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International Business

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  1. International Business Wendy Jeffus Harvard Summer School

  2. Introduction • Chapter 16: Global Production, Outsourcing, and Logistics • Chapter 17: Global Marketing and R&D • Case Study: Microsoft – Outsourcing Xbox • “Global Teen Market” (time permitting) • Chapters 19 & 20: Accounting in the International Business & Financial Management in International Business • The Bottom Line (time permitting)

  3. Congratulations – SPAIN! Image Source: Yanee Zhang- Jilin, China Jaime Fernandez Cuervo- Madrid, Spain Alejandro Chinchilla Vargas- San Jose, Costa Rica Enrique Parra Arce- Madrid, Spain 3

  4. Wendy Jeffus Harvard Summer School Chapter 16:

  5. "In a globalized world, bilateral trade figures are irrelevant… The trade balance between the U.S. and China is as irrelevant as the trade balance between New York and Minnesota." • Dong Tao, Economist, UBS

  6. An Example: Automobiles • The Chevrolet Equinox • is from an American company, • but is assembled in Ontario, Canada, • has an engine made in China • and a transmission from Japan. • The Toyota Sienna • hails from Japan, • but has an engine and transmission built in West Virginia, USA. • and is assembled in Indiana, USA. • Under federal regulations, the Chevy doesn't qualify as a "domestic vehicle" but the Toyota does.,

  7. For your final project… • Consider: • Where should production activities be located? • What is the long-term strategic role of foreign production sites? • Should the firm own foreign production activities or is it better to outsource to vendors?

  8. The Limited • Supply Chain Management • 7,500 independent suppliers in 40 countries. • Once orders are received from The Limited they are delivered within 5 weeks. • Yarn from Korea • Woven & dyed in Taiwan • Zippers from Japan • Final assembly in Thailand,

  9. Outsourcing • “Make vs. Buy” • Extreme examples: Nike & Reebok outsource all manufacturing. • Examples of outsourcing include: IT, HR, Legal services, Manufacturing, and R&D. Pedometer (Germany) eShop (Spain)

  10. Outsourcing

  11. Strategy, Production, & Logistics • Production • the activities involved in creating a product • Note: both service and manufacturing activities are “produced” • Logistics • the activities that control the transmission of physical materials through the value chain • Two Goals • Lower the costs of value creation • Add value by better serving customer needs

  12. Relationship Between Quality & Costs

  13. Where to Produce • For the firm contemplating international production a number of factors must be considered • Country factors (existence of clusters, differences in factor costs, politics, culture, trade barriers, & exchange rates) • Technological factors (how high are fixed costs? will you customize or standardize your products?) • Product factors (characteristics of the product that influence production & distribution)

  14. Country Factors: Clusters • Bangalore, the Silicon Valley of India • The Bangalore Tigers: • TCS (Tata Consultancy Services) • Infosys • WIPRO

  15. Country Factors: Clusters • Zhongguancun Science Park “Z-Park,” China's Silicon Valley • Lenovo • Founder Group Corp • UFIDA Software “UFSoft”

  16. What Country Factors are Important? N.G.O. (Pakistan) Consult. (Nigeria) P.A.T. (Japan) Hotel (USA) Carbon (Brazil) Pedometer (Germany) eShop (Spain) Baharat (China) Track (Canada) MicroFin (Botswana) eMusic (S. Korea) Luggage (UK) • Image sources •

  17. Technological Factors • How high are fixed costs? • Minimum efficient scale • Flexible manufacturing • Reduce setup times for complex equipment • Increase machine utilization • Improve quality control • Flexible machine cells to perform a variety of operations Mass customization Low cost Product customization

  18. Ohno Taiichi • The father of the “Toyota Production System,” also known as “Lean Manufacturing” (or flexible manufacturing technology) • Ohno wrote several books about the system, the most popular of which is Toyota Production System: Beyond Large-Scale Production. • Born in China. • First an employee of the family's Toyoda Spinning • Moved to the motor company in 1943, and gradually rose through the ranks to become an executive. • In what is considered to be a punishment, (possibly because he spoke publicly about the production system), he was denied the normal executive track and was sent instead to consult with suppliers in his later career. Other Innovations: Andon Cord & 5 Whys, Just-In-Time

  19. How (comparatively) High are your Fixed Costs? Hotel (USA) P.A.T. (Japan) High Fixed Costs Luggage (UK) Baharat (China) Track (Canada) Pedometer (Germany) N.G.O. (Pakistan) Carbon (Brazil) eMusic (S. Korea) eShop (Spain) Consult. (Nigeria) MicroFin (Botswana) Low Fixed Costs • Image sources •

  20. Product Factors & Location Strategies • Two product features affect location decisions: • Value to weight ratio • Calculator, phone, ipod, pharmaceuticals vs. sugar, chemicals, paint • Does the product serves universal needs? • How different are consumer needs? • Two basic strategies • Concentrating in a centralized location and serving the world market • Decentralizing them in various regional or national locations close to major markets when opposite conditions exist

  21. Is your value-to-weight ratio comparatively high? N.G.O. (Pakistan) Consult. (Nigeria) Hotel (USA) P.A.T. (Japan) Pedometer (Germany) eShop (Spain) High Value-to-Weight MicroFin (Botswana) Carbon (Brazil) Baharat (China) Track (Canada) eMusic (S. Korea) Luggage (UK) Low Value-to-Weight • Image sources •

  22. Centralized Location High cost of manufacturing Low trade barriers Externalities (i.e. clusters) exist Stable exchange rates Flexible manufacturing technology Product’s value-to-weight ratio is high Product serves universal needs Decentralized Location Low cost of manufacturing High trade barriers Location externalities not important Volatile exchange rates Flexible manufacturing technology unavailable Product’s value-to-weight ratio is low Significant differences in consumer tastes and preferences exist between nations Manufacturing Location

  23. Will you centralize or decentralize manufacturing? N.G.O. (Pakistan) Consult. (Nigeria) Hotel (USA) P.A.T. (Japan) Pedometer (Germany) eShop (Spain) Centralize Manufacturing MicroFin (Botswana) Carbon (Brazil) Baharat (China) Track (Canada) eMusic (S. Korea) Luggage (UK) Decentralize Manufacturing • Image sources •

  24. Will you customize or standardize your product? N.G.O. (Pakistan) Consult. (Nigeria) Hotel (USA) P.A.T. (Japan) Pedometer (Germany) eShop (Spain) Standardized Products MicroFin (Botswana) Carbon (Brazil) Baharat (China) Track (Canada) eMusic (S. Korea) Luggage (UK) Customized Products • Image sources •

  25. Make or Buy Decisions • Should a firm make or buy the component parts that go into their final product? • Issues to consider: • Costs • Does a more efficient producer exist? • Trust • Is there a producer you trust? How high is the need for trust? • Improved scheduling • Does the control make scheduling easier or does it make things more cumbersome to manage? • Offsets • Example: Before Air India places a large order with Boeing, the Indian government might ask Boeing to push some of the subcontracting work to Indian manufacturers.

  26. Strategic Alliances with Suppliers • Long-term relationships with suppliers: • Kodak & Cannon • Canon builds photocopiers for sale by Kodak • Apple & Sony • Sony builds laptop computers for Apple • Microsoft & Flextronics • Flextronics builds the Xbox for Microsoft

  27. What are the “right” answers? N.G.O. (Pakistan) Consult. (Nigeria) Hotel (USA) P.A.T. (Japan) Pedometer (Germany) eShop (Spain) Good Question! MicroFin (Botswana) Carbon (Brazil) Fortunately it is your thought process that matters most! Baharat (China) Track (Canada) eMusic (S. Korea) Luggage (UK) • Image sources •

  28. Wendy Jeffus Harvard Summer School Chapter 17: Global Marketing and R&D

  29. Market Segmentation • Refers to identifying distinct groups of consumers whose purchasing behavior differs from others in important ways • Segments can based on: • Geography • Demography • Socio-cultural factors • Other factors Image Source:

  30. Market Segmentation • Two main issues relating to segmentation: • Extent of differences between countries in the structure of market segments • Existence of segments that transcend national borders Image Source:

  31. Product Attributes • Cultural differences • Dimensions such as language, religion, and education • Note: some tastes and preferences are becoming cosmopolitan • Economic development • Consumers in highly developed countries tend to demand extra performance attributes in their products • Price is less important due to high income level • Consumers in less developed countries value basic features as more important • Price is a factor due to lower income level • Cars: no air-conditioning, power steering, power windows, radios, and cassette players • Product reliability is more important • Product and technical standards • television/cell phone signal frequencies

  32. Distribution Strategy • Optimal channel for delivering a product to the consumer • Retail concentration (Concentrated vs. Fragmented) • Concentrated system (a few retailers supply most of the market) • Common in developed countries • Contributing factors: increase in car ownership, number of households with refrigerators and freezers, and two-income households • Fragmented system (small retailers without much market share supply the market) • Common in developing countries • Contributing factors: great population density with large number of city/village centers, e.g. China • Uneven or mountainous terrain, e.g. Nepal • Channel length (Long vs. Short) • Example a short distribution channel is where the producer sells directly to the consumer. (Channel length is longer in Fragmented Markets) • Channel exclusivity • Japan - exclusive systems because personal relations, often decades old, play an important role in stocking products

  33. Communication Strategy • Defines the process the firm will use in communicating the attributes of its product to prospective customers Cultural barriers Source effects Noise levels Image Source:

  34. HSBC Local Content & Point of View Ads Source: HSBC, Constance Kratsa

  35. Lost in Translation • The name Coca-Cola in China was first rendered as Ke-ke-ken-la. Unfortunately, the Coke company did not discover until after thousands of signs had been printed that the phrase means "bite the wax tadpole" or "female horse stuffed with wax" (depending on the dialect). Coke then researched 40,000 Chinese characters and found a close phonetic equivalent, "ko-kou-ko-le," which can be loosely translated as "happiness in the mouth.“ • The Scandinavian vacuum manufacturer Electrolux tried to sell its goods in America but didn't help itself with this slogan, "Nothing sucks like an Electrolux." • In Taiwan, the translation of the Pepsi slogan "Come alive with the Pepsi Generation" came out as "Pepsi will bring your ancestors back from the dead.";;;

  36. Barriers to International Communication • Cultural Barriers • Firm should use local input such as local advertising agency and sales force & Develop cross-cultural literacy • Source and country of origin effects • Receiver of the message evaluates the message based on status or image of the sender (i.e. Anti-Japan wave in US in 1990’s) • Place of manufacturing influences product evaluations (Often used when consumer lacks more detailed knowledge of the product) • Examples: French wines, Italian clothes, and German luxury cars • Noise levels • Amount of other messages competing for a potential customer’s attention • Developed countries - high • Less developed countries - low • Standardized advertising strategy execution more difficult (culture, laws)

  37. Push Versus Pull Strategy • Push strategy emphasizes personal selling • Requires intense use of a sales force • Relatively costly • Pull strategy depends on mass media advertising • Can be cheaper for a large market segment • Determining factors include: type of strategy, product type and consumer sophistication; Channel length; & Media availability Hotel (USA) N.G.O. (Pakistan)

  38. Push vs. Pull Hotel (USA) • Channel Length • Pull strategy • Long or exclusive distribution channels • e.g. Japan • Mass advertising to generate demand to pull product through various layers • Push Strategy • In countries with low literacy levels to educate consumers • Media Availability • Pull strategy • Relies on access to advertising media • Common in developed nations • Push strategy • Media availability limited by law • All electronic media state owned with no commercial policy N.G.O. (Pakistan)

  39. Global Advertising • Standardized: • Significant economic advantages • Scarce creative talent • Many global brand names • Non-standardized: • Cultural differences • Advertising regulations can be a restriction Image Source:

  40. Global Advertising • Adidas Jose + 10 (2006 World Cup Commercial) • • Visa • • Nike Ad Banned in China • “Chamber of Fear,” stars the NBA’s LeBron James battling a martial arts expert and a pair of dragons, and resisting the temptation of traditionally garbed women in a video game-style setting. • The commercial insulted China’s national pride and culture and was banned in 2004. •

  41. Pricing Strategy • Three aspects of international pricing strategy • Price discrimination • when consumers in different countries are charged different prices for the same product • Two conditions necessary • National markets kept separate to prevent arbitrage • Different price elasticity of demand across countries • Strategic pricing • Experience curve pricing (start with low prices); Multipoint pricing strategy (Kodak vs. Fuji); Predatory pricing. • Regulatory influence on prices • Competition policy, Antidumping regulations

  42. Global Oil Prices Countries Oil Prices Countries Oil Prices France Germany India Nigeria Pakistan Norway Sweden USA • $6.04 • $6.82 • $4.25 • $1.62 • $3.02 • $7.41 • $6.40 • $2.78 Sources: Image Source: Australia Brazil China Columbia Denmark Mexico Egypt United Kingdom • $ 3.84 • $5.69 • $3.71 • $4.81 • $6.89 • $2.45 • $1.17 • $6.60 Prepared By: Sandeep Jain and Ivy Wu (Summer Research Assistants)

  43. Configuring the Marketing Mix Differences Here Standards Competition Distribution Economy Gov’t Regs Culture Product Attributes Pricing Strategy Requires Variation Here Communications Strategy Distribution Strategy

  44. New Product Development • The location of R & D • Rate of new product development greater in countries where • More money spent on R&D • Underlying demand is strong • Consumers are affluent • Competition is intense • Integrating R&D, production and marketing ensures • Project development driven by customer needs • New products are designed for ease of manufacture • Development costs are kept in check • Time to market is minimized

  45. Integrating R&D, Marketing and Production • High failure rate ratio • Between 33% and 60% of new products fail to earn adequate profits • Reasons for failure: • Limited product demand • Failure to adequately commercialize product • Inability to manufacture product cost-effectively • Solution: Cross-Functional Product Development Teams • Effective teams must have • “Heavyweight “ project manager • One member from each key function • Physically co-located to facilitate communication • Clear plan and goals • Own process for communication and conflict resolution

  46. Take a Break… • Microsoft team if you haven’t done so, load your presentation on the desktop, grab a drink, meet your classmates… see you in 10 min. Handout Global Teen Market (Time Permitting) Image source:

  47. Case Assignments Case Study: Microsoft – Outsourcing Xbox

  48. Wendy Jeffus Harvard Summer School Chapter 19: Accounting in the International Business

  49. Accounting Information & Capital Flows

  50. Currency Translation *Used in Germany, Japan & the U.S. If inflation is high the historic cost principle underestimates a firm’s assets, so the depreciation charges based on these underestimates can be inadequate for replacing assets when they wear out or become obsolete. • The current rate method: • Exchange rate at the date on the balance sheet is used to translate foreign subsidiary financial statements into home country currency • Incompatible with ‘historic cost principle’ where the assumption is that the currency is not losing value due to inflation.* • The temporal method: • The foreign subsidiary assets are translated into home-country currency at the time of purchase of the asset • Changing exchange rates may mean the balance sheet may not balance!