1-Regional and Global Strategy(International Business)

Dr Zain Yusufzai

Regional and Global Strategy

Chapter # 1 (page2-34).

Introduction: International Business: - The study of transactions taking place across national borders for satisfying the needs of individuals and organizations. Multinational Enterprise: - A company headquartered in one country but having operations in other countries (pizza hut, Macdonald, total finaelf, shell, ford motor Suzuki, Citicorp). Activities of multinational enterprise classified into two major categories: 1. Exports and imports; 2. Foreign direct investment; 1. Exports and Imports: Exports: Goods and services produced by a firm in one country and then sent to another country. Imports: goods and services produced in one county and bough in by another country. Exports and Imports are seen as physical goods (clothes, oil, cars) contrary to prevailing believes they also include services such as those provided by international airlines, cruise lines ,reservation agencies , and hotels. European Union (E.U.): single largest exporter followed by North America and Asia. European Union (E.U.): single largest importer followed by Asia and North America. Majority export, import activities involve: Manufactured goods: - such as industrial machinery, computers, cars, televisions, electronic goods.  Increasing proportion of world trade in services. Why is study of international business important (Two reasons)? 1. Trade is historical bases of international business and trade activities that help us understand Multinational enterprise (MNE) practices and strategies. Why some countries export or import certain items? Some countries have trade agreements (NAFTA) North American free trade Agreement. A regional free 1 International business Alan M. Rugman, Richard M. Hodgetts

Dr Zain Yusufzai

Regional and Global Strategy

Chapter # 1 (page2-34).

trade agreement between three countries USA, Canada and Mexico. First reason: information about exports and imports helps us understand:  The impact of international business on world economies: Example: Japan imports all of its oil: Price change in oil globally affects auto exports due to rise in manufacturing costs Second reason: World wide exports, imports begin to slow down: A sign of world economies are going into recession (slump). 2. Foreign direct investment (FDI):  Equity funds invested in other nations;  Driver of international business and many companies , to establish footholds in world market place by setting up operations in foreign market or by acquiring businesses there; Recent data reveals two important trends: First: US a prime site for FDI by both Japan and countries in Western Europe. Second: US invested heavily in 1. Western Europe 2. Latin America, Caribbean 3. North America and 4. Japan. These four regions account for over 95 % of stock of all US FDI. Triad: The Three Major Trading and investment blocks in the international arena:  United States of America (USA).  European Union (EU).  Japan. First segment: US have the largest economy in the world with Gross Domestic Product (GDP) of over $10 Trillion (Canada and Mexico included due to NAFTA, 1994). Second segment: Collective GDP of EU is greater than that of Japan or USA. 2 International business Alan M. Rugman, Richard M. Hodgetts

Dr Zain Yusufzai

Regional and Global Strategy

Chapter # 1 (page2-34).

Example: - in terms of imports and exports: EU accounts for  more than 34% of all imports  In addition, 35% of all world exports.  60% of all intra EU trade. France, Germany, Luxembourg, Netherlands and UK accounts for $550 billion of investment in the USA. Third segment: The triad in Japan:  Japan is the worlds fifth largest importer  Third largest exporter  Japan accounts for 27% of all the imports  Japan accounts for 30% of all the exports  Invested $400 billion in EU  Invested $100 billion in USA Total Global Environment (Dynamic):  Introduction of local and international trade regulation  The impact of technology  Rise of small and medium sized multinationals

World Economies: USA a market for exported goods; from all regions of the world as well as a major source of FDI. Reason for Strong USA economy:  Willingness of USA business to cut their workforce  Reorganize their operations  Invest heavily in research and development Large number of layoffs of employees and closures of businesses around the world to stay afloat or go under Organization for Economic Cooperation and Development: (OECD) A group of 30 relatively wealthy member countries that facilitates a forum for the discussion of economic, Social and Governance issues across the world.

3 International business Alan M. Rugman, Richard M. Hodgetts

Dr Zain Yusufzai

Regional and Global Strategy

Chapter # 1 (page2-34).

International trade regulation: International business trend; the emergence of trade and investment liberalization. Firms in triad countries have prospered in open markets. Triad rivalry has led to setbacks in trade liberalization  Japan and China threatened with trade sanctions by the USA, unless they allow US firms to sell products and services in their countries.  Trade conflicts between EU and US over banana , beef hormones, and export subsidies: Disputes of this nature are not settled by countries but by an international organization like (WTO) World Trade Organization: to regulate international commerce. World Trade Organization (WTO): Established: January 1, 1995 An international organization that deals with the rules of trade among member countries. One of its most important functions is to act as a dispute settlement mechanism. General Agreement of Tariffs and Trade (GATT): Established 1947 A major trade organization that has been established to negotiate trade concessions among member countries. Today the WTO is enforcing the provisions of GATT. WTO can enforce its decisions, so countries that refuse to comply can find themselves suffering severe consequences in the form of trade retaliation. International trade liberalizations has arrived and this helps stimulate international business transactions and to prevent countries from discriminating against others. Technology:  Major development changing the way MNEs conducting business: Two areas are having major impact 4 International business Alan M. Rugman, Richard M. Hodgetts

Dr Zain Yusufzai

Regional and Global Strategy

Chapter # 1 (page2-34).

1. communication technology that has advanced at a rapid rate that all businesses now use computers and rely on the World Wide Web (WWW); to both access and send information. Cellular technology individuals can now remain in constant contact with both customers and their home office. 2. Production of goods and services: Modern factories can now produce goods in a shorter period of time and with fewer defects than ever before thanks to the introduction of six sigma quality programs. these programs are designed to increase quality and to eliminate defects , thus allowing firms to compete in any international market Six Sigma is as statistical term that means 3.5 errors per million, effectively y eliminating performance problems and ensuring that products work as intended Companies using this program for success:  Nokia has been able to dominate the international cellular business.  Hewlett-Packard has become the world leader in printers.  “International business strategy in action: Amazon.com; fast growth of new service businesses. Small and medium sized enterprises (SMEs): Definition of SMEs varies according to the nation.  In the US SMEs are companies with up to 500 employees.  In EU, SMEs have between 11 and 200 employees and sales of under US $40 billion.  In Japan SMEs in industries have up to 300 employees while in wholesale ad retail have to 150 and 50 employees respectively. Developing countries use the World Bank benchmark of 11 to 150 employees and sales of under US $5 billion. Globalization and Strategic Management: Major world economies are slowing down and this in turn is placing pressure on multinational enterprises to maintain growth and profitability. Three areas how companies are coping with this international environment: 5 International business Alan M. Rugman, Richard M. Hodgetts

Dr Zain Yusufzai

Regional and Global Strategy

Chapter # 1 (page2-34).

1. Misconceptions about multinational enterprises, and how they formulate their international strategies. 2. The criteria those are important to MNEs in achieving strategic competitive advantage. 3. Examine some of the examples of MNEs using present concepts. Regional triad strategies: (misconceptions). 1. The belief that multinationals have far flung operations and earn most of their revenues overseas. (Nestle sited as example).  Most MNEs earn the bulk of their revenues either within their home country or by selling in nearby locales. (85% of automobiles sold in USA, are built in North America by ford motor co, Chrysler, Daimler).  In service sector employs 70% of all work force in North America, Western Europe and Japan these activities all essentially local or regional. 2. Belief MNEs are globally monolithic and excessively powerful in political terms. 3. MNEs develop homogeneous products for the world market and through their efficient production techniques are able to dominate local markets. Strategic Alliance: A business relationship in which two or more companies work together to achieve a collective advantage. Maintaining economic competitiveness: American companies manage to achieve and then maintain international competitive advantage: HOW?  Continuing to be innovative: for example in the computer industry Intel’s research and development (R&D) created a continuing flow of new age computer chips, each more powerful then its predecessor.  Industrial equipment , financial services , shipping , entertainment Why are some firms able to innovate consistently while others cannot? 6 International business Alan M. Rugman, Richard M. Hodgetts

Dr Zain Yusufzai

Regional and Global Strategy

Chapter # 1 (page2-34).

“Success of nations in international competition is determined by four abroad attributes that individually and interactively determine national competitive advantage: (Michael Porter of Harvard University). 1. factor conditions: 2. demand conditions 3. related and supporting industries 4. The environment in which firms compete”. 1. Factor conditions: Land, labor and capital  Country has a large, relatively uneducated workforce, it will seek to export goods that are highly labor intensive  Workforce is highly educated, the country will seek to produce goods and services that tap the intellectual abilities of these people 2. Demand conditions:  Help seller understand what buyers want  If changes become necessary, such as customer desires for a product that is smaller, lighter, or more fuel efficient, the local sellers has early warning and adjust or innovate for the market before a distant competitors can respond. 3. Related and supported industries:  Suppliers located near the producer, these firms often provide lower-cost inputs that are not available to the producer’s distant competitors.  Suppliers know what is happening in the industry environment and in a position to both forecast and react to these changes. By sharing this information with the producer they help the producer maintain its competitive position.  This interaction is mutually beneficial to both parties. 4. Firm strategy, structure, and rivalry: Firms are created, organized, and managed, as well as the nature of domestic rivalry. Nations tend to do well where the management practices favored by the national environment are suited to their industries ‘source of competitive advantage.  In Italy, Fragmented industries:  In Germany, tend to have hierarchical organizations that emphasize technical or engineering content;

7 International business Alan M. Rugman, Richard M. Hodgetts

Dr Zain Yusufzai

Regional and Global Strategy

Chapter # 1 (page2-34).

 In Japan, require unusual cooperation across functional lines and that demand management of complex assembly operations :  National goals are important  Area of importance is domestic rivalry : Nations with leading world positions often have a number of strong, local rivals : Porter’s determinants as a system: All four depends on each others Demand conditions: - sophisticated buyers provide a company with feed back how to modify or improve its product. Factor conditions: - information will not be useful if the firm lacks personnel with the skills to carry out these functions. Related and supporting industries: - if suppliers can provide the company with low cost inputs and fresh ideas for innovation. Firm strategy, structure, and rivalry: - firm clearly and easily dominates the industry, does not feel the need to upgrade the quality of its products and services, it will eventually lose this competitive advantage. Multinationals in action: how these companies are functioning: Example: - Volkswagen, Carrefour, Kawasaki, and Suzuki; Strategic Management: Managerial actions that include strategy formulation, strategy implementation, evaluation, and control and encompasses as wide range of activities, including environmental analysis of external and internal conditions and evaluation of organizational strengths and weaknesses.

8 International business Alan M. Rugman, Richard M. Hodgetts