership and control.

Foreign firm needs to control the operations when -

It has foreign firm's need to control the operations when it has subsidiaries

to achieve strategic synergies.

The technology, manufacturing expertise, intellectual property rights have

potentialities and their full utilization needs planned exploitation.

ADVANTAGES

Mostly, the customers of the host country prefer to the products produced in their

country like -'Be American, Buy American, 'Be Indian. Buy Indian.'. In such

cases FDI helps the company to gain market through this mode rather than other

modes.

Purchase managers of most of the companies prefer to buy local production in

order to ensure certainty of supply, faster services, quality dependability and

better communication with the supplier.

The company can produce based on the local environment and changing

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preferences of the cutomers.

Disadvantages

o FDI exposes the company (to a fullest extent) tothe host country's politicaL

and economic risks.

o FDI also exposes the company to the exchange rate fluctuations.

o Some countries discourage the entry of foreign companies through FDI in

order to protect the domestic industry.

o Changing Government policies of the host country may create uncertainties to

the company.

o Host country Governments, sometimes, ban the acquisition of local companies

by foreign companies, impose restrictions on repatriation of dividends and

capital. India has allowed IOO% convertibility.

THE GREENFIELD STRATEGY

The term Greenfield refers to starting with a virgin green site and then building is,

Greenfield strategy is starting of the operations of a company from scratch in a

foreign market. The company conducts the market survey, selects the location,

buys or leases land, creates facilities, erects the machinery, remits or transfers the

human resources and starts the operations and marketing activities. This strategy

is followed by Fuji in locating its manufacturing, facilities in South Carolina, by

Mercedes-Benz in locating automobile assembly plant in Alabama and by Nissan

in locating its factory in Sunderland, England."

Disney management faced the problems in building Disneyland in Paris. These

problems include:

Problems in dealing with French construction contractors.

Communication difficulties with painters.

Local contractors demanded $150 million extra at the time of opening , and

threatened the opening.

Local employees resisted the firm's attempt to impose its US work values.

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ADVANTAGES

The company selects the best location from all viewpoints.

The company can avail the incentives, rebates and concessions offered by the

host governments including local governments.

The company can have latest models of the buildings, machinery and

equipment technology.

The company can, also have its own policies and styles of human resources

management.

The company can have its gestation period to understand and adjust to the

new culture of the host country. Thus it can avoid the cultural shock.

DISADVANTAGES

This strategy results in a longer gestation period as the successful

implementation takes time and patience.

Some companies may not get the land in the location of its choice.

The company has to follow the rules and regulations imposed by the host

country's Government in case of construction of the factory buildings.

Host country's Government may impose conditions that the company should

recruit local people and train them, if necessary, to meet the company’s

requirement.

VI. FOREIGN DIRECT INVESTMENT WITH STRATEGIC ALLIANCES

Innovations, creations, productivity, growth, expansions and diversifications, in

the recent years, are mostly accomplished by the strategic alliances adopted by

various companies like mergers, acquisitions and joint-ventures.

Strategic alliance is a co-operative and collaborative approach to achieve the

larger goals. Strategic alliance takes different forms like licensing, franchising,

contract manufacturing, joint ventures etc. Alliance is a strategy to explore a new

market which the companies individually cannot do. For example, Xerox of USA

and Fuji of Japan collaborated to explore new markets in Europe and Pacific Rim.

- 45 -

Two companies join hands in order to align their distinctive and different

strengths. Dunlop and Pirelli - the two tyre making corporations -joined together

in order to synergize the strength of marketing capabilities of Dunlop and R&D

capabilities of Pirelli.

Why Consider Strategic Alliances?

  Multiply market entry alternatives and available resources for expansion into

choice international markets.  Consider possibility of replicating IJV's in different

market areas. 

  Access dominant or leading foreign technology through local manufacture in

the target market.  Domestic markets may also be served trough reverse licensing

from the IJV. 

  Access lucrative but otherwise closed or resistant markets through the efforts of

a foreign partner to maximize value of established relationships.  Develop

customer service channels what would be unfeasible otherwise. 

  Gain cost advantages through scale and locational economies (factor costs). 

  Employ key managers experienced in cultural norms and business practices of

overseas target markets. 

  Realize political or legal advantages via relationship with a partner enjoying

regional or national recognition.

  Exploit multiple synergies in production, marketing, and finance. 

  Limit exposure of own corporate assets to those actually contributed to the joint

venture.

MODES OF FOREIGN ENTRY THROUGH ALLIANCES: -

- 46 -

a. Mergers and Acquisitions

Domestic companies enter international business though mergers and

acquisitions. A domestic company selects a foreign company and merges

itself with the foreign company in order to enter international business.

Alternatively, the domestic company may purchase the foreign company

and acquires its ownership and control.

Domestic business selects this mode of entering international business as it

provides immediate access to international manufacturing facilities and

marketing, network. Otherwise, the domestic company faces serious

problems in gaining access to international markets. For example. ('()C

Cola entered Indian market instantly 11V acquiring the Pane and its

bottling units. In addition, the domestic company through this strategy of

mergers and acquisition may also get access to new technology or a patent

right. 1

Though mergers and acquisitions provide easy and instant entry to global

business, it would be very difficult to appraise the cases of acquisitions

and mergers. Some times it Would he cheaper to a domestic company to

have a green field strategy than by acquisitions. Sometimes mergers and

acquisitions also result in purchasing the problems of a fore

Advantages and Disadvantages of Aquisition strategy

Advantages

The company immediately gets the ownership and control over the

acquired firm's factories, employees, technology, brand names and

distribution networks.

The company can formulate international strategy and generate more

revenues.

If the industry already reached the stage of optimum capacity level or

overcapacity level in the host country. This strategy helps the economy

of the host country.

- 47 -

Disadvantages

Acquiring a firm in a foreign country is a complex task involving

bankers, lawyers, regulations, mergers and acquisition specialists from

the two distribution networks.

This strategy adds no capacity to the industry.

Sometimes host countries imposed restrictions on acquisition of local

companies by the foreign companies.

Labour problems of the host country's company are also transferred to

the acquired company.

Companies adopt this strategy just as a means of entering foreign markets.

Procter and Gamble entered Mexican tissue products in 1997 by

purchasing Loreto Y. Pena Pobre's manufacturing and marketing systems.

b. Joint Ventures

Two or more firms join together to create a new business entity that is

legally separate and distinct from its parents. Joint ventures are established

as corporations and owned by the funding partners in the predetermined

proportions. American Motor Corporation entered into ajoint venture with

Beijing Automotive Works called Beijing Jeep to enter Chinese market by

producing jeeps and other vehicles. Joint ventures involve shared

ownership. Joint Ventures are common in international business. Various

environmental factors like social, technological, economic and political

encourage the formation of Joint ventures. Joint ventures provide required

strengths in terms of required capital, latest technology required human

talent etc. and enable the companies to share the risks in the foreign

markets.

Joint ventures involve the local companies. This act improves the local

image in the host country and also satisfies the governmental requirements

regarding joint ventures. In fact, support of the host country's Government

- 48 -

is essential for the success of the joint venture.

Massey-Ferguson entered into a 51% joint venture in Turkey to produce

Tractors. It planned to produce 50,000 engines per year and called the

Government to provide facilities for an additional production of 30,000

tractors a year. Massey-Ferguson failed to understand economic, political

and Governmental factors in the country. The company needed

Government support for its successful operation. The venture is terminated

as the Government of Turkey did not provide he support to the company.

ADVANTAGES

Joint ventures provide large capital funds. Joint ventures are suitable for

major projects.

Joint venture spread the risk between or among, partners.

Different parties to the joint venture bring different kinds of skills like

technical skills, technology, human skills, expertise, marketing skills or

marketing networks.

Joint ventures make large projects and turn key projects feasible and

possible.

Joint ventures provide synergy due to combined efforts of varied parties.

DISADVANTAGES

Joint ventures are also potential for conflicts. They result in disputes

between or among parties due to varied interests. For example, the

interest of a host country's company in developing countries would be

to get the technology from its partner while the interest of a partner of

an advanced county would be to get the marketing expertise from the

host country's company.

The partners delay tile decision-making once the dispute arises. Then

the operations become unresponsive and inefficient.

Decision-making is normally slowed down in joint ventures due to the

involvement of a number of parties.

- 49 -

Scope for collapse of a joint venture is more due to entry of

competitors, changes in the business environment in the two countries,

changes in the partners' strengths etc.

Life cycle of a joint venture is hindered by many causes of collapse.

LIFE CYCLE OF A JOINT VENTURE

The first stage of the life cycle of a joint venture begins with exploratory

stage. During this stage the prospective partners start making:

Alliances

Project Collaborations

Feasibility Studies

After making alliances, the growth phase of the joint venture takes place.

If the interests of the parties vary at this stage, they will lead to collapse of

the joint venture in this phase itself. If the partners work together, this

phase leads to stability of the joint ventures. Even in the stability stage, the

joint venture may collapse. If not, the changed interests of the parties force

them to renegotiate regarding their interests and shares. If the

renegotiation is not successful, the joint venture may collapse. The reasons

for collapse include:

Entry of new competitors

Changes in Business Environment

Changes in partners' strengths

Today's partners may become tomorrow's competitors,

Changes in partners' interests.

PART III

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FORMULATING STRATEGY FOR INTERNATIONAL

MANAGEMENT

STRATEGY AS A CONCEPT & IMPLEMENTING GLOBAL

STRATEGY

Strategy of a firm defines its long-term goals and objectives and the

resources required to and the courses of action applied to attain those

goals. It is a unified, integrated and comprehensive plan of an

organization that relates to the strategic advantages of the firm to the

challenges of the environment. It is designed to ensure that the basic

objectives of the enterprise are achieved through proper execution by

the organization. Strategy of a firm describes its integrative pattern of

decisions revealing the firm’s action plans, resource allocation

priorities and long-term goals.

J. Lorsch defines strategy as, “the stream of decisions taken over time

by top managers which, when understood as a whole, reveal the goals

they are seeking and the means used to reach those goals.”

A.Hax and N. Majluf define the concept of strategy as follows:

-

I. Strategy is an integrative pattern of decisions revealing the firm’s

resource allocation priorities, action programs and long-term goals.

II. Strategy is a conscious selection of the business that the firm wishes

to be in or is already in, based on its strengths and weaknesses and

the opportunities and threats in the environment.

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III. Strategy is a conscious management effort at the corporate,

business, and functional level to sustain the firm’s competitive

advantage.

IV. Strategy is an attempt to maximize both financial and non-financial

returns to its stakeholders.

Mintzberg divides strategy into: -

1. Deliberate Strategy that emanates from the corporate planning

effort

2. Emergent Strategy that evolves from the environment.

Strategic Management is a continuous, iterative, cross-functional

process aimed at keeping an organization as a whole appropriately

matched to its environment. It is concerned with deciding on strategy

and planning how that strategy is put into effect.

NATURE OF GLOBAL (OR INTERNATIONAL) STRATEGIC

MANAGEMENT: -

1. International strategic management is concerned with the flow of

goods and services across the countries. It thus deals with global

opportunities, threats, challenges and risks.

2. GSM takes into account analysis of the global business environment

and strategies are formulated for particular clusters or markets.

3. GSM process is an integral part of the overall corporate policy of the

firm.

4. GSM is concerned with the impact of the present decision on future.

Thus, it is future oriented.

5. GSM is action oriented as it deals with the execution of the firm’s

strategy.

- 52 -

6. GSM involves continuous and dynamic management of the firm’s

business. The strategy of the firm incorporates the changes taking

place in the firm’s environment.

7. GSM involves planning for the long term.

8. GSM involves analysis of the firm’s global competitors.

9. GSM integrates the firms’ global and domestic operations

10. GSM is a critical exercise of business as it has long-term impact

on the business and its operation. Its effective management is

necessary for the firm’s survival and growth.

GLOBAL STRATEGIC MANAGEMENT PROCESS

1. Analysis of existing missions and goals

The firm’s global strategy stems out of its corporate strategy as

firm’s initially start as domestic firms and later transform into

international firms. When formulating the global strategy of the firm

it is thus important to analyze its current mission and reformulate it

if it appears redundant.

2. Organizational analysis of the Global Business firm

The firm’s internal environment forms it source of strengths and

weaknesses. Organizational analysis is concerned with the analysis

of the internal environment of the firm that is composed of the

Organization’s vision, its functions- HR, Marketing, Finance,

Operations, IT and R & D, its top management’s philosophy, its

culture and climate, its structure, etc. before formulating the global

strategy, it is important for the firm to know its resource allocation

framework and deficits if any.

3. Analysis of the Global Environment

- 53 -

This is required to assess the global opportunities and threats. The

Global Business environment consists of its Political-legal Factors,

Economic Factors, Technological Factors and Social-Cultural Factors.

4. Global SWOT analysis

SWOT stands for Strengths, Weaknesses, Opportunities and Threats.

Based on the company’s organizational and environmental analysis

a SWOT profile can be created. S & W are given rise to by the firm’s

internal environment and O & T are provided by its external

environment. The aim of strategists is however to utilize the firm’s

strengths and minimize its weaknesses to capitalize on its

opportunities and combat its threats.

To evaluate the firm’s strengths and weaknesses, the following

questions need to be answered: -

Do we have a strong market position in the respective

countries in which we operate?

Do we have better quality products than those of the

competitors to serve the market?

Do we have technological advantage in the world regions

where we will operate our major businesses?

Do we have strong brand reputation in the countries in which

we sell our products or services?

Does our financial profile compare favorably with that of the

industry?

Do we have the right people performing the right jobs and

possessing the right competencies?

Are we consistently profitable?, etc.

- 54 -

To evaluate the firm’s Opportunities & Threats, the following

questions need to be answered: -

What threats and opportunities do political and legal factors

present?

What threats and opportunities do technological factors

present?

What threats and opportunities do social and cultural factors

present?

What threats and opportunities do economic factors present?

What is the size of the industry?

What is the growth rate of the industry?

How intense is the competition in the industry?

What is the rate of innovation in the industry?, etc.

5. Formulation of Alternate Corporate Level and Business Level

Strategies: -

Corporate Level Strategies

These strategies are fundamentally concerned with the selection of

the businesses in which the company should compete and with the

development and coordination of that portfolio of the businesses.

The various options of corporate level strategies include: -

1. Stability strategies,

2. Growth/Expansion strategies

3. Retrenchment strategies

4. Combination Strategies

However, for a Global business firm corporate level strategies are

different and before deciding on a particular corporate level

strategy to be undertaken, the companies must decide on which

global markets to enter keeping into mind the market entry and

control costs, product and communication costs, country

- 55 -

characteristics, industry and competitors’ characteristics, etc. The

various corporate level strategies of global business are: -

1. Exporting- Indirect and Direct

2. Licensing and Franchising

3. Joint Ventures

4. Direct Investment

5. Mergers and Acquisitions

6. Production Sharing

7. Management Contracts

8. Turnkey operations

Strategic Business Unit Level Strategies

A strategic Business Unit (SBU) may be a division, product line, or

other profit center hat can be planned independently from the other

businesses of the firm. At the SBU level, the strategic issues are less

about the coordination of operating units and more about

developing and sustaining a competitive advantage for the goods

and services that are produced. At the SBU level, the strategy

formulation phase deals with positioning the business against rivals,

anticipating changes in demand and technologies and adjusting the

strategy to accommodate them and influencing the nature of

competition through strategic actions such as vertical integration

and through political actions.

The various SBU level strategies are: -

I. Porter’s Generic Strategies: -

1. Cost Leadership Strategy

This generic strategy calls for being the low cost producer in

an industry for a given level of quality. The firm sells its

products either at average industry prices to earn a profit

- 56 -

higher that that of rivals, or below the average industry prices

to gain market share. Some of the ways that firms acquire

cost advantages are by improving process efficiencies,

gaining unique access to a large source of lower cost

materials, making optimal outsourcing and vertical integration

decisions, or avoiding some costs altogether. If competing

firms are unable to lower their costs by a similar amount, the

firm may be able to sustain a competitive advantage based

on cost leadership.

2. Differentiation Strategy

It calls for the development of a product or a service that

offers unique attributes that are valued by customers and that

customers perceive to be better that and different from those

offered by the competitors. The value added by the unique

attributed of the product may also allow the firm to charge

premium price for it. Firms succeed in this strategy when they

have access to leading scientific research, have highly skilled

and creative product development team and/or effective sales

team, have established corporate reputation for quality and

innovation, etc.

3. Focus (or Niche) Strategy

Under this strategy, the firm concentrates on a narrow

segment and within that segment attempts to achieve either

cost leadership or differentiation. The premise is that the

needs of a group can be better serviced by focusing entirely

on it. A firm using a focus strategy often enjoys a high degree

of customer loyalty, and this entrenched loyalty discourages

other firms from competing directly.

- 57 -

II. Offensive Strategies: -

These involve: -

Attacking competitors’ strengths

Attacking competitor’s weaknesses

End-run offensives

Pre-emptive strategies, etc.

III. Defensive Strategies: -

These include firm’s effort of protecting its competitive position

and/or taking the first mover’s advantage.

6. Selection of the best strategy from amongst the alternatives

After formulation of the alternative strategies, the firm opts for the

best alternative. The aim here is to select a strategy that best

supports the creation of competitive advantage for the firm.

Two major factors according to Thompson and Strikland in the

determination of the choices are: (1) Competitive Position (CP),

which indicates whether the firm is strong or weak; and (2) Market

Growth Rate (MGR), which indicates whether the market for the

- 58 -

product is growing rapidly, slowly, or not at all.

The following strategic choices may be made on basis of these two

factors:

1. When CP is strong and MGR is rapid, the strategies, in terms of

attractiveness, are: (1) concentration on the existing business

with the possibility of expanding overseas; (2) vertical integration;

and (3) related diversification.

2. When CP is strong but MGR is slow, the strategies, in order of

attractiveness, are: (1) international expansion; (2) related and

unrelated diversification; (3) joint ventures; and (4) vertical

integration.

3. When CP is weak but MGR is rapid, the strategies are: (1)

reformulation of strategy; (2) related acquisition; (3) vertical

integration; and (4) abandonment, as a last resort.

4. When CP is weak and MGR is slow, the strategies are: (1)

reformulation of concentric strategy; (2) merger with a rival firm;

(3) vertical integration; (4) diversification; and (5) harvest or

divest (sell-off divisions or other saleable assets).

These strategic choices however are impacted by the stage of

development of the organization itself. For example, Hofer and

Schendel suggest that a new organization may have an

entrepreneurial strategic mode, whereas a medium-sized firm in a

stable environment may have an adaptive mode. It is likely that a

large firm will have a planning mode with emphasis on detailed

planning as a precursor to strategic management. On the other

hand, all of these modes might be found in the same organization,

depending on where its divisions are in terms of product life cycles.

In addition to considering the stages of development of an

organization, it is important to note that the strategy formulation

process will also be impacted by management style, the size of the

- 59 -

firm, and the existing organization structure.

The various tools for strategic analysis include: -

1. BCG Matrix

In the early 1970’s Boston Consultancy Group developed a

model for managing a portfolio of different business units, the

BCG growth-share matrix displays the various business units

on a graph of the market growth rate (or growth potential) vs.

present market share relative to the competitors. Resources

are allocated to business units according to where they are

situated on the grid.

These groups are explained below:

- 60 -

2. GE Nine Cell Matrix

Mckinsey and Company developed this matrix in 1970’s. It

measures the SBU’s portfolio in terms of Market

Attractiveness and Business Strength. Market Attractiveness

is a function of annual market growth rate, overall market

size, historical profit margin, current size of the market,

market structure, market rivalry, demand variability, global

opportunities, etc. and business strength depends on current

market share, brand image, brand equity, production

capacity, corporate image, relative profit margin, R & D

performance, personnel, etc.

- 61 -

3. Directional Policy Matrix

This matrix measures the health of the market (industry’s

attractiveness/business sector prospects) and the firm’s

strength (business strength/competitive abilities) to pursue it.

Directional Policy Matrix is another refinement upon the

Boston Matrix. As with the GE Business Screen, the location of

a Strategic Business Unit (SBU) in any cell of the matrix

implies different strategic decisions. Each of the zones is

described as follows: -

Leader - major resources are focused upon the SBU.

- 62 -

Try harder - could be vulnerable over a longer period of time,

but fine for now.

Double or quit - gamble on potential major SBU's for the

future.

Growth - grow the market by focusing just enough resources

here.

Custodial - just like a cash cow, milk it and do not commit

any more resources.

Cash Generator - Even more like a cash cow, milk here for

expansion elsewhere.

Phased withdrawal - move cash to SBU's with greater

potential.

Divest - liquidate or move these assets on a fast as you can.

7. Strategy Implementation

At this stage, the global company implements the selected strategy.

The factors of strategy implementation include: -

1. Partner Selection

Selection of a sound and competent partner is must for

successful implementation of the global business strategy.

Before selecting a partner the organization needs to analyze it

- 63 -

in terms if its performance, market standing, competencies

and goodwill. Moreover, a strategic fit between the

organization and its partner is imperative to attain. The

strategist must study before hand the contribution both or all

partners can make to others.

2. Organizational Structure

This deals with the selection of an appropriate organizational

structure for the international division. In case of exporting,

the firm can opt either for opening an Export Department or

an Export Division which can be headed by an Export Manager

reporting to the domestic marketing executive (who in turn

would be reporting to the corporate marketing manager) or by

Division Manager respectively. In case of licensing and/or

franchising, the firm may choose to open up an International

Division or International Quarters (Subsidiaries) headed by

Director of international operations or President, (who is vice

president in parent company) respectively. In cases where

substantial investments have been made by the global firms

and they are performing diverse business activities, global-

functional structure for specific geographies, product lines,

functions or their combination may be adopted.

3. Behavioral Implementation

It is one of the major parts in the global strategy

implementation process. It relates with training the existing

employees in the culture of the foreign company. It also

involves training the expatriates in the culture of the parent

company.

4. Marketing Implementation

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The strategists at this stage alter their market mix according

to the host country’s needs. Thus, this involves implementing

the various marketing strategies like product design, pricing,

distribution, promotion, etc. in order to attain the corporate

goals.

5. Financial Implementation

It involves taking decisions pertaining to acquisition and

allocation of finance taking into account the cost of funds and

financial needs of the enterprise. All long-term and short-term

decisions like capital budgeting, capital structure and working

capital management decisions are taken at this stage.

6. Production Implementation

Decisions regarding the plant location and layout and other

production processes are taken and implemented at this

stage.

7. Human Resource Implementation

This involves recruitment and training and development of

employees by the global company. The HR strategy is based

on the corporate strategy and thus, the firms’ corporate and

SBU level strategies affect the HR decisions and policies.

8. Strategy Evaluation and Control

The activities in this regard include: -

1. Establishment of the standards of the GSM process.

2. Measurement of the performance at every stage of the

process.

3. Comparison of the actual and the standard performance.

4. Observation and analysis of the deviations

5. Corrective steps.

- 65 -

The various measures for strategic evaluation and control

include: -

1. Financial Measures- ROI analysis, Budget Analysis, Historical

Comparisons, etc.

2. MNC-Host Country Relations- Comparison of the benefits and

limitations as posed to the host country by the MNC. The

relations can be: -

a. Contributory Relations

When the foreign company contributes directly to the

attainment of the goals without any simultaneous negative

effect.

b. Reinforcing Relations

When the foreign company’s actions reinforce the

attainment of the host nation’s goals but tend to have

some negative effects.

c. Frustrating Relations

When actions of a foreign company challenge the goals of

the nation or impede its immediate functioning in ways to

which the nation cannot respond effectively so that its

government is frustrated.

d. Undermining Relations

When the foreign company has adverse effect on the host

country’s norms, values and philosophy.

EMERGING MODELS OF STRATEGIC

MANAGEMENT IN INTERNATIONAL CONTEXT

Effective strategic management is absolutely necessary for the firm that is to survive in the

competitive arena of international business. The process of strategic management begins with an

- 66 -

on-going practice of the external and the internal environmental scanning. It is necessary to scan

the internal environment in order to understand the firm's unique strengths and weaknesses. It is

also necessary to scan the external environment in order to identify opportunities and threats to

the firm. The environmental scanning process must be a continuing effort because of the

dynamics of change. Most managers agree that the events of the world are changing so fast that

new opportunities and threats appear almost daily, and the opportunities may not be available for

long. It is more difficult to convince some managers that the conditions within the firm also

change and, what may have been a strength last month may now be a weakness. The point is that

the forces of change are as prevalent within the organization as they are outside. Matching

strengths, weaknesses, opportunities, and threats is the process by which the firm can identify

alternative strategic actions.

This process also further defines organizational goals. What the goals mean, how they will be

accomplished, and how they are viewed is the function of linearity. The linear line is drawn for

the firm and then projected outside by the members of its dominant coalitions. These coalition

members are the key decision-makers in the company who identify the "relevant" environmental

conditions, provide meaning to them, allocate resources, and articulate their rationalizations for

the stakeholders.

This process is the Traditional Strategic Management Model, the logic of which has

been generally accepted for the past three decades. The model proposes that strategic

management is an ends-ways-means sequence, by which the organization's strategic

management process takes place in the following three stages: -

1. Determine objectives, or the ends to be achieved;

2. Determine the strategies, or ways the objectives are to be achieved; and

3. Determine and allocate the resources, or the means for the achievement of the

objectives.

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1. ENDS(Objectives)

2. WAYS(Strategies)

3. MEANS(Resources)

Problems of the Traditional Strategic Model

1. Only recently have some management thinkers begun to question the efficacy of

this traditional model. Citing the experiences of several companies, Hayes

observed that the traditional strategic management process invites managers to

answer the question, "What do we think is going to happen?" when they should be

answering the question, "What do we want to happen?" By addressing the former,

traditional question, managers fail to see the possibility that the firm has the

opportunity to take command of its future.

2. Furthermore, the answers that are normally given by managers to the question of

"what's going to happen," tend to lead the organization to search for structural

changes as a way of achieving goals, when the behavioral aspects-that is, the

things that the firm currently does-may be the real impediments to realizing those

goals. In many firms, goals are set first, and then the coalition members busy

themselves acquiring resources to meet those goals. In these cases, it is often the

financial managers of the firm that are setting strategic boundaries, which tend to

tell their managerial colleagues what they can and cannot do. In this manner,

strategic management becomes an exercise in "living within the budget."

EMERGING SM MODEL

Because of the many problems with the traditional model for strategic management, it

might be worthwhile to conceptualize the model by placing qualitative and quantitative

resources as the starting point of strategy making. The Emerging Strategic Management

Model reflects another three-stage process: -

- 68 -

1. Determine the resources, or the means that are reasonably available to the

organization;

2. Determine the strategies or ways that these resources might be maximized; and

3. Determining the goals, or end results of the strategies.

The emerging model for strategic management offers the following advantages: -

1. The model helps to de-personalize the issues by focusing the resources

2. It assists in emphasizing both the strategic content and the process

3. It does not require the manager to scurry around trying to find needed resources

after the goals are established and publicized.

4. It does not keep the company with its means but allows the stretching of those

resources.

THE 10-P MODEL OF GLOBAL STRATEGIC

MANAGEMENT

The 10-P framework for globalization symbolizes the aspirations and needs of employees

and organizations in the new competitive settings. It comes a long way from the initial

impetus provided to the subject by Michael Porter in his book Competitive Strategy

(1980), and goes beyond his purely industrial organization perspective. The framework

operationalizes the 4-Diamonds for a nation's competitive advantage of Porter. The 10-P

- 69 -

framework integrates theory of strategic management and practice of business policy and

provides a structure for the practicing manager to evaluate competitiveness at regular

intervals.

The 10-P framework explores a fine `fit' between the soft and hard strategic choices. It

seeks a self-motivated network of stakeholders who are able to self-actualize a high sense

of satisfaction, self-worth, liberty and freedom in business organizational settings.

True to the vision of a world-class organization, the central fulcrum in the framework is a

PEOPLE-ORIENTATION-both inside and outside the corporation. This approach

presents a humane perspective to issues at hand and differentiates between a `satisfying'

approach and an `excellent' approach. It realizes and reflects that modern economies and

corporations thrive mainly on innovation in all respects of value-augmentation-creative

thinking at the design stage, ensuring production at highest efficiency and minimum

costs, and satisfying the customer in a most effective manner.

The rest of the 9-Ps are levered in a highly interactive mode with People and amongst

themselves. A change in any of the Ps affects performance of the other levers and

therefore the final outcome for the organization. The 9-Ps are: Purpose, Perspective,

Positioning, Plans (and policies), Partnerships, Products, Productivity, Politics, and

Performance (and profits). The 10-P framework is appropriate for auditing strategic

competitiveness, a monitoring emerging opportunities and threats, devising a value-based

action-plan and executing it in the context of globalizing organizations.

PEOPLE

Organization is people: An organization is created by the people, it exists for the people,

and continuously draws sanction from the people. From this humane perspective, the

primary objective of an organization can only be to add value to the society by serving it

with value augmented products. The people-focus implies that the primary purpose of an

organization can never be to provide employment at the expense of customers or society

in general-a drill routinely exercised in Third World countries, and especially in India by

many public sector and government organizations during the height of regulated

economic regimentation. Similarly, retrenchment of people (hire and fire) cannot be

accepted as a no-holds-barred practice for maximizing organizational profits!

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Retrenchment is a myopic and non-creative response to the problem of cutting costs and

improving productivity. The corporate manager in the new paradigm has the unenviable

role of maximizing `people orientation' as well as `task orientation'. In these emerging

work values, each employee is empowered to take decisions under certain norms. For

instance, under Just-in-Time culture, an ordinary shop-floor worker is empowered to stop

the whole machine assembly line if he finds that the product quality has gone out of

control.

PURPOSE

Organizational purpose as used in strategy-making sense is interchangeable with

mission, vision, core competence, strategic intent, and basic values. It is important not

merely to produce and sell products, but to produce and sell quality products, without

fail. Not only from the production side, but also from the distribution side, we must

constantly review whether our customers are satisfied with our products and whether

customers are satisfied with our service. We must be perfect in satisfying.

Organizational purpose must be explicitly stated. An organization must enjoy social

sanction by serving socially useful purpose. Purposeless organizations are liable to drift

and become marginal in the course of time. A sense of purpose is important for other

organizational reasons, including facilitating interpersonal processes and formalization

of relationships (the other characteristic of an organization). Globalization connotes

dynamic human will for achieving larger social and human purposes.

PERSPECTIVE

Strategic management begins with a statement of clear perspective. Top-management

perspective is not a bunch of hunches. Organizational perspective must be well-

researched. In facing global competitive challenges, it is important that the firm possesses

a global perspective, even though it might be competing and managing locally. Failure to

develop an in-depth perspective results in missed opportunities. Polemical debates arise

from lack of appreciation of multiple perspectives.

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Some of the techniques for improving the perspective horizon and thereby quality of

decisions are: scenario-building, process consultation, in-house training programmes, job

rotation, and cross-functional teams.

POSITIONING

An important dimension in achieving world-class competitiveness relates to the

positioning of the firm. This dimension has high interface with organizational purpose,

planning and perspective, resulting in definitional confusion. Positioning of the firm is

distinct from positioning of products in marketing. The term has remained mostly

confined to abstract strategic management literature despite its obvious criticality to

practice. An important dimension in strategy is to understand `where am I', `why am I

here', `where do I want to be', and `how do I reach there'. In other words, the strategic

manager has to ascertain the existing position and future positioning of the firm.

Positioning means the place in the industry which the firm would like to occupy in

relation to its competitors from the perspective of the consumers. Does the firm compete

on lowest-cost, mass-production, high-technology basis? Does it differentiate itself from

others on the basis of superior and value-augmented products, or on high-ethic practices,

employee policies, etc., which are unique in the industry? Once `positioning' choice is

made, many process and product related decisions flow.

PARTNERSHIPS

The partnership approach suggests a sense of belief and trust in other person's capabilities

and skills. It opens the doors for people to look beyond the usual routined responses, and

create an environment where people voluntarily come up with innovative solutions for

seemingly intractable problems. Partnership is a ‘perspective’ as well as a ‘position’.

Partnership has softer (intangible) and harder (tangible) dimensions. Going beyond the

softer side of partnership-approach, development of long-term partners for weak

competitors is essential for deriving sustainable advantages. Suppliers, bankers and other

investors, employees, government, technology collaborators, transporters, and

distributors do have a stake in the firm's well-being (and vice versa) and therefore have to

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be treated as key resources. In this approach, the perspective is that there can be no

profits at the expense of any resource.

PRODUCTIVITY

Global competitiveness is largely an expression of firm's relative productive efficiency. A

country's prosperity is indicated by the amount of value-added goods that are

produced/made available for consumption. Labor productivity is generally the accepted

measure of value addition with the assumption that the same individual would have

different capacities in different technological environments and organizational contexts.

A key managerial decision that vitally effects the firm's overall productivity pertains to

capital intensity of the project in terms of investments in land, building and machinery.

This decision also affects leverage position of firms.

Leverages are of two types: the first, called the degree of operating leverage (DOL), is

the firm's commitment to fixed overhead expenses irrespective of business done. The

second, degree of financial leverage (DFL), is the way the firm's funds are distributed, for

example, the debt-equity ratio. The degree of combined leverage (DCL) of the firm is the

product of its DOL and DFL.

PRODUCT

A product is a package of information which the customer interprets in his mind while

going through the process of consumption. Therefore, the concept of any product must

start with the customer in mind, and end with his total satisfaction. In this definition all

products are ultimately services converted into information. Beyond quality, products

must offer customers a satisfaction to a level where they become the best salesmen for

the company forever.

PLANS (AND POLICIES)

The thrust of the 10-P framework is to integrate people's personal growth and

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development with organizational objectives through excellent all-round quality. The

premise is that the tasks are executed with finesse by satisfied and motivated people. To

ensure that people remain aligned with the common sense of purpose and do not drift, the

organization must have a clear, documented statement of objectives and broad plans. A

firm's `plan' must contain a clear mission statement on the way it proposes to serve the

customer.

ACHIEVING AND SUSTAINING INTERNATIONAL

COMPETITIVE ADVANTAGE

MEANING OF COMPETITIVE ADVANTAGE

When a firm sustains profits that exceed the average for its industry,

the firm is said to possess a competitive advantage over its rivals. A

competitive advantage is an advantage over competitors gained by

offering consumers greater value, either by means of lower prices or

by providing greater benefits and service that justifies higher prices.

Competitive advantages are capabilities that are difficult to replicate or

imitate and are non-tradable.

Pitts and Snow define a competitive advantage as "any feature of a

business firm that enables it to earn a high return on investment

despite counter pressure from competitors."

A competitive advantage exists when the firm is able to deliver the

same benefits as the competitors are but at a lower cost (cost

advantage), or deliver benefits that exceed those of competing

products (differentiation advantage). Thus, a competitive advantage

enables a firm to create superior value for its customers and superior

profits for itself.

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ATTAINING COMPETITIVE ADVANTAGE

Competitive advantage is gained at the corporate and business

levels through synergy and market share, respectively.

Synergy evolves from size and diversification. By being large, a firm

can gain advantage by: (1) paying less interest to its creditors and

underwriters; and (2) paying less tax by internally shifting funds from

one business to another. Diversified firms can use portfolio planning to

produce synergistic advantage by assisting the firm in allocating

resources according to the product's relative market share and market

growth which in turn, directs the organization in its placement of

managers in appropriate cells. Market share derives from three

different sources: (1) economies of scale attained through

specialization, automation, and vertical integration: (2) experience -

attained through employee learning as well as product and process

development; and (3) market power-which is the amount of control the

firm has over suppliers, customers, and competitors.

Sources of Competitive Advantage include: -

1. Economies of Scale

2. Latest technology

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3. Human resources (Skilled, trained, creative, positive attitude,

high EQ and IQ, competitive, etc.)

4. Continuous learning philosophy and knowledge management.

5. Automation and modernization of business processes like

implementation of ERP, CAD-CAM manufacturing, E-commerce,

BPR, etc.

6. Product and process innovation and development.

7. Diverse workforce.

8. Low cost

9. Development in the external environment favoring the firm’s

business

10. Acquisition of market power.

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PORTER’S CONTRIBUTION

1. THE FIVE FORCE MODEL

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The model of the Five Competitive Forces was developed by Michael E.

Porter 1980. Since that time it has become an important tool for

analyzing an organizations industry structure in strategic processes.  

Porter’s model is based on the insight that a corporate strategy should

meet the opportunities and threats in the organizations external

environment. Especially, competitive strategy should base on an

understanding of industry structures and the way they change.

Porter has identified five competitive forces that shape every industry

and every market. These forces determine the intensity of competition

and hence the profitability and attractiveness of an industry. The

objective of corporate strategy should be to modify these competitive

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forces in a way that improves the position of the organization. Porter’s

model supports analysis of the driving forces in an industry. Based on

the information derived from the Five Forces Analysis, management

can decide how to influence or to exploit particular characteristics of

their industry.

 The Five Competitive Forces

The Five Competitive Forces are typically described as follows:

 

1. Bargaining Power of Suppliers

The term 'suppliers' comprises all sources for inputs that are

needed in order to provide goods or services. Supplier bargaining

power is likely to be high when: 

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- The market is dominated by a few large suppliers rather than

a fragmented source of supply,

- There are no substitutes for the particular input,

- The suppliers customers are fragmented, so their bargaining

power is low,

- The switching costs from one supplier to another are high,

- There is the possibility of the supplier integrating forwards in

order to obtain higher prices and margins. This threat is

especially high when

- The buying industry has a higher profitability than the

supplying industry,

- Forward integration provides economies of scale for the

supplier,

- The buying industry hinders the supplying industry in their

development (e.g. reluctance to accept new releases of

products),

- The buying industry has low barriers to entry.

In such situations, the buying industry often faces a high

pressure on margins from their suppliers. The relationship to

powerful suppliers can potentially reduce strategic options for

the organization. 

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2. Bargaining Power of Customers

Similarly, the bargaining power of customers determines how

much customers can impose pressure on margins and volumes.

Customers bargaining power is likely to be high when: -

- They buy large volumes, there is a concentration of buyers,

- The supplying industry comprises a large number of small

operators

- The supplying industry operates with high fixed costs,

- The product is undifferentiated and can be replaces by

substitutes,

- Switching to an alternative product is relatively simple and is

not related to high costs,

- Customers have low margins and are price-sensitive,

- Customers could produce the product themselves,

- The product is not strategically important for the customer,

- The customer knows about the production costs of the

product

- There is the possibility for the customer integrating

backwards.

3. Threat of New Entrants

The threat of new entries will depend on the extent to which

there are barriers to entry. These are typically: -

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- Economies of scale (minimum size requirements for profitable

operations),

- High initial investments and fixed costs,

- Cost advantages of existing players due to experience curve

effects of operation with fully depreciated assets,

- Brand loyalty of customers

- Protected intellectual property like patents, licenses etc,

- Scarcity of important resources, e.g. qualified expert staff

- Access to raw materials is controlled by existing players,

- Distribution channels are controlled by existing players,

- Existing players have close customer relations, e.g. from long-

term service contracts,

- High switching costs for customers

- Legislation and government action

4. Threat of Substitutes

A threat from substitutes exists if there are alternative products

with lower prices of better performance parameters for the same

purpose. They could potentially attract a significant proportion of

market volume and hence reduce the potential sales volume for

existing players. This category also relates to complementary

products.

The threat of substitutes is determined by factors like: -

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- Brand loyalty of customers,

- Close customer relationships,

- Switching costs for customers,

- The relative price for performance of substitutes, etc.

5. Competitive Rivalry between Existing Players

This force describes the intensity of competition between

existing players (companies) in an industry. Strong competition

pressurizes on prices, margins, and hence, on profitability for

every single company in the industry. Competition between

existing players is likely to be high when: -

- There are many players of about the same size,

- Players have similar strategies

- There is not much differentiation between players and their

products, etc.

Influencing the Power of Five Forces

After the analysis of current and potential future state of the five

competitive forces, managers can search for options to influence these

forces in their organization’s interest. Although industry-specific

business models will limit options, the own strategy can change the

impact of competitive forces on the organization. The objective is to

reduce the power of competitive forces. The following table provides

some examples: -

4.1          Reducing the Bargaining

Power of Suppliers

4.2          Reducing the Bargaining

Power of Customers

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·          Partnering

·          Supply chain management

·          Supply chain training

·          Increase dependency

·          Build knowledge of supplier

costs and methods

·          Take over a supplier

·          Partnering

·          Supply chain management

·          Increase loyalty

·          Increase incentives and value

added

·          Move purchase decision away

from price

·          Cut put powerful

intermediaries (go directly to

customer)

4.3          Reducing the Treat of New

Entrants

4.4          Reducing the Threat of

Substitutes

·          Increase minimum efficient

scales of operations

·          Create a marketing / brand

image (loyalty as a barrier)

·          Patents, protection of

intellectual property

·          Alliances with linked products /

services

·          Tie up with suppliers

·          Tie up with distributors

·          Retaliation tactics

·          Legal actions

·          Increase switching costs

·          Alliances

·          Customer surveys to learn

about their preferences

·          Enter substitute market and

influence from within

·          Accentuate differences (real or

perceived)

4.5          Reducing the Competitive

Rivalry between Existing Players

 

·          Avoid price competition

·          Differentiate your product

·          Buy out competition

·          Reduce industry over-capacity

·          Focus on different segments

·          Communicate with competitors

 

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2. GENERIC COMPETITIVE STRATEGIES

Discussed earlier in this section

3. VALUE CHAIN ANALYSIS

The value chain is a systematic approach to examining the development of

competitive advantage. It was created by M. E. Porter in his book, Competitive

Advantage (1980). The chain consists of a series of activities that create and build

value. They culminate in the total value delivered by an organization. The

'margin' in the value chain is added value. The value chain splits the organization

into 'primary activities' and 'support activities.'

The aim of the activities is to offer the customer a level of value that exceeds the

cost of the activities, thereby resulting in profit margin.

The Primary Value Chain Activities consist of: -

Inbound Logistics

Here goods are received from a company's suppliers. They are stored until they

are needed on the production/assembly line. Goods are moved around the

organization.

Operations

This is where goods are manufactured or assembled. Operations is the process of

transforming inputs into finished products and services.

Outbound Logistics

The goods are now finished, and they need to be sent along the supply chain to

wholesalers, retailers or the final consumer.

Marketing and Sales

In true customer orientated fashion, at this stage the organization prepares the

offering to meet the needs of targeted customers. This area focuses strongly upon

marketing communications and the promotions mix.

Service

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This includes all areas of service such as installation, after-sales service,

complaints handling, training and so on.

Support Activities

Procurement

This function is responsible for all purchasing of goods, services and materials.

The aim is to secure the lowest possible price for purchases of the highest possible

quality. They will be responsible for outsourcing (components or operations that

would normally be done in-house are done by other organizations), and e-

Purchasing (using IT and web-based technologies to achieve procurement aims).

Technology Development

Technology is an important source of competitive advantage. Companies need to

innovate to reduce costs and to protect and sustain competitive advantage. This

could include production technology, Internet marketing activities, lean

manufacturing, Customer Relationship Management (CRM), and many other

technological developments.

Human Resource Management (HRM)

Employees are an expensive and vital resource. An organization would manage

recruitment and s election, training and development, and rewards and

remuneration. The mission and objectives of the organization would be driving

force behind the HRM strategy.

Firm Infrastructure

This activity includes and is driven by corporate or strategic planning. It includes

the Management Information System (MIS), and other mechanisms for planning

and control such as the accounting department.

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4. COMPETITIVE ADVANTAGE OF NATIONS/DYNAMIC

DIAMOND OF NATIONAL CA

Increasingly, corporate strategies have to be seen in a global context. Even if an

organization does not plan to import or to export directly, management has to look

at an international business environment, in which actions of competitors, buyers,

sellers, new entrants of providers of substitutes may influence the domestic

market. Information technology is reinforcing this trend.

Michael Porter introduced a model that allows analyzing why some nations are

more competitive than others are, and why some industries within nations are

more competitive than others are, in his book The Competitive Advantage of

Nations. This model of determining factors of national advantage has become

known as Porters Diamond. It suggests that the national home base of an

organization plays an important role in shaping the extent to which it is likely to

achieve advantage on a global scale. This home base provides basic factors, which

support or hinder organizations from building advantages in global competition.

Porter distinguishes four determinants: 

 

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FACTOR CONDITIONS

The situation in a country regarding production factors, like skilled labor,

infrastructure, etc., which are relevant for competition in particular industries.  

These factors can be grouped into human resources (qualification level, cost of

labor, commitment etc.), material resources (natural resources, vegetation, space

etc.), knowledge resources, capital resources, and infrastructure. They also

include factors like quality of research on universities, deregulation of labor

markets, or liquidity of national stock markets.  

These national factors often provide initial advantages, which are subsequently

built upon. Each country has its own particular set of factor conditions; hence, in

each country will develop those industries for which the particular set of factor

conditions is optimal. This explains the existence of so-called low-cost-countries

(low costs of labor), agricultural countries (large countries with fertile soil), or the

start-up culture in the United States (well developed venture capital market). 

Porter points out that these factors are not necessarily nature-made or inherited.

They may develop and change. Political initiatives, technological progress or

socio-cultural changes, for instance, may shape national factor conditions. A good

example is the discussion on the ethics of genetic engineering and cloning that

will influence knowledge capital in this field in North America and Europe.

HOME DEMAND CONDITIONS

Describes the state of home demand for products and services produced in a

country. 

Home demand conditions influence the shaping of particular factor conditions.

They have impact on the pace and direction of innovation and product

development. According to Porter, home demand is determined by three major

characteristics: their mixture (the mix of customers needs and wants), their scope

and growth rate, and the mechanisms that transmit domestic preferences to

foreign markets.

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Porter states that a country can achieve national advantages in an industry or

market segment, if home demand provides clearer and earlier signals of demand

trends to domestic suppliers than to foreign competitors. Normally, home markets

have a much higher influence on an organization's ability to recognize customers’

needs than foreign markets do. 

RELATED AND SUPPORTING INDUSTRIES

The existence or non-existence of internationally competitive supplying industries

and supporting industries. 

One internationally successful industry may lead to advantages in other related or

supporting industries. Competitive supplying industries will reinforce innovation

and internationalization in industries at later stages in the value system. Besides

suppliers, related industries are of importance. These are industries that can use

and coordinate particular activities in the value chain together, or that are

concerned with complementary products (e.g. hardware and software).

A typical example is the shoe and leather industry in Italy. Italy is not only

successful with shoes and leather, but with related products and services such as

leather working machinery, design, etc.  

FIRM STRATEGY, STRUCTURE, AND RIVALRY

The conditions in a country that determine how companies are established, are

organized and are managed, and that determine the characteristics of domestic

competition 

Here, cultural aspects play an important role. In different nations, factors like

management structures, working morale, or interactions between companies are

shaped differently. This will provide advantages and disadvantages for particular

industries.

Typical corporate objectives in relation to patterns of commitment among

workforce are of special importance. They are heavily influenced by structures of

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ownership and control. Family-business based industries that are dominated by

owner-managers will behave differently than publicly quoted companies.

Porter argues that domestic rivalry and the search for competitive advantage

within a nation can help provide organizations with bases for achieving such

advantage on a more global scale.  

Porters Diamond has been used in various ways.

Organizations may use the model to identify the extent to which they can build on

home-based advantages to create competitive advantage in relation to others on a

global front.

On national level, governments can (and should) consider the policies that they

should follow to establish national advantages, which enable industries in their

country to develop a strong competitive position globally. According to Porter,

governments can foster such advantages by ensuring high expectations of product

performance, safety or environmental standards, or encouraging vertical co-

operation between suppliers and buyers on a domestic level etc.

SUSTAINING INTERNATIONAL COMPETITIVE

ADVANTAGE

Competitive advantage occurs when a firm is using a strategy that is currently not being

currently implemented by any of its present and potential competitors. Sustainable CA

continues to exist after the efforts by competitors to copy tat advantage continues to exist

after the efforts by competitors to copy that CA have ceased. That means, the inability of

competitors to copy the strategy makes for a sustainable competitive advantage. It is

difficult to sustain a significant CA over a time without periodically revisiting the firm’s

identity and purpose. For instance, reducing costs is not a true strategy because it simply

provides a breathing space for the organization to formulate an appropriate strategy. The

length of time over which a firm can maintain its CA is dependent on: -

1. Replicability: how easy it is for the competitors to duplicate it.

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2. Transferability: how easy it is for the competitors to acquire the same resources

and capabilities.

3. Transparency: to what degree can the competition tell what a firm is doing

strategically.

4. Durability: how long can the firm keep its CA.

The most important resources of a firm are those that are durable, difficult to identify

and understand, not easily duplicated, and in areas over which the firm has clear

control.

Sustainability of CA depends on the following characteristics of the critical

resources involved: -

1. The resources need to be valuable to the firm in exploiting opportunities and

neutralizing threats.

2. The resources should be rare and of such a nature that they cannot be reproduced

individually.

3. The resources should be imperfectly imitable because of casual ambiguity, which:

(a) might be due to the historical conditions of its occurrence; (b) makes it

difficult for others to see the linkage between the resource and the benefit; and (c)

makes the resource socially complex due to corporate culture.

Coyne suggests that the durability of CA depends on some “capability gaps” that

exist between firms. These gaps are: -

1. Business System Gaps- often found in organizational structure and its people.

2. Position Gaps- resulting from past decisions, from being a fast mover, or from the

acquisition of a precious resource.

3. Regulatory Gaps- resulting from some governmental limitation on the extent of

competition allowed in the industry.

4. Organizational or Managerial Gaps- when superior leadership results in the

recognition of trends and adaptation to change earlier than the competition.

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Characteristics of sustainable competitive advantage: -

1. Creates flexibility and adaptability so that firm’s products change with the

customers

Create consumer dependence on your bundle of products

Build on the strength of the existing bundle

Product development and/or horizontal integration

2. Creates flexibility and alternatives in the sources and means of production

Mixed production systems

Vertical integration

3. Maintain systems that monitor the environment for change

The number one factor associated with the loss of competitive advantage

is change

o Competitor-induced change—e.g. new products and

technologies

o Environment-induced change—e.g. demographic changes or

random events

o Evolutionary vs spontaneous erosion of competitive advantage

4. Develop internal systems that adapt to change quickly and effectively

Management is generally adverse to change and most management

systems reward consistency. This tends to lead to the slow erosion of

competitive advantage

This requires the development of an internal reward structure that values

new ideas and rewards experimentation (whether it succeeds or fails)

5. Work at protecting, expanding, and building upon the unique assets and

strengths of the company

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This requires using the environmental monitors to look for opportunities to

expand the company’s expertise or bring new expertise into the company

Competitive advantage, in order to be valuable, needs to be long-lasting. From an

economic point of view, a competitive advantage is similar to a monopoly that the

company creates for itself and which gives the company a profit advantage (an eco-

nomic rent). This happens only if this monopoly is not immediately destroyed before

imitation. One can generally distinguish three ways of achieving sustainability:

(a) Customer loyalty

(b) Positive feedbacks

(c) Pre-emption of capabilities.

CUSTOMER LOYALTY creates sustainability when customers keep coming back

to a company by choice, because the product or service provided to them is unique or

more valuable than competition. It can also be due to a brand that has imprinted an

association of uniqueness to the product or service in the mind of the customer. It can

also be due to high switching costs that customers would incur if they changed

products or services: in that case the customer is locked-in. An example of uniqueness

or superior value is provided by Schlumberger, which commands nearly 70 per cent

of the world market for logging, a highly specialized service of control for oil explo-

ration. Coca Cola or Louis Vuitton are among the most characteristic examples of

sustainable competitive advantages coming from a strong brand. A high switching

costs example is given by Microsoft, whose operating system is so dominant that a

customer wishing to shift to a competitive system like Linux or Apple would have

tremendous application software adaptation costs.

POSITIVE FEEDBACKS are advantages that follow the logic of 'success brings

success' and produce increasing returns. There are two kinds of positive feedback:

`network externalises' and `experience effects'. Network externalises exist when the

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customer base of a product or service is such that it induces other products or services

providers to adopt it in their own value proposition. In turn, the fact that other

products or services use the original product increases the value for new customers to

buy the original product or service. This virtuous circle creates a positive loop that

reinforces the company's competitive position. The classic example of network

externalities has been provided by the battle of standards between VHS and Betamax.

Because JVC, the inventor of VHS, opened its licence to many consumer electronic

manufacturers, it made VF IS more readily available. This, in turn, induced video

producers and distributors to put more movies on the VHS standard, inducing more

consumers to buy %'HS machines, given the large number of VHS movies available.

Microsoft DOS and Windows or Microsoft Office followed the same path: more

software available with Windows or more users of Microsoft Office attracts more

customers to buy Windows personal computers and to become users of Microsoft

Office which in turn induces more Windows-based software, thereby attracting more

customers. Betamax cassettes disappeared, Macintosh computers were pushed into a

small market niche and Lotus 123 or WordPerfect nearly collapsed. In the end,

network externalities create a situation in which the `winner takes it all', meaning that

the company which has developed a competitive advantage based on network

externalities has reached a quasi-monopolistic situation.

PRE-EMPTION OF CAPABILITIES is a type of competitive advantage based on

the appropriation by one company of key resources or assets that competitors will

find difficult to access, or to the development of competencies that are `time

incompressible' (see below). Appropriation of resources or assets applies to the

privileged access to natural resources such as location or mining concessions. It may

apply to access to skills and talents when they are in limited supply, as is the case in

many emerging markets such as the Internet-related sectors. It may apply to the right

to do business, such as the obtaining of licenses, as in telecommunications, or landing

rights in air transport. Patenting is a form of pre-emption since it gives the patent

holder a period during which it has the proprietary right to exploit the patent. It

applies to distribution networks, partnerships or access to favorable locations, as in

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the retail or hospitality industries. Time incompressibility is a competitive advantage

based on competencies, which are time-consuming to imitate. For instance, Toyota

obtained a sustainable advantage by developing the `kanban' and the `just-in-time'

processes. Those processes have been built up over time, through trial and error.

When Western automobile manufacturers discovered the power of such processes in

the 1980s they also discovered that they were not so easy to imitate given the

complexity of the social relationships involved. They had to take the time to go

through the same type of trial and error that Toyota had experienced in the first place.

INTERNATIONAL STRATEGIC ALLIANCES

MEANING

1. An alliance can be defined as the sharing of capabilities between two or more firms with the

view of enhancing their competitive advantages and/or creating new business without losing

their respective strategic autonomy. What makes an alliance 'strategic' is that the sharing of

capabilities, such as R&D, manufacturing or marketing affects the long-term competitiveness

of the firms involved and implies a relatively long-term commitment of resources by partners.

2. A Strategic Alliance is a formal relationship between two or more parties to pursue a

set of agreed upon goals or to meet a critical business need while remaining

independent organizations.

3. A strategic alliance is when two or more businesses join together for a set period of

time. The businesses, usually, are not in direct competition, but have similar products

or services that are directed toward the same target audience.

4. A Strategic Alliance is a partnership between businesses in which you combine

efforts in a business effort. The joint effort can involve anything from getting a better

price for goods by buying in bulk together to seeking business together with each of

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you providing part of the product. The basic idea behind strategic alliances is to

minimize risk while maximizing your leverage in the marketplace.

CONCEPT

According to economists, a joint effort involving the contribution of separate firms can be

organized either through a market contract, such as a buyer-supplier contract, or through the

merger of capabilities under a single management control, as in the case of a merger, an

acquisition or an internal development. An alliance is somewhere in between when either full

control is not feasible, for legal or practical reasons, or when a contract is difficult to draw up

because of the uncertainties involved and none of the parties involved has the ability to develop

the needed capability internally. As a consequence, a strategic alliance has been sometimes

defined as `a governance structure involving an incomplete contract between separate firms and

in which each partner has limited control'.' An alliance is an incomplete contract to the extent that

'it cannot specify fully what each party should do under every conceivable condition' and,

therefore, requires that both parties engage in some form of trusting open-ended relationship in

which decision-making is shared in order to allocate resources and distribute the outcome of the

joint activity according to the prevailing business conditions.

International business and the pressure for globalization often make alliances necessary. One can

distinguish four various types of alliances depending upon the scope (global or local) and the

object (market access or capabilities enhancing). A-local alliance would be one in which either

the object is for a foreign company to penetrate a local market (alliance for market entry) or to

have access to a set of resources available in a particular country (resource-based country

alliance). A global alliance would be one in which the object would be either to develop a global

market presence (Slohal reach alliance) or to enhance the worldwide competitive capabilities of

the firms (global leverage alliance).

Global versus local alliances

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Local alliances under the form of joint venture companies have been traditional vehicles for

market entry since 1945 in countries that aimed at bringing value adding productive activities to

their economy, protecting their natural resources and also promoting the strategic development of

national firms. Japan in the 1950s, Korea, China, Indonesia, India in the 1960s are among the

countries that have systematically encouraged the formation of international joint ventures

between foreign investors and local firms. Although in these countries the legal requirement for

joint venture has been somewhat relaxed, a joint venture mindset subsists. The logic of these joint

ventures is simple: it consists in an exchange of market or resources for technology. Foreign

investors are invited to bring their products, processes and management technologies alongside

their capital in exchange for an entry in the domestic market or an access to key natural resources.

The value created by those local alliances is straightforward: the value for the foreign partner is

an increase in market penetration, a set of profits coming from various sources - dividends,

transfer prices, management fees. The value for the local partner is an increase in know-how, a

flow of dividends and other indirect cash flow such as rental fees, local procurement, etc.

By contrast, global alliances are much more complex and subtle in their strategic and economic

scope. Doz and Hamel (1998) distinguish three broad types of strategic alliances:

(a) Coalitions (what Doz and Hamel call 'co-option') are alliances of competitors, distributors

and suppliers in a same industry putting together their capabilities with the view of spanning

world markets ('the search for global reach') or to Global strategic alliances establish a

common standard. Airlines alliances such as STAR represent a good example of such a

coalition.

(b) Co-specializations are alliances of firms that join their respective unique but complementary

capabilities to create a business or develop new products or technology. What characterizes

this type of alliance is that each partner contributes to a unique asset, resource or

competencies. Combined together, the capabilities of partners create the needed capabilities

for business development. Airbus and GE-SNECMA in the aerospace industry are examples

of such alliances.

(c) The primary purpose of learning alliances is to serve as a vehicle for know-how

transfer between partners. A classical example is the alliance formed between Toyota

and General Motors, called the NUMMI project, where the fundamental purpose for

GM was to learn `lean' manufacturing processes and for Toyota to learn how to

operate in a highly unionized North American environment.

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Strategic alliances differ from country-based joint ventures in five main aspects: -

First, they differ not only in their geographical scope - local versus global - but also in the

complexity of their strategic objectives. While in the case of country based joint ventures the

objectives are straightforward; this is less obvious in the case of strategic alliances. Very often

market objectives are combined with technological learning or strategic options. Hidden agenda

are more present in strategic alliances than in joint ventures.

Country-based joint ventures are based on a simple complementary scheme -market access

against technology transfer - while strategic alliances have a more complicated strategic

architecture. Often there is a mixture of complementary capabilities, consolidation of certain

activities as well as technology transfer from both sides.

The valuation of strategic alliances is more difficult than for joint ventures since they

frequently involve contributions in intangible assets and know-how, and in most situations they

take place in new and volatile products or processes. In joint ventures the value is created by the

venture and distributed to the partner under the form of dividends or transfer pricing. In a

strategic alliance value is created not only in the alliance but also outside the alliance through

the applied learning that partners can utilize in other products of their own. Finally, partners

in strategic alliances are frequently also competitors; this is less often the case in country-based

joint ventures.

STAGES OF ALLIANCE FORMATION

A typical strategic alliance formation process involves these steps:

1. Strategy Development: Strategy development involves studying the alliance’s

feasibility, objectives and rationale, focusing on the major issues and challenges

and development of resource strategies for production, technology, and people. It

requires aligning alliance objectives with the overall corporate strategy.

2. Partner Assessment: Partner assessment involves analyzing a potential partner’s

strengths and weaknesses, creating strategies for accommodating all partners’

management styles, preparing appropriate partner selection criteria, understanding

a partner’s motives for joining the alliance and addressing resource capability

gaps that may exist for a partner.

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3. Contract Negotiation: Contract negotiations involves determining whether all

parties have realistic objectives, forming high calibre negotiating teams, defining

each partner’s contributions and rewards as well as protect any proprietary

information, addressing termination clauses, penalties for poor performance, and

highlighting the degree to which arbitration procedures are clearly stated and

understood.

4. Alliance Operation: Alliance operations involves addressing senior

management’s commitment, finding the calibre of resources devoted to the

alliance, linking of budgets and resources with strategic priorities, measuring and

rewarding alliance performance, and assessing the performance and results of the

alliance.

5. Alliance Termination: Alliance termination involves winding down the alliance,

for instance when its objectives have been met or cannot be met, or when a

partner adjusts priorities or re-allocated resources elsewhere.

DETERMINANTS OF EFFECTIVE ALLIANCES

The effectiveness of an alliance depends on the degree to which it complements each

partner’s core competency. Bleeke and Ernst studied cross border alliances involving 49

organizations and summarized their findings as follows: -

1. Alliances are more effective in related businesses and while entering a new

geographical market.

2. Alliances with strong and weak partners seldom work.

3. Alliances, to be effective, require on-site management and control.

4. Alliances with a 50/50 equity split have a better chance to be effective, but the

split itself is not a predictor of success.

5. More than 75 percent of the alliances that did not last ended up in acquisition by

one of the alliance partners.

Lorange and Roos contend that, for an alliance to succeed, there must be a strattegic

match between the partners in terms of: -

1. The goals that each partner wishes to accomplish

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2. Core competencies and the way they complement each other

3. The existing portfolios of each partner and the place of the alliance in these

portfolios

4. Closeness of the core competencies and the safeguards necessary to safeguard

them.

5. The capacity of the alliance to increase each partner’s strengths

6. The degree of cultural similarity between the partners.

As summarized by Treece and Miller in Business Week, the following is the criteria for

alliance effectiveness: -

1. The involvement of top management is needed to ensure that the strategic

importance of an alliance is not lost because of small hitches at the individual

level

2. Mutual trust is created and abetted through frequent meetings, both formal and

informal

3. Use a third party to meditate impasses in negotiation

4. Safeguard the proprietary knowledge of each partner

5. Do not try to hurry the process of forming the alliance

6. Select alliance project managers with sensitivity to each other’s culture.

ADVANTAGES/NEED/RATIONALE/ROLE OF SA

The advantages of strategic alliance include: -

1. Allowing each partner to concentrate on activities that best match their

capabilities,

2. Learning from partners & developing competences that may be more widely

exploited elsewhere,

3. Adequacy and suitability of the resources & competencies of an organization for

it to survive.

4. Providing the parties each others’ strengths

5. Gaining market access

6. Facilitating entry to another country

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7. Bringing together complementary skills and enable both parties to do together

what they could not do separately

8. May facilitate the setting of industry standards

9. Reducing competitive pressure.

10. Others: -

a. Sustaining competitive advantage

b. Sharing market understanding

c. Sharing R&D expenditure

d. New Product Development

e. Avoiding Product Failures

f. Meeting challenges of technological changes.

MANAGEMENT OF STRATEGIC ALLIANCES

The following are key points in structuring and subsequently managing strategic

alliances.

Choose a partner

who shares your vision of the future

whose objectives are complementary to yours

who can be trusted not to take advantage of the relationship.

Structure the alliance by:

walling off critical technology

establishing contractual safeguards

agreeing to swap valuable skills and technology

seeking credible commitments.

Manage the alliance by building trust through:

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interpersonal contact

networking

workshops to build interpersonal skills

learning from partners so that the relationship carries benefits into the future and

through not regarding the alliance as a one-off exercise.

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PART IV

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ORGANIZING AND CONTROLLING FOR

INTERNATIONAL COMPETITIVENESS: INTERNATIONAL

HUMAN RESOURCE MANAGEMENT-CONCEPT AND DIMENSIONS,

HUMAN RESOURCE ISSUES IN DEVELOPING AND MAINTAINING AN

EFFECTIVE WORK FORCE, LEADERSHIP ISSUES; MOTIVATION; BASIC

MODELS FOR ORGANIZATION DESIGN IN CONTEXT OF GLOBAL

DIMENSIONS; FUTURE OF INTERNATIONAL MANAGEMENT IN THE EAST

>>>MANAB THAKUR,

ORGANIZATIONAL STRUCTURE IN INTERNATIONAL

BUSINESS

ORGANIZATION DESIGN

The introduction to this chapter noted that Hill's (2005) text gives little attention

to basic organization design. If you have not previously studied organization

structure, this section is intended to make the textbook chapter easier to

understand than it might otherwise be.

The structural design of an organization is reflected in its organization chart . The

organization chart is the visible representation for a set of underlying activities

and processes. The three key components of organization structure are:

the formal reporting relationships, including the number of levels in the

hierarchy and the span of control of managers

the grouping together of individuals into departments and the grouping of

departments into the total organization; and

the design of systems to ensure effective communication, coordination and

integration of effort across departments

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These three elements of structure pertain to both the vertical and horizontal

aspects or organizing. The first two elements are the structural framework , which

is the vertical hierarchy drawn on the organization chart. The third element

concerns the pattern of interactions, which provide horizontal information and

coordination where and when it is needed.

The term vertical differentiation refers to the depth in the structure.

Differentiation increases as the number of hierarchical levels in the organization

increases. The more levels that exist between top management and operatives, the

greater the potential for communication distortion and the more difficult it is to

coordinate decisions of managers and for top management to exercise control of

subordinates. We examine this further in the next section.

The term horizontal differentiation refers to the degree of differentiation between

units based on the nature of the tasks they perform, the orientation of members

and their education and training. We examine this further in the following section

on 'Organization design options'.

It is important to realize that vertical and horizontal differentiations are not

independent of each other. In your textbook, Hill (2005) condenses vertical

differentiation to an argument between centralization and decent realization and

then uses horizontal differentiation to explain how an organization creates its sub-

units. This is an over-simplification: vertical and horizontal differentiations are

interdependent. You can assess the truth of that assertion by looking at

organizations in a particular industry. Some will be 'tall' with many layers of

hierarchy; others will be 'flat' with few layers in the hierarchy.

CENTRALIZATION AND DECENTRALIZATION

The concept of centralization is easy to understand. It refers to decision making.

In a centralized organization, decisions are made at the head office; in a

decentralized organization, decisions are made by managers 'where the action is'.

However, in the real world, decision making is seldom so absolute. There is a

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range of centralization from high to low and there is a range of functions, some of

which may be subject to centralized control, while others are decentralized.

Typically, functions such as research and development (R&D) and finance are

controlled centrally just as, typically, marketing is decentralized.

International shipping companies centralize the control of ships but decentralize

report management. For example, P&O runs a worldwide shipping network but

has resorts, such as the one on Heron Island on the Great Barrier Reef , which are

largely autonomous. Similarly, CSR Ltd is an Australian MNE which has a small

headquarters in Sydney and decentralized divisions in the sugar and building

materials industries which enjoy a high degree of autonomy.

The advantages of centralization are that it:

facilitates coordination of related activities such as production and

marketing

maintains consistency in decision making

avoids duplication of effort (for example, a centralized marketing

department rather than multiple decentralized marketing offices)

enables senior managers to pursue their 'visions' for the organization with

maximum control.

The advantages of decentralization are that it:

relieves top management from information and work overload

enables subordinate managers to achieve some measure of self-

actualization - which implies freedom from control by superiors

keeps the organization flexible and able to respond quickly to demands in

the marketplace

may produce better decisions, made by managers with access to local

information

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leads to autonomy for subordinate managers, which may actually enhance

control by top management by allowing them to concentrate on important

issues.

The example of Bata Ltd

Bata Ltd began in Czechoslovakia before World War II. In 1939, Bata took 100

Czech families and migrated to Canada , the current head office of this MNE.

Here are some statistics relating to Bata Ltd:

International sales - $US 3 billion

in 115 countries

Independent retailers - 125

Factories in 90 countries

Operations in some form in over 100 countries

Total staff - 85,000

Where possible, Bata owns 100% of the operation. In some countries, this level of

ownership is not possible: for example, in India it is 60% and in Japan 10%. In

some cases, Bata provides licensing, consulting, and technical assistance to

companies in which it has no equity.

Multi-domestic

:

This strategy is one which pursues local responsiveness and this, in

structural terms, is decentralized with its overseas subsidiaries being

functionally self-contained. Bata Ltd is run by Tom Bata (son of the

founder) as a decentralized operation that is free to adjust to the local

environment. As well, the company tries to service each local market

solely through shoes it produces in that market.

  To the extent that Bata is successful in doing that, and if we ignore

those cases where Bata has incomplete control, we can say that Bata

matches its multi-domestic strategy with a decentralized structure.

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International : Under this strategy a firm recognises the value in transferring its core

competencies from head office operations to its overseas subsidiaries

(it is implicit in multi-domestic strategy that overseas subsidiaries are

left to develop these core competencies for themselves). Thus, the

structural match for this type of strategy is to centralize core

competencies and decentralize functional areas. Those decentralized

functional areas are largely self-contained so, structurally, an

international strategy requires more centralization than a multi-

domestic strategy, but it is not as strongly centralized as, say, global

strategy (see below).

  Core competencies are most frequently found in R&D and marketing

(for example, Coca-Cola's centralized control over its key recipe

ingredients and its worldwide marketing themes). In the case of Bata

Ltd, Tom Bata travels extensively to check on quality control and, as

noted above, Bata provides licensing, consulting and technical

assistance in locations where it has no equity. This can be interpreted

as centralization of key competencies so, by this criterion, Bata could

be represented as using an international strategy.

  Global: Where a global strategy is used, major decision making is centralized

and so are core competencies. Ultimate control over operations is

vested with head office but, generally speaking, functional control is

decentralized. On the evidence available, Bata does not retain ultimate

control over decision making so we must infer that Bata does not

employ a global strategy.

Transnational: Companies employing a transnational strategy are trying to optimise a

combination of scale economies and local responsiveness. This

creates competing requirements for centralization vis-à-vis

decentralization. The need to transfer core competencies, particularly

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production and R&D, calls for centralization of operating decisions.

The need to be locally responsive calls for decentralization of

operating divisions, particularly in marketing. The end result is a

mixture of centralization and decentralization. On the criteria

discussed above, it is clear that Bata Ltd is not pursuing a

transnational strategy.

 

ORGANIZATIONAL DESIGN OPTIONS

We noted in the section on organizational design that the framework of an

organization’s structure is dependent upon the extent of both vertical and

horizontal differentiation. We now look at a biological analogy to see what

differentiation is about, using our own body as the exemplar.

At the moment of conception, we consist of two cells - one from each of our

parents. The fused cells then proceed to multiply until eventually there are billions

of cells. Along the way, the cells differentiate: some become nerve cells, others

become muscle cells and organs such as the heart, liver, lungs, skin and so on

evolve. When an organization is conceived, it goes through a similar process and

the organs of our body are analogous to the various departments we find in

organizations.

The type of departments depend on the purpose of the organization, so let's look

at some of the possibilities for creating various departments. We can organise

departments or divisions on the basis of function, product, customer or geography

, as illustrated in the diagram below.

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Basis for an organization structure

A hybrid organization

We can also create hybrid organizations, incorporating two or more of the above

options. A common hybrid employs both the functional and the product options.

Matrix structure

A matrix uses two or more integrated co-existing structures simultaneously. What

distinguishes a matrix from a hybrid structure is its grid-like intersection of

multiple lines of authority and responsibility. The firm shown in Figure 8.3 below

creates its matrix by superimposing a product division over a functional group.

The functional finance, marketing, operations and human resources units give the

matrix its vertical structure, while the product division gives it a horizontal

structure.

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A matrix structure

A major feature of the matrix, which has both advantages and disadvantages, is

the dual authority system which requires some managers to be accountable to two

bosses at the same time. In Figure 8.3, for example, Manager A is responsible to

the Marketing Manager as well as to the Manager for Product A. In Ciba-Geigy,

the Swiss chemical and pharmaceutical MNE, Product A might be a new drug.

Ciba-Geigy, incidentally, has a matrix of three dimensions - product, function and

geography - so Manager A might be a marketing manager in Europe or Australia .

Being responsible to two bosses gives rise to conflict, ambiguity and

responsibility gaps. This means that managing a matrix requires considerable

personal and organizational skills on the part of managers in the matrix.

INTERN ATIONAL STRUCTURE OPTIONS

Many companies go through four stages as they evolve towards full-fledged

global operations.

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In stage one, the domestic stage, the firm is domestically oriented but may want to

consider some initial foreign involvement to expand production volume. The

structure is domestic, typically functional or divisional and foreign sales are

handled through an export department.

In stage two, the international stage, the firm becomes multi-domestic and

foreign subsidiaries may be established. An international division has replaced the

export department of stage one.

In stage three, the global stage, there are two alternatives:

1. If the firm has a domestic structure based on function and has a low degree

of diversification (that is, relatively few products), it will probably adopt a

worldwide area structure as illustrated in Figure below: -

 

 

A worldwide area structure

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2. If the firm has a domestic structure based on product and is relatively

highly diversified (that is, has many products), it will probably adopt a

worldwide product division structure as illustrated in the Figure.

 

In stage four, the transnational stage, the firm is trying to realise location and

experience curve economies, as well as concentrating on local responsiveness and

the diverse transfers of core competencies (global learning from page 430 of your

textbook). These often conflicting demands suggest a global matrix structure as

illustrated in the figure: -.

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COORDINATING AND INTEGRATING MECHANISMS

In management literature you will find a number of words that are used with

considerable licence. These words are system, process, coordination, integration,

and control. Before defining these words in the context of this chapter, here is an

assertion which is fairly consistent with what you will find in management

literature: the basic management systems are the communication system, the

system for coordination and integration, and the control system. Here are the

definitions.

1. A system is a set of interacting elements which acquires inputs from the

environment, transforms them and discharges outputs to the external

environment. 'Interacting elements' mean that people and departments depend

upon one another and must work together.

2. A process is a series of actions, changes or functions that bring about an end

or result.

3. Coordination is the linking of two or more organisational units so that they

work harmoniously. Organisations have two basic kinds of coordination

needs: vertical and horizontal.

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4. Differentiation in the organisation context is also known as division of labour

: that is, breaking the entity into its constituent parts so that people can

specialise in some function such as manufacturing, marketing and so on.

Integration is the converse of differentiation. It is the process of bringing all

the parts together so that they function as a unit.

5. Control is the process through which managers ensure that actual activities

conform to planned activities.

INTERNATIONAL HRM

MANAGING INTERNATIONAL EMPLOYEES

IHRM policies and practices relate to the management of employees who may be

working away from their home country for a specific period of time on

assignment in another country which is known as the host country. The home

country is often referred to as the parent country. Employees on overseas

assignment are called expatriates, which is often colloquially shortened to expats.

Expatriates may be either parent country nationals (PCNs) or third country

nationals (TCNs). PCNs are those whom most people would identify as being

expatriates. They are the employees from the parent (home) country who are sent

overseas because of their managerial knowledge or specialist skills.

Most research we will be examining when referring to expatriates usually refers to

PCNs. Although TCNs are often overlooked in the literature they too are

expatriates because they are moving on assignment from one country, which is

not their home country, to another country.

With the help of the following figure, an example may help clarify the above

terms. An Australian MNE [Firm X] that has subsidiaries in Singapore [Country

C - Firm X 1] and India [shown in the figure as 'any other country'] may send

Australian employees (PCNs) to Singapore and transfer employees in the Indian

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subsidiary to the operations in Singapore (TCN). When the Australian MNE

employs Singaporean citizens in the subsidiary in Singapore , then these

employees are known as host country nationals (HCNs).

Movement of international employees in an MNE

Another term that is sometimes used is inpatriate. The inpatriate refers to an

employee from an overseas subsidiary [Country C - Firm X 1 ] who is on

assignment in the MNE home country headquarters of operations [Country A -

Firm X]. As Briscoe explains, inpatriates could be local-country hires or third

country hires from the firm's foreign operations who are either being developed

by the firm for further management responsibilities or who have special skills or

experiences that the firm needs in the home country.

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Perhaps another definition will help. Hill defines inpatriates as being 'expatriates

who are citizens of a foreign country working in the home country of their

multinational employer'.

STAFFING

Staffing deals specifically with the acquisition, training and allocation of the

organization’s human resources. In both the domestic and the international context,

the staffing process can be seen as a series of steps that are performed on a continuing

basis to keep the organization supplied with the right people in the right positions at

the right time. The steps in this process are:

human resource planning (this is part of the organization’s strategic plan)

recruitment

selection

induction and orientation

training (to improve job skills)

development (to educate people beyond the requirements of their present position)

performance appraisal

remuneration and rewards

transfers

Separations.

In an international business, the way in which these steps are administered depends

very much on the firm's strategy and the staffing policy chosen to support that

strategy. There are four choices in policy: the ethnocentric approach, the polycentric

approach, the geocentric approach and the regiocentric approach. What follows is a

shorthand description based on Dowling and Welch (2004) of the four using the same

criteria for each approach. You should use these descriptions as the 'skeleton' of your

understanding of the four approaches and use the reading from Hill (2005) to provide

the 'flesh'.

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Ethnocentric approach  

Definition: Ethnocentricity (ethnocentrism) is a belief in the superiority

of one's own ethnic group. The firm basically believes that

parent-country nationals are better qualified and more

trustworthy than host country nationals.

Rationale and advantages: Experience curve effects derive from standardisation of

production. The firm produces in the home country initially

and transfers its core competency to the host country under

the guidance of expatriate managers. These managers have

the knowledge to create value through core competencies.

They also contribute to the maintenance of the corporate

culture.

Problems and disadvantages: Denies advancement to host country nationals. This may

breed resentment and diminish the firm's public image.

Expatriate managers are expensive to maintain: they may

become insular in their attitudes and be prone to cultural

myopia. The latter may result in management overlooking

market niche opportunities.

Polycentric approach  

Definition: Polycentricity (polycentrism) is a belief that local people

know the local environment better than outsiders.

Rationale and advantages: Gives hope for profit maximisation through flexibility

because local managers can react quickly to market needs in

the areas of pricing, production, product life cycle, and

political activity. Absence of problems associated with

expatriate managers including cultural myopia. Provides

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continuity in the management of foreign subsidiaries.

Problems and disadvantages: No synergy because there is little communication between

national units. Limits experience of host nationals to their

own country. Corporate headquarters may become isolated

from national units and lead to lack of integration. This in

turn may lead to corporate inertia.

Geocentric approach  

Definition: Geocentricity (geocentrism) is the notion that the best

people should be employed, regardless of their nationality.

Rationale and advantages: Enables the firm to make best use of its human resources

and builds a cadre of executives who feel comfortable

working in any culture.

Ethnocentric and polycentric pressures are balanced in

favour of optimising the company's operations. The

ethnocentric pressure for low cost standardised operations is

satisfied because enough of the right kinds of products exist

in the global customer base to permit scale economies and

experience curve effects. The polycentric pressure for local

responsiveness is satisfied because of the need to meet the

distinctive characteristics which remain in every market.

Problems and disadvantages: May be contrary to host countries' desire for the MNE to

employ local citizens. Expensive to implement because of

the need for considerable cross-cultural training and

development.

Regiocentric approach (Note: This option is not covered by Hill (2005); it is

included here for interest and to indicate that other authors

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have a perspective which is different from Hill (2005).

Definition: Regiocentricity is the variation of staffing policy to suit

particular geographic areas.

Rationale and advantages: Policy varied to suit the nature of the firm's business and

product strategy. Allows interaction between executives

because of inter-regional transfers. Shows some sensitivity

to local conditions. Provides a 'stepping stone' for a firm

wishing to move from an ethnocentric or polycentric

approach to a geocentric approach.

Problems and disadvantages: May produce federalism at a regional (rather than a country)

basis and constrains the firm from taking a global stance.

May improve career prospects at the national level, but only

to the regional level: staff may never attain positions at

corporation headquarters.

The following are the various advantages and disadvantages of using expatriates

(PCNs and TCNs) and locals (HCNs) when considering which category of staff to

employ for international operations: -

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Expatriate managers

No matter which staffing policy a firm has adopted, it usually has some parent-country

nationals (PCNs) who serve in foreign positions, generally at managerial level. The

individual success of these expatriate managers is usually very important to the success

of the company. To understand the importance of expatriate managers, consider the

possible indirect costs of their failure to do a good job):

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foreign governments may be alienated

foreign suppliers, creditors and customers may be lost

foreign contracts may be lost

loss of market share

foreign operators may be inefficient

foreign employees, that is HCNs, may be alienated, resulting in industrial

relations problems such as morale and productivity

the company's international reputation may be damaged

the manager's self esteem will be damaged, leading to adverse long-term

consequences both for the manager and the company

other potential expatriates and their families may be deterred from undertaking

foreign assignments.

There has been considerable research into the selection and training of expatriate

managers to avoid the consequences listed above.

Dowling and Welch (2004) suggest that because of the high costs associated with

expatriate failure, which occurs when an expatriate returns early from an overseas

assignment or is ineffective in the overseas posting, developing selection criteria that

predict success is vital. Selecting potential expatriates is a more complex process than

selecting domestic employees because, in addition to predicting successful job

performance, the HR manager is also attempting to predict the expatriate's ability to

adjust to a different cultural environment. An important point made by Dowling and

Welch (2004) is that a person's ability to perform job tasks (technical ability) in the

domestic business does not necessarily translate into that person performing well abroad

because of the need for the expatriate to adapt to a different cultural environment. That is,

domestic ability is not necessarily a valid predictor of international success.

SELECTION AND TRAINING OF EXPATRIATE MANAGERS

In previous sections there has been repeated emphasis on the need for managers

of international businesses to be aware of cultural factors in the work environment

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and how they may differ both across and within countries. In other words, we

have been referring to the need for managers to have cross-cultural literacy. In

this section we look at the selection and training of managers and the supporting

facilities an organization must provide when managers have taken up their

positions in the host culture.

For now it is suffice to say that not everyone is fitted for the task of management in a

culture different from one's own. Several factors need to be considered in selecting an

expatriate manager. First, a manager must be psychologically suited to the job. In

practical terms, this means such a person should:

have a good self-image without being too egotistical

be able to interact freely with people

have reasonably high intelligence

be self-motivated

have tolerance for ambiguity.

Second, the manager should have few prejudices and be non-discriminatory in terms

of race, gender or ethnic background. Third, the manager must have the skills to do

the job and a broad general knowledge of the area related to the assignment. Specific

skills required include job knowledge, communication skills and a working

knowledge of the language of the host country.

Having selected the manager for the job, he or she must be trained. However, it is not

sufficient to provide training only for the manager: the whole family must be trained.

The training of a spouse/partner may be more important than training the manager

because everyday activities involving school, shopping, interaction with neighbours,

dealing with telephone and postal services, and selecting and managing domestic help

are usually the responsibility of the spouse/partner.

- 141 -

TRAINING AND MANAGEMENT DEVELOPMENT

Having selected the manager for the job, he or she must be trained. However, it is

not sufficient to provide training only for the manager: the whole family must be

trained. The training of a spouse/partner may be more important than training the

manager because everyday activities involving school, shopping, interaction with

neighbors, dealing with telephone and postal services, and selecting and managing

domestic help are usually the responsibility of the partner.

Training should include at least two phases. Pre-departure training should focus

on language, history and culture for the whole family and on job-specific training

for the manager. On arrival in the new country two or three weeks without too

much job-related activity should be allowed for adaptation to the new culture.

Transition training should continue with language and culture training as well as

meetings at which the new expatriates have the chance to mix with local residents

and other foreign nationals.

Caring for expatriate managers does not cease at this point. The home office must

remain alert to the need to provide psychological support in a variety of ways and

to convince expatriates that they are not being disadvantaged for promotion by

service in a foreign country. In this context the expatriate should get out of the

host culture on a regular basis once or twice a year. The ability to 'touch base'

with the home culture gives reassurance to expatriates that they are valued

servants of the organization. It also helps in avoiding 'culture shock' when they

finally return to the home country. People need to be prepared for re-entry to the

home culture and the organization needs to provide the support facilities for this

event.

We should be clear that training and development are two different but related

issues. Training is concerned primarily with the acquisition of skills (for example,

learning a language), but may also refer to the acquisition of awareness (for

example, cultural training). Development is the term used to describe a process in

- 142 -

which the person is changed: that is, 'developed' through the acquisition of

knowledge via some form of education program which may include some

'training'. The distinction between training and development may be made clearer

by discussing the forms they take. Thus training may be:

Cultural training, in which the trainee learns about the host country's culture,

history, politics, economy, religion and social and business practices

Language training, in which the trainee learns a language other than his or her

native tongue

Specific skills training, in which the trainee learns communication skills,

negotiation skills, and other skills needed by a practising manager. In this latter

category we might find training in performance appraisal, total quality

management, and training (as in 'train the trainer').

Management development might also be called 'general education' where the manager

goes to school to learn how to be a manager. Management development subsumes a

range of activities including:

skills training

in-house programs on a wide range of company-related topics

external seminars and conferences on a wide range of topics relevant to company

activities

university courses

job rotation and/or transfers within the company, including overseas postings

exchange visits with other companies, usually within the same corporation

networking with other managers within the company, with government officials

and with manages of suppliers, customers and so on.

PERFORMANCE APPRAISAL

Training and development also involve performance appraisal. Managers at all

levels use appraisal to communicate expectations and to help subordinates

improve personal deficiencies. However, in international business performance

- 143 -

appraisal has problems not usually encountered in the domestic company. These

problems fall generally into the category of bias. Let's see how bias arises because

of the expatriate manager's location.

Expatriate managers are assessed by their superiors in both the host country and

the home country. From these different perspectives:

Host country assessors may be biased by their cultural frame of reference and set

of expectations.

Home country assessors may be biased by their distance from the host country

and by their own lack of experience in the host country. Their cultural frame of

reference may be the same as that of the person being assessed, but their

expectations of that person may or may not be realistic. Home country assessors

rely on facts and figures in making their assessment: facts and figures do not take

account of the 'soft' variables associated with working in another culture.

It is usually very difficult for an expatriate manager to counter an adverse

performance appraisal arising from these biases. For this reason, expatriates often see

little benefit for their careers in overseas postings. Companies which are aware of this

focus their performance evaluation on factors which are within the scope of control of

the person being evaluated. This in itself presents difficulties because there are many

types of decisions over which expatriate managers have little control.

COMPENSATION

Differences in the economies and compensation practices of various countries

make the compensation of expatriate managers a thorny problem for

administrators. Let's begin by noting differences in the compensation packages of

CEOs in several countries as reported by Hill (2005, p. 633). The average

remuneration of a CEO in a large US corporation is nearly twice that of his of her

Canadian or British counterparts and two and a half times that of an Australian

CEO.

- 144 -

The various approaches to staffing relate to compensation by being concerned

primarily with:

parent country nationals (PNCs) - ethnocentric and geocentric

locals or host country nationals (HCNs) - polycentric

third country nationals (TCNs) - geocentric and regiocentric.

It follows that three of these four staffing approaches - ethnocentric, regiocentric and

geocentric - rely on extensive use of expatriate managers (PCNs and TCNs).

There are three approaches or policies to international compensation. These policies

are:

Home-based policy. T his policy links the base salary for PCNs and TCNs to the

salary structure of the relevant home country. For example, a US executive

transferred to France would have a compensation package based on the US base

salary rather than that applicable to the host country France . All PCNs and TCNs

are treated equitably in relation to their home countries but they may be paid

different amounts for doing the same work. For example, in the London branch of

an American bank, a US expatriate and an Australian (TCN) may perform the

same banking duties but the American will receive a higher salary than the

Australian because of differences in their respective home country base salary

levels.

Host-based policy. The base salary is linked to the salary structure of the host

country but supplementary allowances for cost of living, housing, schooling and

so on are linked to the home country salary structure. This policy is attractive to

TCNs where host country salaries are greater than those in their home countries,

but equally unattractive to expatriates who home country salary levels are greater

than those of the host country.

Region-based policy. This is something of a compromise between the home

based and host based policies whereby expatriates working in their home regions

(for example, an Italian in Germany) are compensated at lower levels than those

- 145 -

working in regions far from home, for example, an American working in Saudi

Arabia.

The balance sheet accommodates four categories of expenses likely to be incurred by

expatriate families. According to Dowling and Welch (2004, pp. 146-147), these are:

Goods and services: home country outlays for items such as food, clothing,

personal care, household furniture, recreation, transportation and medical care

Housing: the major costs associated with the employee's principal residence

Income taxes: payments to federal and local governments for personal income

taxes

Reserve: contributions to savings, benefits, pensions, investments, education

expenses, and so on.

INTERNATIONAL LABOUR RELATIONS

International labor relations is a vast topic of considerable complexity and the

existence of optional titles for the topic - industrial relations, employer-employee

relations, workplace relations - is indicative of difference perspectives. Labor

relations by whatever name is commonly the domain of the HRM function, but

some organizations manage their labor relations through a department which is

separate from the HRM department. An MNE must manage its relations with

labor in its own country and in other countries where subsidiaries are located, and

they will all be different.

You will probably know from your reading of newspapers and magazines, and

from your own experience, that labor relations are a subject with political,

sociological and emotional overtones. Your textbook seems to suggest that labor

unions are the enemy of MNEs. This may be so in some cases, but it need not be.

For example, in the 1970s, Capricorn Coal Company, a consortium of four MNEs

based in Britain, Germany and the Netherlands, began the development of an

open cut coal mine at German Creek in the Bowen Basin of Central Queensland.

One of Capricorn Coal's first acts was to include the four unions involved in the

- 146 -

company's planning process. The harmony which ensued is illustrated by the fact

that in the first ten years of the mine's existence, the only time the unions went on

strike was at the request of the company. There was an Australia-wide strike by

coal miners and the company did not wish to incur the wrath of the Australian

Miners Federation by allowing its employees to continue working during the

national strike. The story behind this tale is that the CEO of Capricorn Coal had

begun life as a miner in Wales and had subsequently been a union official. He

understood miners!

That is a rather long-winded introduction to international labor relations, but it

says something about the options which international managers have in their

conduct of relations with their employees

The concerns of unions

Unions, or organised labour, are usually thought to be concerned about pay, job

security and working conditions. In fact unions are concerned about many other

issues including quality of life, equal opportunity, superannuation and so on. In

the international context, unions are concerned about the power of MNEs to move

production facilities from one country to another (or even from one part of one

country to another part) with the consequent loss of jobs. MNEs typically make

such decisions by negotiation with governments, and unions are thus potentially at

a great disadvantage unless they have influence with the government in power.

The power of unions ultimately lies in the strike weapon, but there are also about

twenty forms of non-strike activity such as go slow, work to rule, overtime bans

and the like.

Another concern of unions is the ability of MNEs to move some production

facilities so that low skill jobs are 'exported' from the home country to countries

where labour costs are lower.

A final concern is the desire of some MNEs to transpose work practices from one

country (for example, Japan ) to the home country. In Australia for example,

- 147 -

Mitsubishi and Toyota have been fairly successful in implementing some

Japanese employment practices in their Australian factories. However, this was

done in consultation with unions. In the US, Japanese auto companies have been

able to establish non-union plants - a practice which is feasible in the US because

of the low level of unionisation of the private sector workplace (about 9%), but

not feasible in Australia where unions are much stronger, even though

membership is declining (now about 25% of the total workforce).

The strategy of unions

Unions attempt to match the bargaining power of MNEs by:

trying to establish international labour organisations such as the International

Confederation of Free Trade Unions (ICFTU; see http://www.icftu.org) and the

Global Union Federations (see http://ei-ie.org/ei/english/eeiits.htm)

lobbying governments to restrict the activities of MNEs - also without much

success because MNEs are able to play national governments off against one

another; and

lobbying various arms of the United Nations to restrict the activities of MNEs -

also without success because of the ability of MNEs to play national governments

off against one another.

One of the most pressing tasks facing the international trade union movement is to

address the power and influence of Multinational Enterprises (MNEs) as part of a

trade union response to globalization. The combination of the growth of foreign

direct investment, technological changes, international financial markets and a

wide range of deregulation and privatisation measures have made it possible for

MNEs to be in the driver's seat of the global economy.

The challenge for the international trade union movement is to ensure that

companies respect workers' rights in every part of the world where their influence

is felt and to establish a genuine global dialogue between unions and MNEs.

- 148 -

The Global Union Federations (GUF) have the primary responsibility for dealing

with global companies. They are the major instruments for workers to come

together at international level inside enterprises and industries. The ICFTU works

in partnership with GUFs in many areas including efforts to strengthen

international trade union solidarity and build global social partnership.

The ICFTU represents 234 organizations in 152 countries and territories, in total

representing a membership of 148 million. Some of their activities and priorities

mentioned on their website are:

Activities

The ICFTU organises and directs campaigns on issues such as:

the respect and defence of trade union and workers' rights

the eradication of forced and child labour

the promotion of equal rights for working women

the environment

education programmes for trade unionists all over the world

encouraging the organisation of young workers

sending missions to investigate the trade union situation in many countries.

Priorities for action

The five main ICFTU priorities are:

employment and international labour standards

tackling the multinationals

trade union rights

equality, women, race and migrants

trade union organization and recruitment.

- 149 -

Unions have been a little more successful with two international bodies - the

International Labor Organization (ILO) and the Organization for Economic

Cooperation and Development (OECD).

The ILO is a United Nations affiliate located in Geneva to which participating

countries send representatives from government, industry (management) and

unions. The ILO seeks to define and promote fair labor standards on health, safety

and other working conditions, and freedom of association (that is, the choice to

join unions). It publishes reports on working conditions by country and industry,

but the practical support given by the ILO to unions is limited by the attitudes of

national governments.

The OECD is a government, industry and union group located in Paris. In 1976,

the OECD established a set of voluntary guidelines for MNEs. These guidelines

were originally proposed in 1975 by the ILO: they say that MNEs are obliged to

respect the laws, regulations and administrative practices of member countries

and that countries are obliged to treat MNEs in the same way as domestic firms

within their borders. These guidelines have had limited effect, largely because

there is an umbrella or chapeau clause which is ambiguous. The clause states that

MNEs should adhere to the guidelines 'within the framework of law, regulations

and prevailing labor relations and employment practices, in each of the countries

in which they operate'. The unresolved question is whether the chapeau clause

takes precedence over local law (the MNE review) or whether the clause means

that the guidelines supplement local law (the union view).

Approaches to labor relations

There are two broad approaches to international labor relations: centralized and

decentralized. To argue in favor of one versus the other is to beg the question.

Both approaches are necessary and one must dovetail into the other.

- 150 -

Centralization is desirable when decisions are concerned with labor and

transportation costs, skill levels, availability of natural resources and the political

climate in countries in which the MNE operates.

Decentralization is desirable when decisions are concerned with labor laws, union

power, the nature of collective bargaining and the work culture. Increasingly, the

way work is organized in particular countries is seen as a source of competitive

advantage. Employee participation has a long history and it has many forms. Your

textbook mentions self-managing teams, but quality circles (QC) and ultimately

total quality management (TQM) are manifestations of employee participation in

decision making. This is definitely the domain of local management -

decentralization.

GLOBAL OPERATIONS MANAGEMENT

- 151 -

CHOICE OF MANUFACTURING LOCATION

Following is the list of factors to be considered in the choice of an optimal

manufacturing location:

Country factors include factor costs, politics and culture

Technological factors include set-up costs, minimum efficient scale and the

availability of flexible manufacturing technology

Product factors include value-to-weight ratio and whether or not the product

serves universal needs.

People living in industrial societies tend to ignore some aspects of the natural world,

so let's look briefly at some basic environmental factors and the way they influence

the location of manufacturing. Climate and geographic considerations influence the

distribution of the earth's population and the nature of agriculture, lumbering, grazing

and fishing, although they do not completely explain the nature and dispersion of

economic activity. Given suitable climate and physical features, industries will locate

- 152 -

their manufacturing plants in areas that provide the greatest advantages in the

assembly, production and distribution of the final product.

Major factors to be considered are:

availability of raw materials

skilled but (preferably) inexpensive labor

sources of energy

Transportation facilities.

Other factors are:

perishability of the product

value-to-weight ratio

weight loss in processing (for example, canned fruit, oil products)

available services (for example, transportation, power)

location of competitors; and

location of complementary producers

Requirements of specific industries are as follows: -

Machinery manufacture

The manufacture of machinery requires creative and skilled labour, energy for

processing raw materials, an economy in need of such products and the means for

distributing the finished goods. For example, the large farms of the US and

Canada led to the invention and manufacture of large scale farm machinery.

Electronic products

Electronic products required skilled labour, an established machinery industry and

investment capital. For example, the location of the computer hardware industry

in Silicon Valley in Northern California is due largely to the initial R&D

- 153 -

conducted in the laboratories of universities and corporations in the San Francisco

area.

Shipbuilding

The industry must be located adjacent to deep, quiet waters. Skilled labour must

be available and raw materials, especially steel, must be manufactured nearby.

Examples of this are the Tyne and Clyde Rivers in England before World War II ,

Japan after World War II and Korea more recently because of lower labour costs.

Food processing

The industry develops in areas with the raw materials available. For example, fruit

and vegetables are canned near the producers because of the perishability of the

products and the cost of transporting them unprocessed. Wineries are established

in areas of grape production such as Western Australia and Tasmania because the

finished product can withstand the cost of transportation to markets.

Given these industry requirements, let's see now how certain economic, political

and cultural factors may require firms to modify their perfect choices. Let's call

these country factors .

Textiles

The textile industry requires cheap power, skilled labour and extensive marketing

systems as is the case with northern hemisphere countries such as Europe and,

increasingly, China . On the other hand, wool in particularly is most obtained

from southern hemisphere countries such as Australia and Argentina .

Country factors

Examples to illustrate the idea that governments lay down conditions which

persuade firms to locate their plants in specific areas: -

- 154 -

China has created special economic zones to promote development in areas such

as Guangzhou , Shanghai and Fujian .

Businesses that establish plants in southern Italy can obtain soft loans, tax

concessions and even outright grants of up to 40% of the fixed investment.

Export processing zones that enable firms to take advantage of low labour costs,

and to export their production, exist in Mexico, Korea, Taiwan, Singapore and

some 50 other countries. The firms have a limited selection of plant locations: the

plants are confined to an 'in-bond' area. In Mexico , in-bond plants - maquiladoras

- came into existence because of an arrangement between Mexico and the US .

The Mexican Government permitted plants to import parts and processed

materials to be assembled, packaged and processed without paying import duties

provided the finished products were exported. The US Government permitted the

finished product containing US made parts and materials to be imported with

import duty paid only on the value added in Mexico.

Technological factors

1. Value creation and/or added value

The technology used should create or add value at the lowest possible cost while

giving customers the highest possible value.

2. Fixed costs

If the cost of setting up a plant is high, as for example in the semi-conductor,

cement, steel, aluminium, oil and motor vehicle industries, a single plant at a

single location is usually the optimum solution. If the cost of a plant is relatively

low and multiple plants can economically accommodate demands for local

responsiveness, then this may be the optimum solution. Another advantage of

multiple plants in multiple locations is that the firm avoids the risks associated

with being dependent on any one location. This is significant in a world of

floating exchange rates.

- 155 -

3. Minimum efficient scale

A single large plant is generally the best way to achieve economies of scale: that

is, as the number of products made increases, the unit cost decreases. However,

there is a limit beyond which cost-per-unit does not decrease. This scale of output

is termed the minimum efficient scale and is illustrated in the figure: -

Unit-cost curve

4. Flexible manufacturing system (also called lean production)

These systems are computer-based and are designed to permit the efficient (low-

cost) production of small batches of products or parts. Flexible systems also

encompass the logistics of materials handling. For that reason we will defer

discussion of the technology until a later section, after we have discussed

materials handling. The ability of flexible manufacturing systems to handle small

batches gives a firm more latitude in the way it makes its products. This is known

as economies of scope .

However, economies of scope do not diminish the relevance of economies of

scale and we cannot come to any conclusion about production in small or very

large batches until we consider the product.

- 156 -

Product factors

Two product features influence location decisions. They are:

value-to-weight ratio

universal needs.

Value-to-weight ratio

High value-to-weight ratio products such as electronic goods have low

transportation costs and, other things being equal, it makes sense to produce them

in one optimal location and serve world markets from there. Low value-weight

ratio products such as sugar, bulk chemicals, paint and petroleum products have

large transportation costs. Wherever possible after consideration of all issues, it

makes sense to produce these goods in multiple locations close to their markets.

Universal needs

Products which satisfy common needs such as steel, bulk chemicals and personal

computers are best produced at a single location because there is little need for

local responsiveness.

Concentration (Centralization) Versus Decentralization

In the process of deciding where to locate manufacturing plants around the world

there tend to be two strategies: either to centralize the location or decentralize

them in a number of regions close to the markets.

Location Strategy and Production

Concentrated

production

Decentralized

production

Country Factors

Differences in political

- 157 -

economy

Differences in culture

Differences in factor

costs

Trade barriers

Location externalities

Exchange rates

Substantial

Substantial

Substantial

Substantial

Important in industry

Stable

Few

Few

Few

Few

Not important in

industry

Volatile

Technological Factors

Fixed costs

Minimum efficient

scale

Flexible

manufacturing

technology

High

High

Available

Low

Low

Not Available

Product Factors

Value-to-weight Ratio

Serves universal needs

High

Yes

Low

No

MAKE-OR-BUY DECISIONS

International businesses invariably face decisions about whether they make all or

just some of the components used in their final product and therefore buy in from

other sources ( outsourcing ) those components they decide not to make. This

make-or-buy decision is related to the degree to which a firm is vertically

integrated: that is, the extent to which a firm is its own supplier and market. At

one extreme a firm can make all of its own inputs and be its own supplier; at the

- 158 -

other extreme, it can buy all its inputs and rely on external suppliers. Partial

integration implies that some components are made and others bought.

A major benefit of making inputs (backward or upstream integration) is the

degree of control maintained over cost, quality and timeliness of delivery. Major

drawbacks are the cost of investment and expertise needed to provide these

inputs. A benefit of buying is the ability to choose one or more suppliers. A

corresponding drawback is the reliance on suppliers. The trade-offs associated

with make-or-buy decisions are summarized in following table: -

  Make Buy

Advantages control over costs

control over quality

control over delivery

not competing for supply

develop new expertise

choice among suppliers

avoid their business risks

no additional investment

no need to learn about a

new business

     

Drawbacks increased investment

need for expertise

need for management

may be inefficient

overspecialization

reliance on outsiders

need to compete for

supplies

supplier may go out of

business

- 159 -

Make-or-buy decisions in an international firm may be complicated because they

are made relative both to the whole company and to each of its subsidiaries. Three

make-or-buy options exist:

a subsidiary is fully integrated and makes its own parts

a subsidiary is vertically integrated with other parts of the company and buys

inputs from other subsidiaries or from the parent company.

there is no vertical integration and inputs are obtained from outside suppliers.

The 'real world' is seldom so simple and a wide variety of combinations is

possible. However, there is another way to obtain some of the benefits of vertical

integration without incurring some of the costs: through strategic alliances. Bear

in mind from our discussion in Chapter 8 that strategic alliances have costs as

well as benefits. The principal cost may be giving away technological know-how.

Strategic alliances in the make-or-buy context may be said to come in two sizes.

The larger is between two or more companies of similar size. Your textbook cites

alliances between Kodak and Canon to manufacture copiers to be sold by Kodak;

between Motorola and Toshiba to cross-licence their respective technologies; and

between General Motors and Toyota to build the Chevrolet Nova as a joint

venture. The smaller size of strategic alliance is between a large company such as

Toyota and a number of small-parts suppliers, some of whom supply only Toyota

while others supply most of their output to Toyota . This is the more likely

scenario in make-or-buy situation, where Toyota does not have production

facilities for all of the thousands of parts needed to construct a motor vehicle.

MATERIALS MANAGEMENT

Materials management and physical distribution are concerned with the means by

which inputs get to the production site and the finished product gets to the

customer. If we show this process from suppliers to customers, it could be

displayed as in the figure: -

- 160 -

There are other support activities that go hand in hand with procurement. These

are purchasing (if the inputs are bought rather than made), maintenance of

buildings and equipment, and technical functions which provide the production

facility with manufacturing specifications.

The procurement process ends with the supply of inputs to production, but the

system must be geared to providing the right quantity of inputs. Is a materials

inventory to be held or is there a just-in-time (JIT) system in operation? We will

address JIT in the next section, but if an inventory is to be held, what level of

stock is appropriate? Decisions such as these are germane to the position of the

materials management cell in the organisation structure.

PRODUCTION AND MATERIALS TECHNOLOGY

New manufacturing technologies introduced over the last two or three decades

include robots, numerically-controlled machining tools and computer software for

product design, engineering analysis and control of manufacturing machinery.

This technology is called computer-integrated manufacturing (CIM): it is also

- 161 -

called flexible manufacturing systems. CIM coordinates robots, machines,

product design and engineering analysis through a single computer.

CIM is able to produce products of different sizes, types and customer

requirements on the one assembly line without slowing production. It does this

through three sub-components:

computer-aided design (CAD) . Computers are used to assist in the drafting,

design, and engineering of new parts. Hundreds of design options can be

explored, as can scaled-up or scaled-down versions of the original.

computer-aided manufacturing ( CAM ). Computer-controlled machines in

materials handling, fabrication, production and assembly greatly increase the

speed at which products can be manufactured. CAM also permits a production

line to shift rapidly from producing one product to any variety of other products

by changing the instruction tapes or software in the computer.

administrative automation . The computerised accounting, inventory control,

billing and shop floor tracking systems allow managers to monitor and control the

manufacturing process. The JIT system, as discussed in the reading from your

textbook, is part of this total system

For JIT to be successful, manufacturers need the cooperation of their suppliers.

JIT is a two-way street and suppliers need the cooperation of manufacturers if

they are not be become a de facto inventory system for the manufacturer

There is seldom one clear choice and trade-offs will involve decisions on concentration

(centralization) or decentralization.

The make-or-buy issue was discussed in the context of the extent to which the firm is

vertically integrated. A high level of vertical integration implies make while a low level

- 162 -

of integration implies buy. Making the component preserves trade secrets, but creates an

incestuous buying/selling arrangement with subsidiaries. Subsidiaries have a guaranteed

market, the parent company has a guaranteed supply and there is little incentive to

achieve lowest cost and highest quality. Outsourcing risks exposure of proprietary

technology but provides flexibility of supply, albeit with some risk to continuity of

supply.

Strategic alliances offer the benefits of vertical integration without the costs, but they

may limit strategic flexibility because of the commitment to alliance partners.

We looked at materials management which encompasses all the activities from supply of

materials through the manufacturing process to the distribution of the product to the

customer. This process is subject to problems of distance, time, exchange rates and

customs and other trade barriers.

The technologies associated with manufacturing and materials management were

discussed in the final section. They are broadly described as flexible manufacturing

systems, a term which subsumes:

robots

numerically controlled machinery

computer integrated manufacturing; which includes:

o computer-aided design (CAD)

o computer-aided manufacturing ( CAM )

o administrative automation, which includes electronic data interchange

(EDI) and just-in-time (JIT).

- 163 -

PART II

ENVIRONMENT FACING BUSINESS: CULTURAL

ENVIRONMENT FACING BUSINESS, MANAGING

DIVERSITY WITHIN AND ACROSS CULTURE,

HOFSTEDE STUDY, EDWARD T HALL STUDY,

CULTURAL ADAPTATION THROUGH SENSITIVITY

TRAINING, POLITICAL, LEGAL, ECONOMIC,

ECOLOGICAL AND TECHNOLOGICAL FACING

BUSINESS AND THEIR MANAGEMENT.

CULTURAL ENVIRONMENT, MANGING DIVERSITY, HOFSTED

STUDY, EDWARD T HAL STUDY>>> REFER SLIDES FOR THIS

PORTION.

CULTURE DEFINED

The word 'culture' is derived from the Latin cultus, meaning cult or worship. The word

culture in our society has many connotations: artistic, elitist and biological to name but a

few. In the context of international business, culture may be defined as learned

patterns of behavior or guidelines for behavior which are primarily passed on from

parents to their children but also by social organizations, special interest groups, the

government, schools, and churches. Common ways of thinking and behaving that are

developed are then reinforced through social pressure.

- 164 -

This learning and adjusting is called acculturation. Another definition of culture is that it

is a learned, shared, compelling, interrelated set of symbols the meaning of which

provides a set of orientations for members of a society.

The latter definition contains five important elements:

culture is learned behavior

culture is shared: the group transcends the individual and thus defines

membership of the society

culture is compelling: individuals are not aware that their behavior is determined

by culture

culture is interrelated: each facet of culture may not be understood in isolation,

meaning that the culture must be studied as a complete entity

culture provides orientation: groups react in the same way to a given stimulus, so

that understanding culture can help to determine how individuals might react in

various situations

Individuals may be influenced by cultures other than the societal culture defined above,

and the societal culture may be subjected to the influence of national laws, the type of

government in power, the state of the economy, and even technology. We will call this

composite entity the societal or national culture. Other cultures which affect individual

behavior are:

Corporate Or Organizational Culture : the set of values, guiding beliefs, work

systems and practices, understandings, rules and codes of conduct and ways of

thinking shared by members of an organization, and taught to new members as

correct (Nankervis et al. 2005); and

Professional Culture: the set of values, beliefs, understandings and ways of

thinking shared by members of a profession (for example, accountants, engineers,

managers).

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CULTURAL DIMENSIONS OF BUSINESS

All cultural phenomena do not have the same importance for business. In this section we

examine those cross-cultural issues that practicing managers of international business

must understand.

1. Social structure

Social structure includes a number of cultural features that can influence the

quality of workers available to an international business. The more important of

these are:

Ranking by ethnic, racial, economic, educational or caste background

Commonly cited examples are the position of native Indians in Latin America,

Algerians in France, the Buraku people of Japan , the Osi of Nigeria, and the

Dalits of India. In the US , which likes to consider itself classless, many

barriers exist for such groups as Jews, African-Americans, Hispanics - and

women. Such barriers effectively deny organizations considerable talent and

may also lose potential customers.

A newspaper article by Macwan (2001, p. 11) in the Straits Times estimates

there are 250 million people in South Asia 'condemned to servitude and

segregation by caste discrimination'. For example, in India where the caste

system was abolished in 1949, lower caste people known as the Dalits still

exist and are discriminated against. Dalits make up 16% of India 's one billion

population, that is, 160 million, or about eight times the population of

Australia ! Read Figure 2.3 for examples of the difficulties faced by these so-

called untouchables of the 21st century.

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Occupational Status

Societies vary considerably in the status they accord different occupations. In

Australia, top students have been, traditionally, attracted to the professions of

medicine and law, but not to engineering. In Germany and Japan, engineering

is a high status occupation. In Argentina, law and architecture are more

prestigious than business or engineering.

2. Language

As the vocabulary and grammatical structure of every language are highly

idiosyncratic, current theories about language and culture argue that language

affects the way in which people think. A common vocabulary and syntax results

in common thought patterns among the people within a particular language group

as well as common behaviors, attitudes and emphases. For example, in Arabic

there are about 6000 words for describing the camel and its equipment; similarly

the Inuit have over 200 words for describing snow. English by contrast has fewer

words for describing camels and snow, but its multiple origins (Greek, Latin,

French and others) give it a broad scope and it has an extensive vocabulary for

business-related issues. For this reason, English is the most commonly used

second language for those for whom it is not the 'mother tongue'.

Communication difficulties for international business managers arise when:

the manager does not speak or understand the local language

the manager speaks and understands the language a little, but not sufficiently

to understand the nuances of meaning which are present in all languages

the manager has to rely on the services of a translator who

may not be equally fluent in both languages and either misses a point or mis-

translates it; and/or

wishes to gain some personal advantage by deliberately mis-translating

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However, there are times when we may understand the language but not the slang.

3. Time

Concepts of time vary widely between cultures. In some countries 'time is money':

in other countries this attitude is considered vulgar and even offensive. In Europe

and North America, punctuality is respected and to arrive late for an appointment

is considered disrespectful. In the Middle East and parts of Africa and South

America, being late for a meeting may be acceptable.

Closely related to the concept of time is the cultural view of the future. In most

English speaking countries, people believe they have the power to control, or at

least influence, future events. This belief is a very positive view of time. Other

people express a more negative view and behave accordingly, stoically submitting

to a fate that they see as beyond their control.

4. Religion, ethics and superstition

Managers are also interested in the dominant or state religion of the country, the

importance of religion in the society, the degree of religious homogeneity or

heterogeneity and the degree of tolerance of religious diversity, ethics and

superstition.

Religion: The dominant religion influences everyday activities such as opening

and closing times, holidays, ceremonies and available foods. A company's

operations must be geared to these factors. Sunday, for example, is the Sabbath

day in Christian countries; Friday is the Sabbath in Islamic countries. The

dominant religion affects production because of these issues, but it is worthwhile

remembering that it also affects consumption.

The importance of religion is also a concern for business. Where religious beliefs

are fundamental to the society there will be little flexibility in terms of adherence

to religious holidays and low tolerance of religious mistakes by foreigners. Take

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the example of the heavily commercialized celebration of St Valentine's Day

where romantics at heart exchange cards, flowers, chocolates, and gifts as

expressions of their love. Each year Hindu nationalists issue warnings that they

will shave the heads of young lovers celebrating St Valentine's Day and beat

them. The reasoning for this is that the Hindu nationalist Shiv Sena party consider

the celebration obscene and a violation of the Hindu cultural ethos. However,

where religion plays a relatively minor role, people will be more relaxed about

religious issues and more tolerant of the mistakes of foreigners.

The degree of religious homogeneity or heterogeneity, and the degree of tolerance

of religious diversity, will of course have varying degrees of significance for

managers.

Ethics: According to Hill 'ethical systems refer to a set of moral principles, or

values, that are used to guide and shape behavior'. Ethics is a set of moral

principles usually derived from religion. Thus there are Christian ethics, Islamic

ethics, and Buddhist ethics and so on. Largely (but by no means exclusively)

because of corporate misconduct, business ethics have become extensively

important. Concern for stakeholders and the environment is increasingly relevant

for managers of international businesses, as is bribery.

Superstitions: These also affect international business in much the same ways as

religion. Colors for example, should be used with great care. Black is the color for

mourning in Christian countries as well as being the color for trendy clothing,

whilst in the Middle East it stands for modesty. White is the color for mourning in

Islamic countries. Red is considered lucky in China, as is yellow in Thailand.

White carnations, which are often worn at formal events in some English

speaking countries, are a symbol of death in some East Asian countries.

5. Wealth and material possessions

In most countries, wealth and material possessions are viewed as desirable

attributes, but in some cultures, such as some Pacific Islanders, individuals work

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only long enough to earn a little money and then cease work until those funds

have been exhausted. In other, generally more affluent cultures, people live to

work and are interested in job security, participation in management and self-

actualization rather than only straight monetary rewards. Managers in

international business must identify the types of rewards that are considered

important by employees in a particular culture.

6. Decision making

Decision making in Western societies is typically the province of top

management. In other cultures - Japan being the archetype - decision making is

shared with subordinates to some degree. In some cultures it might be

inappropriate for top managers to consult subordinates since executives are

supposed to be knowledgeable in all matters. In such situations, it would be

impossible to institute a participative management system.

7. Bribery

In international business, bribery has two forms. The first involves large sums of

money offered (generally) to political figures to give multinational enterprises an

unfair advantage. This form of bribery is illegal and generally frowned upon in

most cultures.

The second form involves the payment of relatively small sums of money to

minor officials to expedite some government procedures such as clearing goods

through customs. These petty bribes are often called tips or gifts and are thought

of by some as analogous to the tips given to waiters in restaurants. Other

examples may be hiring extra employees, 'sponsoring' a host country manager's

child by providing them accommodation in your own country and assisting their

application to a university. These bribes are not seen as harmful or even illegal:

they represent reasonable payment for services by civil servants who are often

grossly underpaid by Western standards. However, they present a dilemma for

managers from cultures where even the smallest bribe is deemed unethical.

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HOFSTEDE’S STUDY

Gerard Hendrik Hofstede (born 2 October 1928, Haarlem) is an influential Dutch writer on

the interactions between national cultures and organizational cultures, and is an author of

several books including Culture's Consequences (2nd, fully revised edition, 2001) and

Cultures and Organizations, Software of the Mind (2nd, revised edition 2005, with his

son Gert Jan Hofstede).

Hofstede's study demonstrated that there are national and regional cultural groupings that

affect the behaviour of societies and organizations, and that are very persistent across

time.

Culture - Geert Hofstede's Model

Based on his IBM study in 72 different countries, Hofstede identifies five of these

differences in mental programming, which he calls five dimensions:

1. Power distance

Power distance measures how subordinates respond to power and authority. In high-

power distance countries (Latin America, France, Spain, most Asian and African

countries), subordinates tend to be afraid of their bosses, and bosses tend to be

paternalistic and autocratic. In low-power distance countries (the US, Britain, most of the

rest of Europe), subordinates are more likely to challenge bosses and bosses tend to use a

consultative management style.

Power Distance Index (PDI) focuses on the degree of equality, or inequality, between

people in the country's society. A High Power Distance ranking indicates that inequalities

of power and wealth have been allowed to grow within the society. These societies are

more likely to follow a caste system that does not allow significant upward mobility of its

citizens. A Low Power Distance ranking indicates the society de-emphasizes the

differences between citizen's power and wealth. In these societies equality and

opportunity for everyone is stressed.

2. Collectivism versus Individualism

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In individualistic countries (France, Germany, South Africa, Canada, etc.), people are

expected to look out for themselves. Solidarity is organic (all contribute to a common

goal, but with little mutual pressure) rather than mechanical. Typical values are personal

time, freedom, and challenge.

In collectivist cultures (Japan, Mexico, Korea, Greece) individuals are bounded through

strong personal and protective ties based on loyalty to the group during one’s lifetime and

often beyond (mirrored on family ties). Values include training, physical condition, the

use of skills. See Appendix 2 for comments on differences between American and

Chinese society on this dimension.

What makes individualism in the United States is not so much the peculiar characteristics

of each person but the sense each person has of having a separate but equal place in

society.... This fusion of individualism and equality is so valued and so basic that many

Americans find it most difficult to relate to contrasting values in other cultures where

interdependence, complementary relationships, and valued differences in age and sex

greatly determine a person's sense of self.

Individuality is different and appears to be much more the norm in the world than United

States-style individualism is. Individuality refers to the person's freedom to act differently

within the limits set by the social structure. Compared to the United States, many other

cultures appear to be much more tolerant of "eccentrics" and "local characters." This

confusion of one kind of individualism with individuality at first appears paradoxical: We

might suppose that a society which promises apparently great personal freedoms would

produce the greatest number of obviously unique, even peculiar people, and yet for more

than a century visitors to the United States have been struck by a kind of "sameness" or

standardization. As one writer interpreted it, U.S. freedom allows everybody to be like

everybody else.... While the individual (glorified as "the rugged individualist") is praised,

historically individuals in the United States have made their achievements in loose

groupings. What is different here is that the independent U.S. self must never feel bound

to a particular group; he must always be free to change his alliances or, if necessary, to

move on.... Cultures better characterized by values of individuality are likely to lack this

kind of independence from the group, as well as individual mobility. Thus it may be that

such cultures allow for greater diversity in personal behavior in order to give balance to

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the individual vis-à-vis the group, whereas the United States, characterized by loose

groupings and high mobility, does not.

 

Individualism (IDV) focuses on the degree the society reinforces individual or collective,

achievement and interpersonal relationships. A High Individualism ranking indicates that

individuality and individual rights are paramount within the society. Individuals in these

societies may tend to form a larger number of looser relationships. A Low Individualism

ranking typifies societies of a more collectivist nature with close ties between individuals.

These cultures reinforce extended families and collectives where everyone takes

responsibility for fellow members of their group.

3. Femininity versus Masculinity

Hofstede’s study suggested that men’s goals were significantly different from women’s

goals and could therefore be expressed on a masculine and a feminine pole. Where

feminine values are more important (Sweden; France, Israel, Denmark, Indonesia),

people tend to value a good working relationship with their supervisors; working with

people who cooperate well with one another, living in an area desirable to themselves and

to their families, and having the security that they will be able to work for their company

as long as they want.

Where the masculine index is high (US, Japan, Mexico, Hong Kong, Italy, Great Britain),

people tend to value having a high opportunity for earnings, getting the recognition they

deserve when doing a good job, having an opportunity for advancement to a higher-level

job, and having challenging work to do to derive a sense of accomplishment.

Masculinity (MAS) focuses on the degree the society reinforces, or does not reinforce,

the traditional masculine work role model of male achievement, control, and power. A

High Masculinity ranking indicates the country experiences a high degree of gender

differentiation. In these cultures, males dominate a significant portion of the society and

power structure, with females being controlled by male domination. A Low Masculinity

ranking indicates the country has a low level of differentiation and discrimination

between genders. In these cultures, females are treated equally to males in all aspects of

the society.

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4. Uncertainty avoidance

When uncertainty avoidance is strong, a culture tends to perceive unknown situations as

threatening so that people tend to avoid them. Examples include South Korea, Japan, and

Latin America.

In countries where uncertainty avoidance is weak (the US; the Netherlands; Singapore;

Hong Kong, Britain) people feel less threatened by unknown situations. Therefore, they

tend to be more open to innovations, risk, etc.

Uncertainty Avoidance Index (UAI) focuses on the level of tolerance for uncertainty and

ambiguity within the society - i.e. unstructured situations. A High Uncertainty Avoidance

ranking indicates the country has a low tolerance for uncertainty and ambiguity. This

creates a rule-oriented society that institutes laws, rules, regulations, and controls in order

to reduce the amount of uncertainty. A Low Uncertainty Avoidance ranking indicates the

country has less concern about ambiguity and uncertainty and has more tolerance for a

variety of opinions. This is reflected in a society that is less rule-oriented, more readily

accepts change, and takes more and greater risks.

5. Long-term versus Short-term orientation

A long term orientation is characterized by persistence and perseverance, a respect for a

hierarchy of the status of relationships, thrift, and a sense of shame. Countries include

China; Hong Kong; Taiwan, Japan and India. A short-term orientation is marked by a

sense of security and stability, a protection of one’s reputation, a respect for tradition, and

a reciprocation of greetings; favors and gifts. Countries include: Britain, Canada, the

Philippines; Germany, Australia

Geert Hofstede added the following fifth (5th) dimension after conducting an additional

international study using a survey instrument developed with Chinese employees and

managers. That survey resulted in addition of the Confucian dynamism. Subsequently,

Hofstede described that dimension as a culture's long-term Orientation.

Long-Term Orientation (LTO) focuses on the degree the society embraces, or does not

embrace, long-term devotion to traditional, forward thinking values. High Long-Term

Orientation ranking indicates the country prescribes to the values of long-term

commitments and respect for tradition. This is thought to support a strong work ethic

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where long-term rewards are expected as a result of today's hard work. However,

business may take longer to develop in this society, particularly for an "outsider". A Low

Long-Term Orientation ranking indicates the country does not reinforce the concept of

long-term, traditional orientation. In this culture, change can occur more rapidly as long-

term traditions and commitments do not become impediments to change.

Dr. Geert Hofstede conducted perhaps the most comprehensive study of how values in

the workplace are influenced by culture. From 1967 to 1973, while working at IBM as a

sychologist, he collected and analyzed data from over 100,000 individuals from forty

countries. From those results, and later additions, Hofstede developed a model that

identifies four primary dimensions to differentiate cultures. He later added a fifth

dimension, Long-term Outlook. As with any generalized study, the results may or may

not be applicable to specific individuals or events. In addition, although the Hofstede's

results are categorized by country, often there is more than one cultural group within that

country. In these cases there may be significant deviation from the study's result. An

example is Canada, where the majority of English speaking population and the minority

French speaking population in Quebec has moderate cultural differences.

Geert Hofstede's dimensions analysis can assist the business person or traveler in better

understanding the intercultural differences within regions and between counties.

"Culture is more often a source of conflict than of synergy. Cultural differences are a

nuisance at best and often a disaster." - Dr. Geert Hofstede

CRITICISM OF HOFSTEDE’S MODEL

Geert Hofstede’s depiction of enduring and powerful national cultures or national cultural

differences is legendary. If his findings are correct they have immense implications for

management within and across countries, and for the future of nation states - including

the prospects for greater European integration. However, closer examination of his

research reveals that it relies, in my view, on fundamentally flawed assumptions. This

article examines four crucial assumptions upon which his measurements are based. These

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assumptions are ‘crucial’ in the sense that each is necessary for the plausibility of his

identification claims. It is argued that they are all flawed and that therefore his national

cultural descriptions are invalid and misleading.

 

Assumption 1: Every micro-location is typical of the national

 

Hofstede generalizes about the entire national population in each country solely on the

basis of analysis of a few questionnaire responses. The respondents were simply certain

categories of employees in the subsidiaries of a single company: IBM. What evidence

does he have that they were nationally representative? None. He just assumes it.

Sometimes he supposes that every individual in a nation shares a common national

culture. At other times he claims to have found in the IBM data a "national norm" or

"central tendency", or "average [national] tendency." Both claims are problematic.

 

A statement that every English person is violent, because on occasions some English

football fans are violent, would be regarded by any rational person as absurd.

Generalizing about an entire national population on the basis of miniscule number of

questionnaire responses - in some countries fewer than 100 - is equally absurd. If a

national culture were common to all national individuals - and survey responses could

identify those cultures - there would not have been significant intracountry differences in

individuals’ questionnaire responses. But the IBM surveys within each country revealed

radical differences in the answers to the same questions.

 

If somehow the "average tendency" of IBM employees in each country - constructed by

statistical averaging of highly varied responses - is assumed to be nationally

representative, and this is Hofstede’s assumption - then with equal plausibility, or rather

equal implausibility, it must also be assumed that each Hofstedian average tendency was,

and continues to be, the same as the average tendency in every other part of a country, in

every company, tennis club, knitting club, political party, and massage parlour. The

"average [national culture] tendency" in the New York City Young Marxist Club, for

example, is (if Hofstede’s Assumption 1, above is believed) the same as in the Keep

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America White Cheer-Leaders Club in Smoky Hill, Kansas, USA, and amongst any other

group, in any other part, of the USA. Is Hofstede’s assumption credible?

 

There are no evidence-based reasons for assuming that the average IBM responses

reflected ‘the’ national average. Hofstede’s assumption is a mere leap of faith. It is not

grounded in evidence. Furthermore, IBM subsidiaries demonstrably had many nationally

atypical characteristics. These included: the company’s selective recruitment only from

the ‘middle classes’; the frequent international training of employees; the technologically

advanced and unusual characteristics of its products during the survey periods - which

were before the development of the ‘personal computer’; the ‘frequent personal contacts’

between subsidiary and international headquarters staff; its tight, internationally

centralised control; US ownership during a period in which foreign direct investment was

new and controversial; and the comparatively young age of its managers. Furthermore,

IBM employees diverged from the general population more in some nations than in

others. For instance, during the time the survey(s) were undertaken, working for a non-

family owned firm would have been much more unusual in Taiwan than in Britain.

Hofstede does not demonstrate the national representativeness of what he claims to have

found in each IBM subsidiary is nationally representative. He asserts it. What is said to

have been identified is actually presupposed. Hofstede’s reasoning is circular - he begs

the question.

 

Suppose that by sheer chance he did find national averages - what use would they be? As

managers, employees, investors, tourists, citizens, or whatever we do not engage with

statistical averages but with real local specifics - as the statistician who drowned in the

river whose average depth was five centimetres unfortunately discovered.

 

Assumption 2: Respondents were already permanently ‘mentally programmed’

with three non-interacting cultures

 

How does Hofstede claim to have identified national culture in IBM subsidiaries? As

well as supposing the existence of such cultures, and the typicality of what he could

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identify in that company, he had to make a number of other and equally implausible

assumptions in order to be able to assert that he could describe, indeed measure, these

cultures.

 

Three discrete cultures: Out of the potentially huge number of cultural and non-cultural

influences on the questionnaire answers, Hofstede assumed that only three: organisational

(OrC); occupational (OcC) and national cultures (NC), were significant. Each respondent

was conceived of as exclusively carrying - as being permanently "mentally programmed"

by - these three non-interacting cultures (or values). This extraordinarily reductive

conception of IBM employees conveniently allowed him to argue that as there was only

one IBM culture, and as he occupationally matched the respondents, the questionnaire

response differences showed "national culture with unusual clarity."

 

Hofstede’s anorexic and mechanistic assumption can be seen from its expression below

as an equation:

(OrC + OcC + NC1) - (OrC + OcC +NC2) = NC1 - NC2

in which,

OrC = Organizational culture (IBM’s);

OcC = Occupational Cultures;

NC = National Culture;

and therefore NC1 - NC2 = Difference(s)

between two national cultures.

 

Convenient for processing questionnaire answers, but unrelated to reality. Was there

really just one monopolistic organizational culture in IBM world-wide? Does every

occupation have a single global culture?

 

Organizational culture: The principal problem for Hofstede’s analysis is not that he

supposed that there was a single worldwide IBM organizational culture - albeit that is

contestable, and not self-evident as he suggested - but he treats that culture as the only

organizational culture in IBM. He ignored extensive literatures which argue for

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recognition of multiple, dissenting, emergent, organic, counter, plural, resisting,

incomplete, contradictory, fluid, cultures in an organization. If the assumption of a single

and monopolistic IBM culture is rejected and the possibility of a host of diverse cultural

and/or non-cultural influences on the questionnaire responses is acknowledged,

Hofstede’s underlying equation collapses.

 

About ten years after the initial publication of his analysis of the IBM survey data,

Hofstede had begun to acknowledge that there is cultural variety within and between

units of the same organisation. An acceptance that organisations have multiple cultures

and not a single culture would seem to undermine a crucial, and much trumpeted, part of

his analysis: that all respondents were from the same company and therefore had the

same organisational culture. However, Hofstede never admits error or weaknesses in his

analysis. In parallel with his acknowledgement of cultural heterogeneity in organisations,

Hofstede redefined ‘organisational culture’. He stated that "national cultures and

organisational cultures are phenomena of a different order." Thus he concludes that the

cultural heterogeneity within IBM did not affect his cross-IBM-subsidiary comparison of

values, as organisational culture does not contain/reflect values. His definitional change

is problematic for many reasons (see McSweeney, 2002).

 

By expediently taking organisational cultures out of his definition, Hofstede’s

methodology becomes even more reductive and unreal as can be seen in the revised

equation which excludes organisational culture:

 

(OcC + NC1) - (OcC + NC2) = NC1 - NC2

 

Like the earlier version, this reasoning relies on the unwarranted presumption that

occupational cultures are universally the same.

 

Occupational culture: Hofstede’s notion of uniform world-wide occupational cultures

supposes early and permanently-imprinted socialisation. Occupational cultures, which he

also calls "values" (and indeed national culture/values also), are, he claims, enduringly

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"programmed into" carriers in pre-adulthood. "Values", he states: "Are acquired in one’s

early youth, mainly in the family and in the neighbourhood, and later at school. By the

time a child is ten years old, most of its basic values have been programmed into its

mind... for occupational values the place of socialization is the school or university, and

the time is in between childhood and adulthood."

 

The notion that national and occupational cultures are unchanging and finalised

consequences of early ‘socialization’ has few supporters. Even Talcott Parsons, the high

priest of socialisation, was less rigid. And yet the continuity assumption is crucial for

Hofstede’s analysis. Without it, the mere matching of respondents on an occupational

basis could not plausibly be deemed to isolate national cultural values.

 

Hofstede’s deterministic notion of permanent programming of "occupational cultures"

conveniently, but ridiculously, supposes that throughout the world members of the same

occupation (plumbers, electricians, clerks, pimps, accountants, or whatever) regardless of

nationally diverse entry requirements, regulations, educational backgrounds, training

requirements, examinations and differences in their social status, variations in the

numbers and types of trade associations or professional bodies, post-experience course

requirements and content, and so forth, each share an identical and monopolistic world-

wide occupational culture.

 

Many other factors - cultural and noncultural - could have influenced IBM employee

responses. To take but one. The questionnaires were not designed to identify national

cultures. They were constructed to enhance senior management’s interventions at a time

of worry within the company about morale. Some years later Hofstede used these non-

independent, company-administered, sometimes nonconfidential, ‘second-hand’

questionnaires for his analysis. Respondents had foreknowledge that: their managers

were expected to develop strategies for corrective actions which the survey showed to be

necessary. Is this not likely to have encouraged them to manipulate their answers to

improve their own, and their divisions’, position, resources, remuneration, and so forth?

Yet, Hofstede relies on the supposition that the answers were immune to respondents’

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gaming, uninfluenced by the possible consequences of their answers. He treated the

answers as the pure outcomes of their unconscious preprogrammed values.

 

Furthermore, it would have been remarkable if the analysis of employee responses

classified on the basis of their national location had not produced response differences.

Every conceivable classification of the questionnaire responses would produce

differences. But what would be the representational status of those statistically conjured

differences?

 

The IBM questionnaire answers could have been categorised, in ways which reflected

possible response differences additional, or alternative to, nationality - for example - race,

religion, first language, type of car, or hair colour. The problem for Hofstede’s analysis is

that each of these classifications would produce response differences, and yet using the

same methodology he employed, each could be deemed to have been caused by, and the

means of identifying, a particular ‘culture’ or cultural difference on the basis of whatever

a priori classification framed the data stratification. But Hofstede ignores this

classification problem. Nationally classified data provides no evidence of either the

influence or identifiability of national cultures.

 

Assumption 3: The main dimensions of a national culture can be identified by

questionnaire response difference analysis

 

Despite the criticisms above, even if it is assumed that Hofstede managed to isolate

unique aspects of national cultures, it takes another non-evidence-based leap of faith to

conclude that he was able to construct adequate depictions of national cultures or national

cultural differences. Were the questions asked wide-ranging and deep enough? The

consequences of not having comprehensively ‘identified’ national value sets is not

merely incomplete descriptions, but more importantly inaccurate descriptions. Restricted

questions/answers would miss influential values that might counterbalance or outweigh

the values that were measured, so the resulting depictions of national cultures would be

distorted. As the questionnaires were not designed to identify national cultures it is likely

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that the questions were not adequate for that purpose. Researchers who have asked

questions different from those used by Hofstede provide evidence of this flaw. Instead of

revealing the same dimensions and ranking of those dimensions, they have indeed usually

produced quite different descriptions of specific national cultures. Shalom Schwartz

(1994), for instance, found seven culture-level dimensions which were "quite different"

from Hofstede’s. Even if it is crudely supposed that a national culture is somehow

composed of separately identifiable independent dimensions, why should we accept that

Hofstede successfully identified even the "dominant" dimensions? Questionnaire answers

are not neutral ‘windows’ through which national cultures can be perceived.

 

Hofstede’s depicts his dimensions of national culture as bi-polar in the sense that each is

composed of contrasting positions, for instance ‘individualism’ versus ‘collectivism’.

This is also problematic - the two can coexist and are simply emphasised, more or less,

depending on the situation. Every society presents a number of contradictory adages or

sayings such as "look before you leap" and "he who hesitates is lost" as part of its

repertoire. But Hofstede’s dimensions exclude such coexistence and are thus blind to key

cultural qualities. That is not to argue that the dimensions which Hofstede used - but did

not originate - or those of others, cannot usefully frame initial discussion about national

particularities, to alert, or remind us, that the world is not culturally homogeneous. But

Hofstede claims much more, too much more: to have been able to use those dimensions

to identify and compare, indeed measure, the dominant dimensions of unique, enduring,

and systematically causal cultures in numerous countries.

 

Such is the elusiveness of the concept of culture that in the wider literature on the subject

there is no consensus about which ‘units’ or ‘dimensions’ should be used for describing

it: essentially cultures are still ‘grasped’. Hofstede’s arithmetisation of some employees’

answers to survey questions is not equal to the task.

 

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Assumption 4: That ‘identified’ in the workplace is unaffected by location

 

Hofstede assumes that what he identified within a workplace is situationally nonspecific.

It is the same in the courtroom, on the sports field, in the bedroom, everywhere. But we

all know managers who are ‘rotweilers’ at work and ‘pussycats’ at home, and the

converse. We may often be individualistic within office politics, but usually act in a

collectivist way on behalf of our organisations.

 

The IBM data was effectively restricted to the workplace. Other sections of national

populations - the unemployed, full-time students, the self-employed, the retired,

homeworkers, and others - were ignored. The questions were almost exclusively about

workplace issues, were completed in the workplace and not replicated in other types of

location.

 

Despite this, Hofstede claims to have identified situationally unrestricted national

cultures. On what grounds does he do so? Yet again, it’s a mere assertion, not an

evidencebased conclusion. That which should have been explored was conveniently, but

inappropriately, presumed.

 

In summary, the validity of Hofstede’s national culture identification claims face two

profound problems.

 

First, the generalisations about national level culture from an analysis of small

subnational populations necessarily relies on the unproven, and unprovable, supposition

that within each nation there is a uniform national culture and on a mere assertion that

micro-local data from a section of IBM employees was representative of that supposed

national uniformity.

 

Secondly, the elusiveness of culture. It was argued that what Hofstede ‘identified’ is not

national culture, but an averaging of situationally specific opinions from which

dimensions or aspects, of national culture are unjustifiably inferred. Even if we heroically

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assume that the answers to a narrow set of questions administered in constrained

circumstances are ‘manifestations’ of a determining national culture, it requires an

equally contestable act of faith to believe that Hofstede’s overly contrived methodology

successfully identified those cultures.

 

CRITICISM PART 2

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CULTURAL ADAPTATION THROUGH SENSITIVITY

TRAINING

Globalization and aggressive foreign direct investment, combined with domestic

restructuring, have dramatically changed the workforce of many companies. As the

world gets ``smaller'', more and more people are spending time living and working

away from their home country, giving rise to greater face-to-face contact amongst

people from different cultural backgrounds.

Globalization not only requires the adoption of a cross-cultural perspective in order

to successfully accomplish goals in the context of global economy but also needs a

new and higher standard of selection, training, and motivation of people. As a result,

cross-cultural training is fast becoming a recognizably important component in the

world of international business.

Cultural differences exist at home and abroad but, in many cases, international

interaction creates problems, since people are separated by barriers such as time,

language, geography, food, and climate. In addition, peoples' values, beliefs,

perceptions, and background can also be quite different. For instance, in business

scenarios, the expectations for success or failure may differ, which can be very

frustrating and confusing to sojourners and expatriates. Intercultural differences

influence international business in many ways. For example, consider the matter of

punctuality or the time factor. In some cultures, e.g. the Germans, Swiss, and

Austrians, punctuality is considered extremely important and lateness is not

tolerated. By contrast, in other European and Latin American countries there is a

different, somewhat ``looser'' approach to time with some degree of tolerance for

lateness. Sojourners or expatriates who lack sensitivity or awareness of this ``time''

orientation can make severe interpersonal blunders, and then need cross-cultural

training to avoid culture shock.

THE NEED FOR CROSS-CULTURAL TRAINING

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Chen and Starosta (1996) believe that people have to develop their intercultural

communication competence in order to live meaningfully and productively in the

global village. According to Landis and Brislin (1983), as the workforce in various

countries becomes more culturally diverse, it is necessary to train people to become

more competent and thus to deal effectively with the complexities of new and

different environments. Thus, the issue of cross-cultural training in developing

intercultural communication competence can no longer be neglected. People who

are sent abroad must develop such competence in order to be successful. Cross-

cultural training has long been advocated as a means of facilitating effective cross-

cultural interaction (Bochner, 1982; Harris and Moran, 1979; Landis and Brislin,

1983; Mendenhall and Oddou, 1986; Tung, 1981). The importance of such training

in preparing an individual for an intercultural work assignment has become

increasingly apparent (Baker, 1984; Lee, 1983;

Tung, 1981). As Bhagat and Prien (1996, p. 216) put it, ``as international companies

begin to compete with each other in the global market, the role of cross-cultural

training becomes increasingly important.'' A comprehensive literature review by

Black and Mendenhall (1990) found strong evidence for a positive relationship

between cross-cultural training and adjustment. In addition, another survey

revealed that 86 percent of Japanese multinationals report a failure rate of less than

10 percent for their expatriates who have received training (Hogan and Goodson,

1990). Numerous benefits can be achieved by giving these expatriates cross-cultural

training. It is seen as: -

A distinct advantage for organizations;

A means for conscious switching from an automatic, home-culture

international management mode to a culturally appropriate, adaptable and

acceptable one;

an aid to improve coping with unexpected events or culture shock in a new

culture;

A means of reducing the uncertainty of interactions with foreign nationals;

and

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A means of enhancing expatriates' coping ability to by reducing stress and

disorientation.

It can reduce or prevent failure in expatriate assignments.

THE CROSS-CULTURAL CYCLE

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The Cross-Cultural Cycle describes the concept of ‘cultural change’ which represents

a transition between one's own culture and a new culture. Cultural change is part of

a problem-solving process undergone by users. Here, the users are identified as

sojourners and expatriates who experience a new culture which is unfamiliar and

strange. In the initial stage of confrontation with the new culture, the user

experiences a culture shock. Then full or partial acculturation takes place,

depending on factors such as former experience, length of stay, cultural distance

between home and new culture, training, language competency among other factors.

The greater the users' ability to acculturate, the less the impact of culture shock on

them. The ability to acculturate and reduce the impact of the culture shock can be

developed through an appropriate and effective cross-cultural training. Apart from

that, training can also help the users to develop intercultural communication

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competence, which is needed to adapt better and perform well in the new

environment. As a result, once sojourners and expatriates have succeeded in

completing the cycle, they will be more familiar with it the next time they confront a

new culture. The change process will be improved and becomes less complicated.

However, the success or failure of the users to adjust and perform depends on how

they respond to the cycle.

Culture

Culture is the complex whole, which includes belief, knowledge, art, law, morals and

customs and any capabilities and habits acquired by a person as a member of a

society. According to Hall (1959), culture is communication and communication is

culture.

Acculturation

Acculturation is defined as, ``Changes that occur as a result of first-hand contact

between individuals of differing cultural origins'' (Redfield et al., 1936). It is a

process whereby an individual is socialized into an unfamiliar or new culture. In

short, it refers to the level of adoption of the predominant culture by an outsider or

minority group. According to Gordon, 1967; Garza and Gallegos, 1985; Domino and

Acosta, 1987; Marin and Marin, 1990; Negy and Woods, 1992, the greater the

acculturation, the more the language, customs, identity, attitudes and behaviors of

the predominant culture are adopted. However, many sojourners and expatriates

experience difficulty in fully acculturating, only adopting the values and behaviors

they find appropriate and acceptable to their existing cultures. It is a question of

willingness and readiness.

Culture shock

Many expatriates experience what is called ``culture shock'' when they first confront

or come into contact with a different culture. Adler (1997) defines this as the

frustration and confusion as a result of being bombarded by too many new and un-

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interpretable cues. Culture shock is also the expatriate's reaction to a new,

unpredictable, and consequently uncertain environment (Black, 1990)

Cross-cultural training

Training in general can be defined as any intervention aimed at increasing the

knowledge or skills of the individual. This can help them cope better personally,

work more effectively with others, and perform better professionally. It is an

organized educational experience with the objective of helping expatriates learn

about, and therefore adjust to, their new home in a foreign land.

Cross-cultural training may be defined as any procedure used to increase an

individual's ability to cope with and work in a foreign environment. There are many

types of training that can be given to people to be sent abroad depending upon their

objectives, the nature of their responsibilities and duties, the length of their stay,

and their past experiences. As Kealey and Protheroe also point out, ``The

effectiveness of the various types of training will naturally depend to some extent on

the time and resources available for undertaking them, the quality of trainers, and

the possibilities for in-country training'' (p. 149). Some of the types of training

available to expatriates are technical training, practical information, area studies,

cultural awareness, intercultural effectiveness skills, and interpersonal sensitivity

training.

Intercultural communication competence

Many theorists have wrestled with the exact nature of the definition of

``competence'' in the context of cross-cultural adaptation. However, one of its most

common definitions is ``effectiveness'' (Hawes, and Kealey, 1979; Abe and Wiseman,

1983; Gudyskunst and Hammer, 1984). This effectiveness is generally described in

terms of skills, attitudes, or traits which the sojourner and expatriate use to build a

successful interaction (Ruben, 1976). Scholars have also argued that the concept of

communication competence can be broken down into three broad sets of skills:

affective, cognitive, and behavioral (Chen and Starosta, 1996). Wiseman and Koester

(1993) examined the relationship between intercultural communication

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competence, knowledge of the host culture, and cross-cultural attitudes. As a result,

they conceptualized intercultural communication competence as:

Culture-specific understanding of the other;

Culture-general understanding; and

Positive regard of the other.

SENSITIVITY TRAINING

Sensitivity training is about making people understand about themselves and others

reasonably, which is done by developing in them social sensitivity and behavioral

flexibility. Social sensitivity in one word is empathy. It is ability of an individual to

sense what others feel and think from their own point of view. Behavioral flexibility

is ability to behave suitably in light of understanding.

Sensitivity training is often offered by organizations and agencies as a way for

members of a given community to learn how to better understand and appreciate

the differences in other people. It asks training participants to put themselves into

another person's place in hopes that they will be able to better relate to others who

are different than they are. Sensitivity training often specifically addresses concerns

such as gender sensitivity, multicultural sensitivity, and sensitivity toward those

who are disabled in some way. The goal in this type of training is more oriented

toward growth on an individual level. Sensitivity training can also be used to study

and enhance group relations, i.e., how groups are formed and how members interact

within those groups.

Sensitivity Training involves such groupings as T-Groups, encounter groups,

laboratory-training groups and human awareness groups. Sensitivity training

attempts to teach people about themselves and why and how they relate to, interact

with, impact on and are impacted upon by others.

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HISTORY OF SENSITIVITY TRAINING

The origins of sensitivity training can be traced as far back as 1914, when J.L.

Moreno created "psychodrama," a forerunner of the group encounter (and

sensitivity-training) movement. This concept was expanded on later by Kurt Lewin,

a gestalt psychologist from central Europe, who is credited with organizing and

leading the first T-group (training group) in 1946. Lewin offered a summer

workshop in human relations in New Britain, Connecticut. The T-group itself was

formed quite by accident, when workshop participants were invited to attend a

staff-planning meeting and offer feedback. The results were fruitful in helping to

understand individual and group behavior.

Based on this success, Lewin and colleagues Ronald Lippitt, Leland Bradford, and

Kenneth D. Benne formed the National Training Laboratories in Bethel, Maine, in

1947 and named the new process sensitivity training. Lewin's T-group was the

model on which most sensitivity training at the National Training Laboratories

(NTL) was based during the 1940s and early 1950s. The focus of this first group was

on the way people interact as they are becoming a group. The NTL founders'

primary motivation was to help understand group processes and use the new field

of group dynamics, to teach people how to function better within groups. By

attending training at an offsite venue, the NTL provided a way for people to remove

themselves from their everyday existence and spend two to three weeks undergoing

training, thus minimizing the chances that they would immediately fall into old

habits before the training truly had time to benefit its students. During this time, the

NTL and other sensitivity-training programs were new and experimental.

Eventually, NTL became a nonprofit organization with headquarters in Washington,

D.C. and a network of several hundred professionals across the globe, mostly based

in universities.

During the mid-1950s and early 1960s, sensitivity training found a place for itself,

and the various methods of training were somewhat consolidated. The T-group was

firmly entrenched in the training process, variously referred to as encounter groups,

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human relations training, or study groups. However, the approach to sensitivity

training during this time shifted from that of social psychology to clinical

psychology. Training began to focus more on inter-personal interaction between

individuals than on the organizational and community formation process, and with

this focus took on a more therapeutic quality. By the late 1950s, two distinct camps

had been formed-those focusing on organizational skills, and those focusing on

personal growth. The latter was viewed more skeptically by businesses, at least as

far as profits were concerned, because it constituted a significant investment in an

individual without necessarily an eye toward the good of the corporation. Thus,

trainers who concentrated on vocational and organizational skills were more likely

to be courted by industry for their services; sensitivity trainers more focused on

personal growth were sought by individuals looking for more meaningful and

enriching lives.

During the 1960s, new people and organizations joined the movement, bringing

about change and expansion. The sensitivity-training movement had arrived as

more than just a human relations study, but as a cultural force, in part due to the

welcoming characteristics of 1960s society. This social phenomenon was able to

address the unfilled needs of many members in society, and thus gained force as a

social movement. The dichotomy between approaches, however, continued into the

1960s, when the organizational approach to sensitivity training continued to focus

on the needs of corporate personnel.

The late 1960s and 1970s witnessed a decline in the use of sensitivity training and

encounters, which had been transformed from ends in themselves into traditional

therapy and training techniques, or simply phased out completely. Though no

longer a movement of the scale witnessed during the 1960s, sensitivity-training

programs are still used by organizations and agencies hoping to enable members of

diversified communities and workforces to better coexist and relate to each other.

PROCEDURE OF SENSITIVITY TRAINING

Sensitivity Training Program requires three steps:

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1. Unfreezing the old values –It requires that the trainees become aware of the

inadequacy of the old values. This can be done when the trainee faces

dilemma in which his old values is not able to provide proper guidance. The

first step consists of a small procedure:

a. An unstructured group of 10-15 people is formed.

b. Unstructured group without any objective looks to the trainer for its

guidance

c. But the trainer refuses to provide guidance and assume leadership

d. Soon, the trainees are motivated to resolve the uncertainty

e. Then, they try to form some hierarchy. Some try assume leadership

role which may not be liked by other trainees

f. Then, they started realizing that what they desire to do and realize the

alternative ways of dealing with the situation

2. Development of new values – With the trainer’s support, trainees begin to

examine their interpersonal behavior and giving each other feedback. The

reasoning of the feedbacks are discussed which motivates trainees to

experiment with range of new behaviors and values. This process constitutes

the second step in the change process of the development of these values.

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3. Refreezing the new ones – This step depends upon how much opportunity

the trainees get to practice their new behaviors and values at their work

place.

GOALS OF SENSITIVITY TRAINING

According to Kurt Back, "Sensitivity training started with the discovery that intense,

emotional interaction with strangers was possible. It was looked at, in its early days,

as a mechanism to help reintegrate the individual man into the whole society

through group development. It was caught up in the basic conflict of America at mid-

century: the question of extreme freedom, release of human potential or rigid

organization in the techniques developed for large combines." The ultimate goal of

the training is to have intense experiences leading to life-changing insights, at least

during the training itself and briefly afterwards.

Sensitivity training was initially designed as a method for teaching more effective

work practices within groups and with other people, and focused on three

important elements: immediate feedback, here-and-now orientation, and focus on

the group process. Personal experience within the group was also important, and

sought to make people aware of themselves, how their actions affect others, and

how others affect them in turn. Trainers believed it was possible to greatly decrease

the number of fixed reactions that occur toward others and to achieve greater social

sensitivity. Sensitivity training focuses on being sensitive to and aware of the

feelings and attitudes of others.

By the late 1950s another branch of sensitivity training had been formed, placing

emphasis on personal relationships and remarks. Whether a training experience

will focus on group relationships or personal growth is defined by the parties

involved before training begins. Most individuals who volunteer to participate and

pay their own way seek more personal growth and interpersonal effectiveness.

Those who represent a company, community service program, or some other

organization are more likely ready to improve their functioning within a group

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and/or the organization sponsoring the activity. Some training programs even

customize training experiences to meet the needs of specific companies.

The objectives of sensitivity training are: -

1. Increased understanding, insight, and self-awareness about one’s own

behavior and its impact on others, including the ways in which others

interpret one’s behavior.

2. Increased understanding and sensitivity about the behavior of others,

including better interpretation of both verbal and non-verbal clues, which

increases awareness and understanding of what the other person is thinking

and feeling.

3. Better understanding and awareness of group and inter-group processes,

both those that facilitate and those that inhibit group functioning.

4. Increased diagnostic skills in interpersonal and inter-group situations.

5. Improvement in individuals’ ability to analyze their own behavior, as well as

to learn how to help themselves and others with whom they come in contact

with to achieve more satisfying, rewarding and effective interpersonal

relationships.

CULTURAL SENSITIVITY

Extensive research across disciplines has investigated the question of how to create

culturally competent managers (e.g., Chen and Starosta, 1996; Hinckley and Perl,

1996; Post, 1997; Shanahan, 1996; Spitzberg and Cupach, 1989). From the

numerous definitions of competence, one subsumes the ongoing discussion quite

well: competence may be described as (work-related) knowledge, skills and

aptitudes, which serve productive purposes in firms. It distinguishes outstanding

from average performers (Dalton, 1997; Kochanski, 1997; Nordhaug, 1998;

Nordhaug, 1993). When operationalizing cultural competence, previous research

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has mostly focused on one of the following dimensions: the affective (motivation),

the cognitive (knowledge) or the conative (skills) dimension. However as results

have shown, this emphasis on just one dimension falls short of depicting this

complex construct. Therefore, more recent attempts to measure cultural

competence integrate all three dimensions. Among these holistic approaches, the so-

called “Third Culture Approach” by Gudykunst et al. (1977) has found a particularly

widespread reception in the field. Under the “Third-Culture” approach, a manager

displays cultural competence, when he/she interprets and judges culturally

overlapping situations neither from an ethnocentric perspective, nor from an

idealised host culture perspective, but assumes a neutral position. To achieve this

neutral position, Gudykunst et al. (1977) stress the importance of the affective

component of cultural competence, which may be called cultural sensitivity. In their

model, cultural sensitivity is a prerequisite which instils the acquisition of

knowledge (cognitive dimension) and skills (conative dimension). Gudykunst et al.

(1977) see cultural sensitivity as the psychological link between home and host

culture. This notion clearly contradicts the current business practice mentioned

earlier, where language or professional knowledge and skills are deemed key

prerequisites for successful foreign assignments.

Cultural Sensitivity is the ability to be open to learning about and accepting of

different cultural groups. It leads to Cultural Competency. The following diagram

shows an individual’s path to cultural competency: -

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Individual’s Path to Cultural Competency

1. Ethnocentricity – This is a state of relying on our own, and only our

own, paradigms based on our cultural heritage. We view the world

through narrow filters, and we will only accept information that fits our

paradigms. We resist and/or discard others.

2. Awareness – This is the point at which we begin to realize that there are

things that exist which fall outside the realm of our cultural paradigms.

3. Understanding- This is the point at which we are not only aware that

there are things that fall outside our cultural paradigms, but we see the

reason for their existence.

4. Acceptance/Respect - This is when we begin allowing those from other

cultures to just be who they are, and that it is OKAY for things to not

always fit into our paradigms.

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Multiculturation

Selective Adoption

Appreciation/Valuing

Acceptance/Respect

Understanding

Awareness

Ethnocentricity

5. Appreciation/Value- This is the point where we begin seeing the worth

in the things that fall outside our own cultural paradigms.

6. Selective Adoption - This is the point at which, we begin using things

that were initially outside our own cultural paradigms.

7. Multiculturation- This is when we have begun integrating our lives with

our experiences from a variety of cultural experiences.

A CULTURAL SENSITIVITY TRAINING OUTLINE

When developing cultural sensitivity in the context of international business, a

major focus lies on preparing managers confronted with culturally overlapping

situations with respect to two goals: (1) identifying features of the host country’s

cultural orientation systems which have an effect on activities and actions, and (2)

incorporating these features in their spectrum of actions to accomplish specific

marketing tasks under foreign cultural frameworks and in interaction with partners

shaped by these frameworks. As will be explained later on in more detail, cultural

orientation systems are developed through socialisation within a specific cultural

environment. They influence perception, thought, values and behaviour of society

members and, in their way, establish membership of this society. Despite the high

failure rates of international assignments due to a lack of international managers’

cultural sensitivity and the unsuccessful integration of family members into the host

culture (e.g., Bird and Dunbar, 1991; Black, 1988; Black and Gregersen, 1991;

Harvey, 1985), participants in such training most commonly do not expect major

difficulties regarding their competence in culturally overlapping situations. They

have hardly any idea about which effects cultural differences can have on private

and business matters (Bittner, 1996; Bittner and Reisch, 1994). Taking these

circumstances into account, an exemplary sequence of training issues in

intercultural preparatory programs is outlined below:

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Create a learning need: The first step in a “culture training” is to create awareness

among the participants that a confrontation of different cultural orientation systems

is bound to lead to problems in interaction. Participants need to realise that

misunderstandings are not a result of personality or character, but are due to the

unreflected transfer of home-country cultural patterns. In this phase, it is also

necessary to encourage reflection on one’s own culture and personality. This

facilitates learning success and prevents the establishment of learning barriers (e.g.,

Bittner, 1996; Goodman, 1994).

Put received judgements into perspective: This training step aims at understanding

and accepting different cultural standards which represent the operationalisation of

a country’s

cultural orientation system. This training phase focuses on the fact that the mere

knowledge of a different cultural framework does not necessarily lead to a

willingness to accept and to adjust to these conditions. This training step addresses

the problem of different cultures’ significance and superiority, which often results in

highly visible ethnocentric arrogance (Hentze and Kammel, 1994). The learning

effect consists of questioning internalized values, which are often accepted without

reflection and therefore seen as superior to others.

Partially adopt local judgements: This training step demonstrates to trainees why

the majority of interaction partners in the target country appreciate their own

culture as it is. This appears necessary in order to partially adopt cultural values.

Mentally, it imposes entirely different behaviour on the trainees than merely

accepting the fact that some aspects of one’s own cultural orientation system are

(unfortunately so far) not common in the target culture (e.g., Bittner, 1996; Landis

and Bhagat, 1996).

Weighting the personal influence: Here, the training intention can be subsumed

under the

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label of “training humbleness”. Due to the intensive analysis of intercultural matters,

the

trainees realise that opportunities to influence a local culture are far less than

expected before the training. Bittner (1996) calls it the path from a manager’s self-

understanding as a “highcarat manager” towards a “mediator between cultural

worlds”. This changed perspective can produce massive insecurity which needs to

be dealt with adequately. For a final integration of single training steps, it seems

desirable to give a robust orientation framework (Bhawuk and Triandis, 1996).

This leads to the fundamental question of which concept of culture represents the

theoretical foundation for such a training. For the purpose of developing cultural

sensitivity, the concept of culture selected should provide extensive coverage of the

complex phenomenon “culture” and, for applicability purposes, be action-relevant

than merely abstract. In the following section, key concepts of culture are presented

and evaluated for their practical relevance to cultural sensitivity training.

WORKFORCE DIVERSITY

Workplace diversity refers to the variety of differences between people in an

organization. That sounds simple, but diversity encompasses race, gender, ethnic group,

age, personality, cognitive style, tenure, organizational function, education, background

and more.

Diversity not only involves how people perceive themselves, but how they perceive

others. Those perceptions affect their interactions. For a wide assortment of employees to

function effectively as an organization, human resource professionals need to deal

effectively with issues such as communication, adaptability and change. Diversity will

increase significantly in the coming years. Successful organizations recognize the need

for immediate action and are ready and willing to spend resources on managing diversity

in the workplace now.

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Workforce Diversity refers to policies and practices that seek to include people within a

workforce who are considered to be, in some way, different from those in the prevailing

constituency. In this context, here is a quick overview of seven predominant factors that

motivate companies, large and small, to diversify their workforces:

As a Social Responsibility

Because many of the beneficiaries of good diversity practices are from groups of people

that are “disadvantaged” in our communities, there is certainly good reason to consider

workforce diversity as an exercise in good corporate responsibility. By diversifying our

workforces, we can give individuals the “break” they need to earn a living and achieve

their dreams.

As an Economic Payback

Many groups of people who have been excluded from workplaces are consequently

reliant on tax-supported social service programs. Diversifying the workforce, particularly

through initiatives like welfare-to-work, can effectively turn tax users into tax payers.

As a Resource Imperative

The changing demographics in the workforce, that were heralded a decade ago, are now

upon us. Today’s labor pool is dramatically different than in the past. No longer

dominated by a homogenous group of white males, available talent is now

overwhelmingly represented by people from a vast array of backgrounds and life

experiences. Competitive companies cannot allow discriminatory preferences and

practices to impede them from attracting the best available talent within that pool.

As a Legal Requirement

Many companies are under legislative mandates to be non-discriminatory in their

employment practices. Non-compliance with Equal Employment Opportunity or

Affirmative Action legislation can result in fines and/or loss of contracts with

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government agencies. In the context of such legislation, it makes good business sense to

utilize a diverse workforce.

As a Marketing Strategy

Buying power, particularly in today’s global economy, is represented by people from all

walks of life (ethnicities, races, ages, abilities, genders, sexual orientations, etc.) To

ensure that their products and services are designed to appeal to this diverse customer

base, “smart” companies, are hiring people, from those walks of life - for their

specialized insights and knowledge. Similarly, companies who interact directly with the

public are finding increasingly important to have the makeup of their workforces reflect

the makeup of their customer base.

As a Business Communications Strategy

All companies are seeing a growing diversity in the workforces around them - their

vendors, partners and customers. Companies that choose to retain homogenous

workforces will likely find themselves increasingly ineffective in their external

interactions and communications.

As a Capacity-building Strategy

Tumultuous change is the norm in the business climate of the 21st century. Companies

that prosper have the capacity to effectively solve problems, rapidly adapt to new

situations, readily identify new opportunities and quickly capitalize on them. This

capacity can be measured by the range of talent, experience, knowledge, insight, and

imagination available in their workforces. In recruiting employees, successful companies

recognize conformity to the status quo as a distinct disadvantage. In addition to their job-

specific abilities, employees are increasingly valued for the unique qualities and

perspectives that they can also bring to the table. According to Dr. Santiago Rodriguez,

Director of Diversity for Microsoft, true diversity is exemplified by companies that “hire

people who are different – knowing and valuing that they will change the way you do

business.”

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For whichever of these reasons that motivates them, it is clear that companies that

diversify their workforces will have a distinct competitive advantage over those that

don’t. Further, it is clear that the greatest benefits of workforce diversity will be

experienced, not by the companies that that have learned to employ people in spite of

their differences, but by the companies that have learned to employ people because of

them.

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