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

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  Supervision of employees in different countries
 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

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

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• 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.
• 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

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 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
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

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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
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.

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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
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

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competitive advantage.

Stage 5:Transnational Company

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

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etc. Similarly, they also analyze the global challenge and threats like competition
from the other global companies, local companies of host countries, political
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.

Managing
Director

Manager Manager Manager Manager

Manager
R& D Finance Production Human
Marketing
Resources

Assistant Assistant
Assistant Manager
Manager Manager
South India Exports
North India

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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,

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 it markets more or less the same product designed under polycentric approach in
other countries of the region, but with different market strategies.

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.

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 - 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
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

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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?

Reasons for Going International

Complementary
Convergence in: Development
>Tastes and Preferences >NIC Purchasing Power
>Organization Design >Developing Countries’
>Financial System Ability to Purchase
Good Quality Products

Removal of Trade Barriers Resulting in

Meeting Global Consumer Demands

Lower Price
Better Value

Sustainable Competitive Advantage

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 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
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

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 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
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

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 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
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

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 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
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-

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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

• 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

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 • 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
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.

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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.
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.

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V. INDIA’S ATTRACTIVENESS FOR INTERNATIONAL
BUSINESS

- 25 -
- 26 -
- 27 -
- 28 -
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.

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3. Internationalization Advantages
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.

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• 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
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.

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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
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.

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 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
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

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 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).
 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.'

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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.
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.

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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
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.

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  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.
 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

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  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.
 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

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 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
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.

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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 for 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.
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.

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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
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

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  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.
 There is a problem of leakage of trade secrets.

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.

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  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.
 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.

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 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.

 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: -

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 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,
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.

IV. 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.

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 • 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
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,

- 46 -
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.

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

- 47 -
 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.

V. 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.
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.

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 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: -

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.

- 49 -
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 merg ers 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.

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.

- 50 -
 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
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

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 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.
 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

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 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
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

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 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.
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.

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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.
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

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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

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.

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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.

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?

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  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
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

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 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
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

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 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.

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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
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

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 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
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

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are allocated to business units according to where they are
situated on the grid.

These groups are explained below:

- 63 -
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.

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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.
Try harder - could be vulnerable over a longer period of
time, but fine for now.

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 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
in terms if its performance, market standing, competencies
and goodwill. Moreover, a strategic fit between the

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 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
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,

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 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.
The various measures for strategic evaluation and control
include: -

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 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
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

- 69 -
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.

1. ENDS 2. WAYS 3. MEANS

(Objectives) (Strategies) (Resources)

Problems of the Traditional Strategic Model

- 70 -
 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: -

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 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
framework integrates theory of strategic management and practice of business policy and
provides a structure for the practicing manager to evaluate competitiveness at regular

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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!
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

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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.
Some of the techniques for improving the perspective horizon and thereby quality of
decisions are: scenario-building, process consultation, in-house training programmes, job

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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
be treated as key resources. In this approach, the perspective is that there can be no
profits at the expense of any resource.

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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
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

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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
3. Human resources (Skilled, trained, creative, positive attitude,
high EQ and IQ, competitive, etc.)
4. Continuous learning philosophy and knowledge management.

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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
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:

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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:

- 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,

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 - 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.

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,

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 - 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.
Threat of New Entrants

The threat of new entries will depend on the extent to which

there are barriers to entry. These are typically: -

- 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

1. 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

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 existing players. This category also relates to complementary
products.

The threat of substitutes is determined by factors like: -

- Brand loyalty of customers,

- Close customer relationships,
- Switching costs for customers,
- The relative price for performance of substitutes, etc.

2. 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

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reduce the power of competitive forces. The following table provides
some examples: -

4.1 Reducing the Bargaining 4.2 Reducing the Bargaining

Power of Suppliers Power of Customers
· Partnering · Partnering
· Supply chain management · Supply chain management
· Supply chain training · Increase loyalty
· Increase dependency · Increase incentives and value
· Build knowledge of supplier added
costs and methods · Move purchase decision away
· Take over a supplier from price
· Cut put powerful intermediaries
(go directly to customer)
4.3 Reducing the Treat of New 4.4 Reducing the Threat of
Entrants Substitutes
· Increase minimum efficient · Legal actions
scales of operations · Increase switching costs
· Create a marketing / brand · Alliances
image (loyalty as a barrier) · Customer surveys to learn
· Patents, protection of about their preferences
intellectual property · Enter substitute market and
· Alliances with linked products / influence from within
services · Accentuate differences (real or
· Tie up with suppliers perceived)
· Tie up with distributors
· Retaliation tactics
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

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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
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

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support or hinder organizations from building advantages in global competition.
Porter distinguishes four determinants:

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

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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.
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.

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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
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.

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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.
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

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 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.

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

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 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
• 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

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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
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

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 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
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

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 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
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

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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

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

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 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.

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.

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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.
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

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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
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

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 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
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.

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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:

• 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
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.
International : Under this strategy a firm recognises the value in transferring its core
competencies from head office operations to its overseas subsidiaries

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 (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
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.

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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.

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INTERNATIONAL STRUCTURE OPTIONS

Many companies go through four stages as they evolve towards full-fledged

global operations.

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: -

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 A worldwide area structure

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'.

Ethnocentric approach

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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
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.

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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
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.

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 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: -

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

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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):

• 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.

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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
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.

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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

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 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

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 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.

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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

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 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

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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,

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 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.

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 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.

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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.

- 149 -
 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

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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

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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

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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: -

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 • 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

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.

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.

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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

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.

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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 Decentralized
production production
Country Factors
Differences in Substantial Few
political economy

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 Differences in culture Substantial Few
Differences in factor Substantial Few
costs
Trade barriers Substantial Few
Location externalities Important in industry Not important in
industry
Exchange rates Stable Volatile

Technological Factors
Fixed costs High Low
Minimum efficient High Low
scale
Flexible Available Not Available
manufacturing
technology
Product Factors
Value-to-weight Ratio High Low
Serves universal needs Yes 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
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

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 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 choice among suppliers

control over quality avoid their business risks

control over delivery no additional investment

not competing for supply no need to learn about a

new business
develop new expertise

Drawbacks increased investment reliance on outsiders

need for expertise need to compete for

supplies
need for management
supplier may go out of
may be inefficient
business

overspecialization

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.

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 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: -

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 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

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 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

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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).

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 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

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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.

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.

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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.

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.

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.

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.

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.

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.

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.

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

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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

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: -

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 • 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
• 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

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be developed through an appropriate and effective cross-cultural
training. Apart from that, training can also help the users to develop
intercultural communication 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.

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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-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

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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 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

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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.
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

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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, 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.

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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:
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

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 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.

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

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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 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: -

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 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

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research 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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 Multiculturation

Selective Adoption

Appreciation/Valuing

Acceptance/Respect

Understanding
Awareness
Ethnocentricity

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.

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 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.

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

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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:

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

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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
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

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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.

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.

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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
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

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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.”

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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