McGraw-Hill/Irwin International Management © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. International Management Phatak, Bhagat, and Kashlak

McGraw-Hill/Irwin International Management © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter 1 An Introduction to International Management

1-3 Chapter Objectives Define the concepts of international business and international management. Examine the transnationality of countries and companies Distinguish among the various types of international mindsets observed in international firms. Discuss the stages of development of an international company. Define and understand the strategic, marketing and economic motives of firms seeking to expand internationally. Explain the strategic objectives and sources of competitive advantage for an international firm.

1-4 Chapter Topics The International Management Setting What is International Business What is International Management International Companies and International Mindsets The Evolution of an International Enterprise Why Firms Seek to Engage in International Business Strategic Objectives and Sources of Competitive Advantage The Environment of International Management

1-5 Fig. 1-1: Managing in the International Environment Section I: The Macro-Environment (Economics, Politics, Infrastructure Laws, Culture) Section II: Firm-Level Initiatives (Strategy, Structure, Implementation, Control) Section III: Manager Responses ( Communication, Motivation, Leadership, Negotiations, Responsibility

1-6 Definition of International Management  International management is defined as a process of accomplishing the global objectives of a firm by:  effectively coordinating the procurement, allocation, and utilization of the human, financial, intellectual, and physical resources of the firm and across national boundaries, and  effectively charting the path towards the desired organizational goals by navigating the firm through a global environment that is not only dynamic but often very hostile to the firm’s very survival.

1-7 Domain of International Management Why, when, and how does a business firm (as an organization) decide to “go international” including the expansion and reduction of such internalization? Why, when, and how is its organizational behavior – a broad term covering mission, objectives, strategies, structures, staff, and processes [particularly, decision- making] internal, and external transactions and relations, performance, impact, etc. – altered by internationalization.

1-8 An International Company … is an enterprise that has operations in two or more countries. If it has operations in several countries then it may have a network of wholly or partially (jointly with one or more foreign partners) owned producing and marketing foreign affiliates or subsidiaries. The foreign affiliates may be linked with the parent company and with each other by ties of common ownership and by a common global strategy to which each affiliate is responsive and committed. The parent company may control the foreign affiliates via resources that it allocates to each affiliate – capital, technology, trademarks, patents, and manpower – and through the right to approve each affiliate’s long- and short-range plans and budgets.

1-9 Table 1-1: Largest International Companies (Selected) Global Rank Company2002 Revenues ($ millions) Wal-Mart Stores Exxon Mobil General Motors BP Ford Motor 219, , , , ,412.0

1-10 Table 1-3: Labor Productivity of Foreign Affiliates and Domestic Firms in Manufacturing in Selected Economies CountryForeign Affiliates Domestic Firms Ratio Foreign: Domestic U.S.A U.K Netherlands Ireland China France Sweden

1-11 International Mindsets Specific pressures will affect competition in industries and firms that cross national boundaries causing 1) a global orientation that relies on coordination of worldwide activities to maximize the collective organization, and 2) a multidomestic orientation that responds to individual country opportunities and constraints.

1-12 International Mindsets (contd.) Increasingly, there are pressures for international companies to be both globally efficient and locally responsive. These pressures derive from environmental changes such as new technologies, unanticipated competition, and the convergence of industry boundaries. In such situations, firms exhibit a transnational mindset to simultaneously gain efficiency and local market benefits.

1-13 Foreign Market Entry Modes  Exporting  Counter-trade  Contract manufacturing  Licensing  Franchising  Turnkey projects  Non-equity strategic alliances  Equity-based ventures such as wholly-owned subsidiaries and equity joint ventures

1-14 Fig. 1-2: Motives to Go International The Historically Indigenous Firm Cost-Reduction Motives Strategic Motives Market-Seeking Motives

1-15 Evolutionary Stages Stage 1: Foreign Inquiry Stage 2: Export Manager Stage 3: Export Department and Direct Sales Stage 4: Sales Branches and Subsidiaries Stage 5: Assembly Abroad Stage 6: Production Abroad Stage 7: Integration of Foreign Affiliates

1-16 Bandwagon Effect … when firms venture abroad to follow their major competitors

1-17 Ex. 1-2: Global Strategy: An Organizing Framework Strategic Objectives National Differences Scale EconomiesScope Economies Achieving efficiency in current operations Benefiting from differences in factor costs – wages and cost of capital. Expanding and exploiting potential scale economies in each activity. Sharing investments and costs across products, markets, and businesses. Managing risksManaging different kinds of risks arising from market or policy- induced changes in comparative advantage of different countries. Balancing scale with strategic and operational flexibility. Portfolio diversification of risks and creation of options and side-bets.

1-18 Ex. 1-2 (contd.) Strategic Objectives National Differences Scale EconomiesScope Economies Innovation, learning, and adapting. Learning from societal differences in organizational and managerial processes and systems. Benefiting from experience – cost reduction and innovation. Sharing learning across organizational components in different products, markets, or businesses. Sources of Competitive Advantage

1-19 Fig. 1-3: The International Environment Economic: Trade Agreements Trading Blocs GNP/Wages Inflation Legal: International Law Host Country Laws Home Laws International Piracy Infrastructure: Communications Internet Transportation Technology Cultural: Customs Values Language Religion Political: Governments Ideology Stability Civil Strife The International Company

1-20 Fig. 1-4: Fundamentals of International Management: A Model of International Management International Environmental Analysis Economic Environment & Infrastructure (Chapter 2) Political Environment (Chapter 3) Cultural Environment (Chapter 5) International Strategic Initiatives Strategies for Int’l Competition (Chapter 6) Foreign Modes Of Entry (Chapter 7) Int’l JVs and Alliances (Chapter 8) Organizing Int’l Operations (Chapter 9) Controlling Int’l Operations (Chapter 10) Int’l Human Resource Mgmt (Chapter 12) Work Motivation (Chapter 13) Leadership (Chapter 14) Communications (Chapter 15) Ethics and Social Responsibility (Chapter 17) Legal Environment (Chapter 4) Management/Implementation of International Initiatives Managing Technology and Knowledge(Chapter 11) Negotiations and Decision-Making (Chapter 16)

1-21 Key Terms and Concepts Foreign Direct Investment (FDI) Definition of International Business Definition of International Management Definition of International Company Transnationality Index International Mindsets  Global orientation  Multidomestic orientation  Transnational orientation

1-22 Key Terms and Concepts (contd.) Evolution of an International Enterprise Evolution of Service Firms Motives for International Expansion  Market seeking  Cost reduction  Strategic Global Strategy