International Business Management

1
International Business Management

• IIBD 0105
• Dr. Tang

2
Course Structure

• Module I Globalization Information Economy
• Module II Country Evaluation
• Module III Strategy Entry Mode
• Module IV Control HRM
• Module V Foreign Exchange Multinational
  Financial Management
• Module VI International Marketing Operation

3
Module I Globalization Information Economy

• IIBD 0105
• Dr. Tang

4
Agenda

• Globalization
• Concept Measurement
• Driving Force
• Trade Investment Barriers
• Liberalization with WTO Regional Groups
• Response
• Information Economy
• Information Goods
• Information Economy

5
Globalization ?

• Globalization of
• Product irrelevance of national product
• Market
• world wide or international mobile customers
• Converging taste
• Merger of national market
• Competition
• global scale efficiency
• Multi-market cross subsidizing
• As a result of international exchange of goods,
  service, capital human resources

6
Globalization of Product ?
Product Life Cycle Model

• Irrelevance of the Model
• Truncated Life Cycle
• Globalization of Product
• R D
• Advanced Components
• Standard Components
• Assembly

7
Measurement ?

• Trade FDI as a of GDP
• Price convergence
• As a result of arbitrage

8
International Trade FDI ?
9
Export As Percentage of GDP ?
10
Driving Force ?

• Transportation telecommunication technology
• Liberalization movement to breakdown trade
  investment barriers

11
Average Tariff Rate
  1913 1950 1990 2000
France 21 18 5.9 3.9
Germany 20 26 5.9 3.9
Italy 18 25 5.9 3.9
Japan 30 -- 5.3 3.9
Holland 5 11 5.9 3.9
Sweden 20 9 4.4 3.9
Britain -- 23 5.9 3.9
United States 44 14 4.8 3.9
12
Tariff ?

• Ad valorem of value
• Specific fixed sum per unit
• Compound Ad Valorem Specific

13
Can Protection Protect? ?

• Effective protection
• Price elasticity of demand supply

14
Effective Protection ?

• t tariff rate w weight of imported components
• k the final goods, i intermediate goods
• Country A Country B
• TV 10 20
• TV components 10 40
• Effective Protection (T) (10-5)210 (20-20)20

15
Price Elasticity ?

• Demand Supply
• Elastic P?D? P ? S?
• Inelastic P?D no change P ?S no change
• Price before tariff Tariff Price after tariff
• 1000 10 1100
• 909 10 1000

16
Non-Tariff Barrier ?

• Quota (VER voluntary export restraint)
• License
• Customs valuation, classification procedure
• Technical standard
• Government procurement
• Antidumping duty
• Countervailing duty (against subsidy)

17
Investment Barrier ?

• Entry barriers (e.g. finance, transportation)
• Ownership limit
• Performance requirement (e.g. local content)
• Non-national treatment (e.g. factor price)

18
WTO ?

• Freer trade
• No discrimination (MFN National Treatment)
• GATT (general agreement on tariffs trade)
• GATS (general agreement on trade in services)
• TRIPS (trade related aspects of intellectual
  property rights)
• Quota (MFA phased out)
• Subsidy (prohibited actionable)
• Safeguard (temporary protection)

19
Regional Integration ?

• Stages
• FTA Free Trade Area
• (low tariff for members)
• Custom Union
• (same tariff on non members)
• Common Market
• (factor mobility)
• Economic Union
• Political Union

20
Regional Integration ?

Name Year Current Member Liberalization Integration
APEC (21) 1989 US, Canada, Mexico, Chili, Peru, China, H.K., Taiwan, Japan, S. Korea, Russia ASEAN7 (Indonesia, Malaysia, Philippine, Singapore, Thailand, Brunei, Vietnam) Papua New Guinea, Australia, New Zealand Free trade investment by 2010 for industrialized countries by 2020 for developing countries
ASEAN (10) 1967 Indonesia, Malaysia, Philippines, Singapore Thailand, Brunei, Vietnam, Laos, Myanmar Cambodia AFTA (ASEAN free trade area) by 2003
EU (15) 1993 (1958) Germany, France, Italy, ,Belgium, The Netherlands, Luxembourg, Denmark, UK, Ireland, Greece, Portugal, Spain, Austria, Finland, Sweden Single market Customs Union Economic Monetary Union by 1999
NAFTA (3) 1994 US, Canada, Mexico Free trade area
21
What is Comparative Advantage?

• Absolute Advantage efficiency
• Export a good if you can produce more efficiently
• Comparative Advantage cost
• Export a good if you can produce cheaper
• Efficient but not cheap
• Because you have higher opportunity cost

22
RCA Revealed Comparative Advantage
X export, M import, i country, W world, k
product Comparison between products, countries
Periods ?
23
Response to Globalization ?
Journal of International Marketing, 5-1, pp9-30
24
Strategy Drift ?
Strategic Management Journal 9 pp75-91
25
INFORMATION ECONOMY ?

• INFORMATION
• INFORMATION GOODS
• INFORMATION ECONOMY

26
Information ?

• Anything with value that can be digitalized

27
Information Goods ?

• Information embedded in text, number, graph,
  audio video materials
• Valuation
• Physical Nature

28
The Nature of Information Goods ?

• Valuation
• Heterogeneity
• Experience goods
• Exclusivity vs. Popularity
• Value added in searching

29
The Valuation of Information Goods

• demand curve heterogeneous
• Value
• Customers
• What should we do?

30
Customization Price Discrimination ?

• Value
• P
• Customers

31
The Valuation of Information Goods

• Experience Goods
• Valuation after Consumption
• (e.g. a film, MBA)
• What should we do?

32
Experience Goods ?

• Brand Name
• Free Samples

33
The Valuation of Information Goods

• Exclusivity
• higher value when it is scarce
• Popularity (Network Externality)
• Higher value when it is popular
• what should we do?

34
Network Externality

• Value virtuous circle
• vicious circle
• Users

35
Exclusivity Popularity ?

• Versioning
• Free Distribution for a Critical Mass

36
Value Added in Searching ?

• Internet
• Portal Links
• Archive

37
The Nature of Information Goods ?

• Physical Nature
• Indestructible vs. Perishable
• Non-Depletable Reproducible
• Transmutable Non-Fixation

38
The Physical Nature of Information Goods

• Indestructible
• Lack of normal wear tear
• Shrinking market due to resale
• Perishable
• Time dependable
• What should we do?

39
Indestructible vs. Perishable ?

• Planned Obsolescence
• Customization
• Real time application

40
The Physical Nature of Information Goods

• Non-Depletable
• Can be shared
• Reproducible
• Near zero marginal cost
• What should we do?

41
The Physical Nature of Information Goods

• Transmutable
• Can be easily altered
• Problem of authenticity integrity
• Non-Fixation
• Always growing no final cut
• What should we do?

42
Reproducible Non-Fixation ?

• Continuous Updating
• Selling the connection
• instead of the information

43
Information Economy

• An Economy
• with super connectivity (communication with near
  zero cost)
• where information goods become the center of
  economic activities

44
e-Commerce

• Use of Internet to enhance communications
  transactions with an organizations stakeholders
  (people who determine its future)

45
e-Business

• A new business approach based on the
  possibilities provided by the interactive nature
  of the Internet

46
The Nature of Information Economy ?

• Business Mode
• Mass Customization
• Immediate Ubiquitous
• Business Structure
• Hollywood Effect

47
Immediate Ubiquitous ?
Todays Internet Ubiquitous Internet
Intermediary Destination Website Mobilemediary
Access Point PC with Web browser PDA, Wireless, Interactive TV, Kiosks, POS terminal, smart card
Reach Customer When browsing web on PC Whenever wherever
Customer Focus Price conscious shopper Immediate need to be served
Strategy Focus on content Build destination website Personalize web page Wait for customers Focus on context Build ubiquitous agent Know when you are needed and be there
48
Hollywood Effect Out Sourcing ?

• Transaction cost vs. Economy of scale
• Transaction cost cost of information for search,
  negotiate enforce a contract
• Economy of scale
• Internalize vs. Externalize
• High transaction cost internalize
• High economy of scale externalize

49
Module IICountry Evaluation

• IIBD 0105
• Dr. Tang

50
Agenda

• Understand System
• Identify Opportunity
• Market
• Resources
• Identify Risk
• Economic Risk
• Political Risk
• Legal Risk
• Country Selection
• Porters Diamond Eclectic Theory
• Opportunity Risk Grid BERI
• Attractiveness Competence Profile

51
Understand System ?

• Economic wealth (voluntary trade)
• Ownership, Movement Creation of Resources
• Political power (coercion)
• Articulate Aggregate of Individual Interest
• Make, Implement Adjudicate Public Decision
• Legal Reorganization Enforcement of Rules
• Cultural Shared belief practice in a group

52
Economic System ?

• Planned economy vs. Market Economy
• Ownership State (SOE) vs. Private
  (Privatization)
• Allocation Command vs. Price
• Rationale
• Market failure monopoly, friction, income
  distribution
• Government failure information incentive
• Alienation vs. Dependence
• Mixed economy

53
Political System ?

• Constitutional democracy
• Constitution, Free Election Freedom of speech
• Legislature, Executive, Judiciary
• Authoritarian
• Blind submission to authority
• Totalitarian
• Subordinate all aspects of individual life

54
Political System Critique ?

• Public Choice
• Politician as a vote maximizer
• Short term vs. long term interest
• Captive Theory
• a few gain a lot at the expense of
• many loosing a little as individual
• Personal stake vs. information organization cost

55
Dealing With Government ?

• Authority
• Bargaining Strength
• Available Choice
• Possible Response
• 5C of Negotiation
• Conflicted Interest
• Common Interest
• Criteria (objective)
• Convincing (impossible to give away)
• Compromising

56
Legal System ?

• Common Law
• Britain former colonies
• Tradition, precedent, custom
• Detailed contact
• Civil Law (Codified Roman Law)
• Continental Europe, Japan etc.
• Detailed codes
• Shorter contract
• Religious Law
• Bureaucratic Law
• Consistency, predictability appeal procedure?

57
Legal System ?

• Public law Constitution Administrative law
• Commercial code (Uniformed Commercial Code)
• Business formation
• Agent, Corporate Non-corporate
• Business Conduct
• Contract, Sales, Negotiable instrument, Secured
  transaction
• Regulations
• Taxation
• Accounting Standard
• Dispute Settlement

58
Regulations ?

• Protection of consumer
• Advertising, inspection certification,
  labeling, safety,
• warranties, consumer credit
• Protection of property (Possess transfer)
• Protection of public investor (information
  disclosure, inside trading)
• Protection of labor (compensation, leave, safety,
  social security, discrimination, labor relation)
  
• Protection of competition antitrust
• Protection of environment

59
Differences in Legal Systems ?

• Vulnerability of defective products
• USA vs. Britain case law difference
• Public scrutiny
• USA vs. Britain Statutory law difference
• Legal expenses (plaintiff or defendant)
• USA vs. Britain law administration difference

60
Taxation ?

• Direct tax (income)
• Corporate
• Personal
• Indirect tax
• VAT or Business tax
• Excise tax
• Property tax
• Stamp duty
• Tariff

61
International Taxation ?

• Tax jurisdiction (residential vs. territorial)
• Withholding tax (dividend, royalty interest)
• Double taxation tax credit (35 10 25)
• Transfer Pricing (vs. arms length no
  relationship)
• Branch vs. Subsidiary (tax to home country)

62
Foreign Tax Credit
63
Accounting Standard (IAS vs. GAAP) ?

• Revenue recognition (Critical path)
• Accrual method Front end loading (premature
  recognition)
• Inventory valuation
• FIFO, LIFO, HIFO
• Amortization depreciation
• Straight line vs. Double decline balance
• Length of estimated life
• Asset capitalization Rear end loading
• underestimate of current period expense
  (WorldCom)
• Asset impairment revaluation
• Off-balance sheet debt
• Unconsolidated debt of subsidiaries (Enron)

64
Accounting Standard ?
Buckley, A. 2000 Multinational Finance, Prentice
Hall, p49
65
Dispute Settlement ?

• Which countrys law applies
• In which country the issue be resolved
• Which technique litigation, arbitration..
• How will the settlement be enforced

66
Cultural System ?

• Value Norm
• Belief of being good right
• Reflected in re-enforced by
• Behavior (pattern of response) Ritual (formal
  repetitive)
• Information media of information
• Artifacts (objects)
• Institute (stratification mobility)

67
Value Norm

• Virtue
• True (honest)
• Kind (golden rule)
• Beautiful (right proportion)
• 4 Cardinal virtue
• ?(ren) ?(yi) ?(li) ?(zhi), ?(xin)

68
Differences in Cultural Systems?

• Hofstede 5 orientations
• Power orientation (distance)
• Uncertainty orientation
• Social orientation (individualism)
• Goal orientation (material possession)
• Time orientation (short term gain)
• Eastern vs. Western
• Patience Vs. Action
• Harmony Vs. Freedom
• Hierarchy Vs. Equality

69
Market Potential ?

• GDP p.c.
• The problems of
• Commercialization of economic activities
• Income distribution
• Market exchange rate

70
Market Potential ?

• Trade Statistics (UN Trade Statistics Year Book)
• Market Index (Cross Border Monitor)
• Proxy
• Comparable Segment

71
UN trade Statistics ?
72
Market Index ? ?

• Cross Border Monitor (Business International)
  EIU 40 indicators
• Pop population, upop urban population pc
  private consumption
• KWH electricity stl steel consumption cem
  cement production
• Tele telephone in use cars in use TV in use

73
Proxy ?

• Tire purchase 1.6 x Car registration
• Satellite dish, imported car in street for other
  luxury goods
• Refrigerators 0.2 marriage0.3 divorce0.1
  house start

74
Comparable Income Segment ?

• PPP Exchange rate Big Mac Index
• 1S 25 Baht S5000 125,000 Baht
• 1 big Mac 1 big Mac
• 5S 50 Baht
• 1S 10 Baht S5000 50,000 Baht

75
Big Mac Index
76
PPP Exchange Rate
77
Resources ?

• Availability, Cost, Reliability
• Infrastructure, Human, Capital, Raw Materials,
  Intermediate Goods, Machinery Equipment,
  Geographic proximity

78
Economic Risk

• Internal Balance
• Recession or inflation
• Demand misalignment or structural problem
• External Balance
• BOP Balance (trade capital)
• Exchange rate

79
Economic Risk ?

• Foreign debt default
• Moratorium
• debt service ratio (interest principal
  due)/exports
• Foreign exchange risk
• Interest rate risk
• Inflation risk

80
Internal External Balance
81
Internal External Balance
82
Political Risk ?

• Change in leader or policies
• Civil disorder
• Animosity between host other countries
• Sanction (restraint against commerce technology,
  tariff, loan etc.)
• Embargo (comprehensive sanction)
• Ownership risk
• Operation risk
• Transfer risk

83
Political Risk Perception
84
Ownership Risk
In 1960s to 1980s
85
Analysis Of Political Risk
86
Managing Political Risk ?

• Integral part of the host country
• Intensive use of local resource
• Contribution
• Joint venture
• Insurance coverage

87
Legal Risk ?

• Uncertainty of law law enforcement
• Extraterritoriality (outside boarders)
• Burma sanction
• FCBA
• Incomparable legal requirement
• Property right protection
• Product safety liability
• Environment workplace standard
• Corruption (Foreign Corrupt Business Act)

88
Porters Diamond ?
Chance
Management Ideology Industrial Structure
Demand Condition (size sophistication)
Factor Condition (natural advanced)
Supporting Industry (component tool)
Government
89
Eclectic Theory of Entry Mode ?

• Ownership Advantage
• Competitive advantage over the rivals
• Location Advantage
• Why host country
• Internalization Advantage
• In source or out source

90
Location Advantage ?

• Low input cost
• Market
• R D facilities
• Logistic
• Administration
• Economic, political, legal cultural system

91
Opportunity Risk Grid ?
Country Variables Weight A
B C D Acceptable/Unacceptable Allow 100
ownership U A A A Opportunity (H
preferable) Size of investment needed 0-5 - 4 3 3
Direct cost 0-3 - 3 1 2 Tax rate 0-2 - 2 1 2
Market size (now) 0-4 - 3 2 4 Market size 3-10
years 0-2 - 2 1 2 Risk (H Preferable) Loss
making 0-4 - 4 2 1 Exchange rate 0-3 - 0 2 3 P
olitical unrest 0-3 - 3 1 2 Total 21 13 19
92
BERI (Business Environment Risk Index) ?

• Criteria weight Multiply 0-4 OVERALL
• Political stability 3
• Economic growth 2.5
• Currency convertibility 2.5
• Labor cost/productivity 2
• Short-term credit 2
• Long-term credit 2
• Attitude towards foreign investment 1.5
• Nationalization 1.5
• Monetary inflation 1.5
• BOP 1.5
• Enforceability of contract 1.5
• Bureaucratic delays 1
• Communications 1
• Local Management 1
• Provisional Service Contractors 0.5
• TOTAL 25 Max100

1poor, 2average 3above average 4superior
gt80 favorable 70-79 not so favorable 55-69
immature with potential 40-54 high risk lt40
very high risk
93
Country Attractiveness Competitive Strength ?
94
Unilevers Global Profile ?
brand
product
region
country
95
Module III Strategy Entry Mode

• IIBD
• Dr. Tang

96
Agenda

• Preliminary
• Globalization Imperative
• STEP Environment
• Task Environment
• Competence Profile
• Strategic Management Model
• Anatomy of strategy
• Business Model Business Plan
• Strategic choices
• Entry Mode Practice
• Export vs. Local Production
• Whole Ownership vs. Alliance
• Green Field vs. M A
• Entry Tactics
• Take-over Anti take-over Tactics
• Alliance Tactics

97
Globalization Imperatives ?

• Growth imperative
• First mover advantage
• Efficiency imperative
• Scale cost
• Knowledge imperative
• Leading edge customer, innovative competitor
  supplier, R D
• Globalization of customers international
  mobile
• Globalization of product irrelevance of national
  product
• Globalization of competition multi market cross
  subsidizing

98
Five Force Model
99
Five Source Model ?
Journal of General Management, 21-1 pp1-23
100
Competitive Advantage ?
101
Market Value Capital
102
Resource Analysis
103
Simplified Value Chain ?
augmentation
104
Competitive Triangle
105
Competitive Benchmarking ?
106
Competence Profile ?
107
Strategic Management Model ?

• Environment
• Scanning
• External
• Societal
• Task
• Internal
• Structure
• Culture
• Resource

• Strategy
• Formulation
• Mission
• reason for
• existence
• Objectives
• results to
• accomplish
• Strategies
• plan

• Strategy Implementation
• Programs activities
• Budgets resource allocation
• Procedures sequence of steps
• Policies
• guideline

Evaluation Control Monitor corrective
action
108
Balanced Scorecard for Planning
109
Balanced Scorecard for Planning
110
Du Ponts Mission ?

• To be the worlds most successful energy
  chemistry based company, dedicated to creating
  high quality, innovative materials that make
  peoples lives better easier

111
Objectives ?

• Measurable results
• Sales
• Market share
• Profitability
• Turnover

112
Strategy Formation Procedure
113
Strategy Formation Procedure
114
Strategy Formation Procedure
115
Anatomy of Strategies ?

• Action plan to reach objectives
• Corporate
• Focus (geographic region, product, process)
• Business
• Method of Competition (price, quality, image,
  speed)
• Functional
• Marketing
• Operation
• Financing
• HRM
• R D

116
Winning Business Idea ?

• Exceptional Utility
• Irresistible Price
• Deliver with Tidy Profit Business Model
• Supported by Stake Holder Adoption Hurdle

117
Business Model ?
118
Structure of A Business Plan ?

• Executive summary
• Situation Analysis
• The Target market
• Product
• Team alliance
• Competitive Advantage (USP)
• Marketing strategy
• Operation strategy (business process)
• Financial projection funding requirement
• Implementation schedule
• Exit strategy
• Appendices (Financial statement)

119
Strategic Choice
120
Choice of Product ?
entire portfolio vs. sub set
121
Choice of Market ?
122
Strategic Choice Du Pont Model ?

• Return on Assets Profit Margin x Asset
  Turnover
• capacity constraint
• net income/sale
• ROA net income/assets
• competition constraint
• sales/assets

123
Strategic Choice Global Integration?
Global Standard product or service to maximize economy of scale Transnational Balance of global efficiency local responsiveness
Home Replication Compete with the home grown core competency Multi-domestic Independent subsidiary operation to maximize local responsiveness
124
Choice of Entry Mode ?

• Export vs. Local Production
• 100 export finished goods
• Local Assembly
• 100 local production
• Whole Ownership vs. Alliance
• 0 franchise license
• Contact alliance
• Joint Venture
• 100 ownership
• Green Field vs. M A
• Start from 0
• Using existing capacity

125
Progress of Entry
126
Export vs. Local Production ?

• Size of local market for the minimum efficient
  scale
• Shipping tariff cost
• Need for local customization
• Local content requirement
• Local resource supporting industry

127
Whole Ownership vs. Alliance Based ?

• Physical, linguistic cultural distance
• Operational integration requirement
• Risk of asymmetric learning
• Adequacy of capital
• Local equity participation requirement

128
Transaction Cost Analysis ?
Hollensen, S. 2002 Global Marketing, Prentice
Hall p55
129
Internalization vs. Externalization ?
Hollensen, S. 2002 Global Marketing, Prentice
Hall p57
130
Export
131
Alliance
132
Full Internalization
133
Green Field vs. M A ?

• Uniqueness of Corporate Culture
• Management practice, operation mode
• Speed to the Market
• Intensity of local competition
• New capacity addition

134
Export ?

• Agent or broker commission
• Dealer or Distributor inventory
• Direct sales end user
• Case 8-1

135
Licensing ?

• Rights to use the intangible property
• Patent
• Know-how not subjected to patent
• Technical or marketing advice and assistance
• Trade mark
• Royalty
• Critical components
• Cross licensing
• DVD machine, PC, Nintendo games
• Case 7-2

136
Franchising ?

• Special form of licensing
• Product trade mark franchising (cola)
• Business format franchising (conveniences stores
  and fast foods)
• More control operational assistance
• Store layout information, promotion, training,
  supplies (central purchasing), quality assurance
• Case 7-3

137
Difference between Franchising Licensing
?
Les Nouvelles 22-4 pp155-8
138
Contract Alliance ?

• Manufacturing Contract Out source the
  manufacturing,
• Nike, Mega toy
• Management Contract Managing a business for a
  fee
• Hilton Hotel (logo, management, global booking)
• Disney Land
• Turnkey Operations Design, construct equip a,
  ready to use facility
• Nuclear power plant, air port, oil refinery
• BOT
• Alliance in Marketing, Financing R D,
• Mattel (barbie) Bandai (Power ranger), Star
  alliance
• 20th Century Fox Paramount (Titanic)
• Intel, Samsung, Siemens (DRAM chips)

139
Joint Venture ?

• Partnership or co-owned corporation
• with a new legal entity
• and shared equity
• to achieve common objectives
• Case 8-2

140
M A ?

• Merger
• Companies join together (through exchange of
  shares)
• Acquisition
• The buyer purchases the assets or stock of the
  seller

141
Entry Modes Compared ?
142
Samsungs Alliance ?
143
Entering Asia Pacific ?
Long Range Planning 29-1 pp13-30
144
Take-over Tactics ?

• Negotiation
• Open market purchase
• Tender offer
• Contingent on the tender of a fixed number of
  shares
• Proxy fight
• Control in corporate voting
• Leveraged buyout
• Debt financing With the asset of the target
  company as collateral

145
Anti Take-over Tactics ?

• Poison pill
• Poison Shares (more voting power when activated)
• Poison puts (debt securities callable when
  activated)
• White knight (acquirer) White squire
  (shareholder)
• Self tender (replacing equity with debt)
• Charter amendment (e.g. Supermajority)
• Golden parachute (special compensation)

146
Poison Pill ?

• Shareholders right activated
• At Kick-in threshold
• To increase take-over cost
• More shares outstanding
• (flip in buy own stocks at a higher price)
• To dilute the acquirers ownership position
• Convertible in the case of 100 takeover
• (flip over convertible to acquirers stock at a
  lower price)

147
Choice of Alliance Partner
148
Choice of Intermediary
149
Joint Venture Formation
International Market Entry Development,
Prentice Hall
150
Stage Document for M A
Stage Document
Approaching Business plan
Initial negotiation Offer letter
Due diligence Consultant report
Final Negotiation/completion Shareholders agreement Memorandum of association
Funding installment/ Monitoring Report minutes
Exit
151
Alliance Tactics

• Walling off (Modularization)
• Boeing (R D, marketing vs. production
  technology)
• Contract safeguard
• TRW (auto part restriction of markets)
• Swap of Critical Resources
• Cross licensing (Motorola Toshiba)
• Credible Commitments
• Licensing vs. JV (Xerox Fuji)

152
Contract Issues ?
Dealership Licensing/ Franchising Joint Venture
Appointment Scope Expected activities Manufacturers support Performance quota Intellectual property obligation Termination renewal Grant Scope Quality control, accounting report Technical assistance, training,, warranty, advertising Performance quota Intellectual property obligation Termination renewal Payment to the licensor/franchisor Nature purpose Status of the respective parties Capital property contribution Management, control voting rights Rights in JV properties Confidentiality anti competition Termination renewal
153
ContractswithIntermediary
?
154
System of Control International HRM

• IIBD 0105
• Dr. Tang

155
Agenda

• Control Mechanism
• Procedure
• Instruments
• Infrastructure
• Choice of Controlling Strategy
• Vertical Differentiation
• Horizontal Differentiation
• Choice of Control System
• Choice of Leadership Style
• Culture International HRM

156
Procedure of Control ?

• Set standards
• Measure actual performance
• Identify deviation
• Initiate corrective actions

157
Instruments of Control ?

• Budget
• plan of resource allocation
• Profit loss, capital expenditure, cash flow
• Scheduling
• timing sequence
• Best Practice
• Key Success Factors
• Balanced Score Card
• Comprehensive Evaluation Plan
• Case 9-2 Control in Nestle

158
Budget
159
Best Practice ?

• The Example in Xerox
• 9 practices identified and distributed
• Australian practice in retaining customers
• Italian practice in market intelligence
• Spanish practice in handling new account

160
Key Success Factors ?

• Bench Marking in the case of IBM

KSF Measurable Indicators Deviation Analysis
Product quality of product returned Number of customer complaints Performance vs. standard
Customer service Delivery cycle Field service delays Service to sales personnel ratio
Employee morale Trends in employee attitude survey Absenteeism vs. plan Employee turnover
Competition Number of new products introduced Expansion of product line bid awarded
161
Balanced Score Card
162
Balanced Score Card
163
Balanced Score Card
164
Balanced Score Card
165
BSC Financial
166
BSC Customer
167
BSC Process
168
BSC R D
169
BSC Human Resource
170
EFQA
171
EP2M (effective progress Performance
Measurement)
172
7-S Framework
The Essence of Marketing
173
Comprehensive Evaluation Plan ?
174
Comprehensive Evaluation Plan ?
175
Comprehensive Evaluation Plan ?
176
Comprehensive Evaluation Plan ?
177
Marketing Evaluation Plan
178
Marketing Evaluation Plan
Principles Practice of Marketing, McGraw Hill
179
Early Performance Indicator
International Marketing, Macmillan
180
Infrastructure ?

• Organization structure
• (Distribution of information, power
  responsibility)
• International division
• Global product, region or function
• Matrix
• Policies procedure
• Corporate culture

181
International Division ?

• Typical Functional Structure
• International Division

182
Global Product vs. Region ?
Global Product (SBU) diversified product
Global Regions diversified market
183
Global Functional ?
184
Global Matrix ?

• Case 1 Shell Australia Shell Chemical
  division, London

Food Electronic Car
Asia Factory 1 Factory 2 Factory 3
Europe Factory 4 Factory 5
America Factory 6 Factory 7
185
Policies Procedure ?

• Guideline for decision
• with allowable discretion
• refund policy,
• 1 revenue on advertising
• travel reimbursement procedure

186
Corporate Culture ?

• shared value that
• provides meaning
• guide for action
• Case 9-3 Corporate culture of GE Privatized
  SOE

187
Module VForeign Exchange Multinational
Financial Management

• Dr. Tang

188
Agenda

• Foreign Exchange Rate
• Foreign Exchange Derivatives
• Future
• Currency Options
• Swap
• Multinational Financial Management
• Tax Management
• Currency Management
• Transaction Exposure
• Economic Exposure
• Translation Exposure
• Funds Management
• Covered interest arbitrage
• Capital Budgeting
• Capital Structure
• Working Capital Management

189
Foreign Exchange Rate ?

• Direct Indirect
• Direct local/foreign (7.6HK/)
• Indirect foreign/local (0.132/HK)
• Bidding Asked
• Bidding the bank buys foreign currency (7.5
  HK/)
• Asked the bank sells foreign currency (7.7
  HK/)
• Spread A-B (7.7-7.50.2)
• Spot Forward
• Spot immediate delivery (within 2 days)
• Forward settlement in future
• Forward premium (discount)
• Exchange Rate, Interest Rate Inflation Rate

190
asked
bidding
?
191
Spot Forward ?
Outright quoting
Baht/ Bidding Asked
spot 37.58 38.32
1 month 37.50 38.26
2 months 37.42 38.20
3 months 37.34 38.14
6 months 37.11 37.97
Baht/ export import
Satangs
1 month -8.00 -6.00
2 months -16.00 -12.00
3 months -24.00 -18.00
6 months -47.00 -35.00
The forward spread should always be wider than
the spot spread
192
Forward Premium/Discount ?
/Can
Spot 0.8428
30 day fwd 0.8399
90 day fwd 0.8344
180 day fwd 0.8280
193
Determination of Exchange Rate

• Trade balance (exportgtimport appreciate)
• Capital movement (inflowgtoutflow appreciation)
• Inflation (higher domestic inflation
  depreciation)
• Speculation
• Government intervention

194
Basic Relationships ?
195
Future ?

• Standard contract (size maturity)
• Less counterparty risk (the exchange guarantee)
• Margin account marking to market
• 10 margin, 75 maintenance, Future contact
  1000, B40/
• Margin account 1000 x 40 x 10 4000 Baht
• Maintenance 4000 x 75 3000 Baht
• If spot rate 38 Baht/ loss 2x10002000 Baht
  margin call

196
Future Contract ?
197
Margin of Future Contract ?
International Monetary Market, Chicago Mercantile
Exchange
198
Application Of Future Contract

• An American firm has to pay 250,000 SF on March
  1st. Analyze his decision to buy a future
  contract on February 1st with the following data
  

Date Spot rate Future 15/3
February 1st 0.6667/SF 0.6655/SF
March 1st 0.7658/SF 0.7650/SF
199
Application Of Future Contract ?

• February 1st buy future (0.6655 x 250,000
  166,375)
• March 1st
• Sell future (0.7650 x 250,000191,250)
• Buy spot (0.7658 x 250,000 191,450)
• Profit
• Foreign exchange gain 191,250-166,37524,875
• Foreign exchange loss 191,450-166,67524,775
• Net profit 24,875-24,775100

February 1 spot 0.6667 x 250000
200
Currency Options ?
Option Buyer of Option Seller of Option
Call Option Right to buy foreign currency at strike Obligation to sell foreign currency at strike
Put Option Right to sell foreign currency at strike Obligation to buy foreign currency at strike
Premium Pay premium Receive premium
Premium of the USD Amount (Chase Manhattan) Premium of the USD Amount (Chase Manhattan) Premium of the USD Amount (Chase Manhattan) Premium of the USD Amount (Chase Manhattan)
Strike the money FWD 1 month 2 months 3 months
YEN call USD Put 1.24 1.87 2.38
USD call Baht Put 1.12 1.59 1.93
201
Currency Options ?
202
Profit Loss in Options ?
Strike at 1.5 per , and a Premium of 0.1 per
Call Put
Spot buyer seller
1.2 -0.1 0.1
1.3 -0.1 0.1
1.4 -0.1 0.1
1.5 -0.1 0.1
1.6 0 0
1.7 0.1 -0.1
1.8 0.2 -0.2
1.9 0.3 -0.3
2.0 0.4 -0.4
Spot buyer seller
1.0 0.4 -0.4
1.1 0.3 -0.3
1.2 0.2 -0.2
1.3 0.1 -0.1
1.4 0 0
1.5 -0.1 0.1
1.6 -0.1 0.1
1.7 -0.1 0.1
1.8 -0.1 0.1
203
?
204
Application Of Currency Options

• An American firm has to pay 625,000 marks on June
  1st. It may purchase a mark call option on
  February 1st, with a strike price of 0.5 and a
  premium of 0.03 cents. Analyze its decision if
  the spot rate on February 1st is 0.49, and the
  spot rate on June 1st might be 0.6 or 0.48.

205
Application Of Currency Options

• The premium paid 0.03/100 x 625,000187.5
• June 1st spot rate 0.6
• No option 625,000 x 0.6 375,000
• With option 625,000 x 0.5 187.5 312,687.5
• Saving 375,000-312,687.5 62,312.5
• June 1st spot rate 0.48
• No option 625,000 x 0.48 300,000
• With option 625,000 x 0.48 187.5 300,187.5
• Loss 300,000-300,187.5 -187.55

206
Swap ?

• Exchanging obligation
• Chase Manhattan March 2 2000

2 years 3 years 5 years
6 months to Baht fix 6.30 7.10 7.95
6 months to fix 7.24 7.35 7.43
207
Application of SWAP

• A firm may issue a fixed rate bond with a 12.75
  coupon. If this firm could issue commercial paper
  (CP) at LIBOR plus 0.375, should this firm enter
  an interest rate swap, paying 11.27 in exchange
  for the LIBOR?

208
Application of SWAP

• 12.75
• -(11.27-LIBOR0.375LIBOR)
• 1.105
• yes

209
SWAP Back to Back Loan ?
Firm A (US parent) Firm B (Swiss Parent)
US 10 11.5
SFr 5 6
5.5
A
B
10.75
6
10
Bank
Bank
Cost of A (borrow SFr) 105.5-10.754.75 sav
e 0.25 Cost of B (borrow US) 610.75-5.5
11.25 save 0.25
Case 6-1
210
Tax Management
211
Arms Length Price ?

• Price between unrelated parties
• Comparable uncontrolled price
• Resale price (subtract mark up from sale price)
• Cost plus (plus mark on sellers cost)

212
Fronting Loans ?

• Deposit 1 million Loan 1 million
• Pay 8 interest rate Pay 9
  interest rate (tax deductible)

Parent Company In a low tax country
International Bank
Subsidiary in a high tax country
213
Transaction Exposure ?

• Source Contractual payment
• Management
• Natural hedging offsetting inflow outflow
• debt paid by sales
• Contractual hedging
• Currency risk sharing plan (case 5-1)
• Forward Contracts
• Shot term borrowing
• Discounting (B/E)
• Factoring (P/N)

214
Currency Risk Sharing Plan ?
215
Forward Contracts ?

• Forward options (optional date forward)
• Optional maturity within specific period
• Forward swap
• Forward/forward (payment delayed)
• May 1 Sell matured June 30
• May 20th Buy matured June 30th,
• Sell matured July 31st
• Forward/spot (payment earlier)
• May 1 Sell matured June 30
• May 20th Buy matured at June 30th,
• Sell spot May 20th

216
Forward Contracts Example ?
A Thai exporter made a contract on May 1st to
receive 1000 in future. He sold forward
matured on June 30th. On May 20th, he was
confirmed that the payment could be received on
July 31st. Help him to arrange forward swap,
using the following in formation

• May 1 spot 37.58 38.32
• 2 months (30/6) forward -16 -12
• May 20 spot 36.00 36.74
• 40 day (30/6) forward -16 -12
• 71 day (31/7) forward -16 -12
• July 31 spot 35.00 35.74

217
Forward Contracts Example ?
May 1 sell 2 month forward 1000 x 37.42 B
37420 May 20 buy 40 day forward 1000 x 36.62
B 36620 sell 71 day forward 1000 x 35.84 B
35840 With SWAP Net receipt 37420-366203584036
640 Without SWAP 1000 x 3535000

• May 1 spot 37.58 38.32
• 2 months (30/6) forward -16 -12
• May 20 spot 36.00 36.74
• 40 day (30/6) forward -16 -12
• 71 day (31/7) forward -16 -12
• July 31 spot 35.00 35.74

218
Forward Contracts Example ?
A Thai exporter made a contract on May 1st to
receive 1000 in future. He sold forward
matured on June 30th. On May 20th, he received
the payment. Help him to arrange forward swap,
using the following in formation

• May 1 spot 37.58 38.32
• 2 months (30/6) forward -16 -12
• May 20 spot 36.00 36.74
• 40 day (30/6) forward -16 -12
• 71 day (31/7) forward -16 -12
• July 31 spot 35.00 35.74

219
Forward Contracts Example ?
May 1 sell 2 month forward 1000 x 37.42 B
37420 May 20 buy 40 day forward 1000 x 36.62
B 36620 sell spot 1000 x 36.00 B
36000 With SWAP Net receipt 37420-36620360003
6800 Without SWAP 1000 x 36.00 36000

• May 1 spot 37.58 38.32
• 2 months (30/6) forward -16 -12
• May 20 spot 36.00 36.74
• 40 day (30/6) forward -16 -12
• 71 day (31/7) forward -16 -12
• July 31 spot 35.00 35.74

220
Economic Exposure ?

• Source NPV of the company
• Management
• Diversification of production
• Plant location (change in production run or
  relocation)
• Input mix (domestic vs. foreign) or Sourcing
• Diversification of Marketing
• Product differentiation, diversification,
  deletion
• Price adjustment
• Promotion budgets adjustment
• Diversified markets
• Diversification of Financing
• Currency denomination place of issue
• Maturity structure
• Capital Structure

221
Hedging Economic Exposure ?
222
Translation Exposure ?

• Source Financial statement consolidation
• Current Rate Method
• local currency functional
• Assets, Liability current rate (on the statement
  date)
• Equity historical rate
• Income statement average rate

C C/
Assets 960 1.2 800
Liabilities 480 1.2 400
Equities 480 1.1 436
Translation adjustment -36
Total LE 960 800
Case 5-3
223
Covered Interest Rate Arbitrage ?

• Interest Rate Parity

rdgtrf (F-S)/S Invest in domestic Borrow from foreign Sell S Buy SB Sell FB Buy F F? to F
rdltrf (F-S)/S Invest in foreign Borrow from domestic Sell SB Buy S Sell F Buy FB F? to F
224
Covered Interest Rate Arbitrage Application?

• Suppose the spot and the one year forward rate is
  0.2/FF and 0.1923/FF respectively and the US
  one year interest rate is 6
• If the French interest is 12, what arbitrage
  would you perform?
• What will be your arbitrage profit if you start
  with 1 million?

225
Covered Interest Rate Arbitrage Application?

• rdltrf (F-S)/S
• Borrow sell S invest in France and buy F
• (1/0.2)(1.12)0.1923-1.060.01688 m16880

226
Capital Budgeting ?
1999 2000 2001 2002
Net cash flow in S -1,660,000 300,000 600,000 1,500,000
Exchange rate S/ 1.6600 1.7430 1.8302 1.9217
Net cash flow in -1,000,000 172,117 327,833 780,559
PV factor 1.0000 0.8621 0.7423 0.6407
PV in -1,000,000 148,377 243,633 500,071
NPV in -107,919
NPV in S 5,505
227
Capital Structure ?
Equity Debt
Parent Parent
Joint Venture Partner Joint Venture Partner
Share issue in host or home country Bond issue or bank loan in host or home country
Share issue in a third country Bond issue or bank loan in a third country
Case Study 6-2
228
Working Capital Management ?

• Cash pooling
• Payable receivable leads lag control
• Re-invoicing (netting, transfer price)

US Parent
Luxembourg Re-invoicing Center
payment
payment
German Subsidiary
merchandise
French Subsidiary
229
Netting ?
French
Italian
150
French
Italian
50
150
100
Clearing Center
200
200
200
50
British
German
German
British
100
150
100
Subsidiary Total receivable Total Payable Net Position
French 250 350 -100
German 250 100 150
Italy 150 300 -150
British 300 200 100
230
Module VIInternational Marketing Operation

• IIBD
• Dr. Tang

231
Agenda

• Marketing Strategy
• STP
• Marketing Mix
• Operation Strategy
• Standardization
• Centralization
• Outsourcing
• International Trade Practice
• Term of Price
• Method of Payment
• Export Financing
• Marketing in the Emerging Market

232
STP Model ?

• Segmentation
• Identifying distinct customer groups
• Targeting
• Focusing on a particular segment
• Positioning
• Creating favorable image

233
Segmentation ?
234
Marketing Mix ?

• Product Place Promotion Price

Physical function appearance Packaging
Accessories Manuals Brand Producer
Image Service Warranties
Channels Coverage Locations Inventories Transp
ort
List price Discount Allowance Payment
period Credit
Advertising Personal selling Sales
promotion Publicity
235
The 7 P model ?

• Product
• Price
• Promotion
• Place
• People
• educated participation of customer
• Motivated well trained employees
• Physical Aspects
• Delivery location
• Tangible
• Process
• Method of delivery to ensure availability
  quality

236
Marketing Mix with Internet ?

• Product
• Mass production to mass customization
• Truncated product cycle
• Value migration (new contents, new products
  attention)
• Economy of scope
• Price
• Reverse auction find producer with given price
• Promotion
• Broadcasting to customer searching focast
  (focused-cast)
• Place
• Informediary Informatization (smart goods)
• Distributor becomes supplier (pay per view)

237
What is Product
238
Exceptional Utility
Purchase Delivery Use Supplement Maintenance Disposal
Customer Productivity Fast food coffee Dell Normal Computer
Simplicity
Convenience
Risk Reduction
Fun Image Starbucks
Environment Friendness Philips Bulb
239
Value Repositioned

• Value food chain
• Experience
• Information service
• Differentiation
• Commodity

Experience of community Experience of
entertainment Experience of thrill (win)
240
Product Extension
241
Brand Decision
242
Brand Decision ?
243
Price Corridor
Low competition
Price of goods with similar Form Function Objecti
ve
Average competition
High competition
244
New Pricing Model

• Reverse pricing (price to cost) (Swatch)
• Leasing (video)
• Time share (jet), slice share (mutual fund)
• Equity share ( of sales)

245
Price Decision
Discriminative Pricing Aggressive
Pricing Transfer pricing

246
Discriminative Pricing ?
247
Aggressive Pricing ?

• Predatory pricing aggressive pricing with cross
  subsidizing
• Multipoint pricing aggressive pricing in
  different points
• Fuji vs. Kodak
• Experience Curve Pricing aggressive pricing to
  reach the economy of scale

248
Promotion Mix
Push
Pull
249
Advertising Strategy
250
Checklist for Sales Force Management
Structured selling efforts Organization, Size, Territory deployment
Right staff Age, tenure, education, Inter-person skills, Technical capabilities, Selling technique
Strong guidance Written guidance, Key task definitions Call frequency, time allocation People to be seen, market, account focus
Adequate support Training, Technical backup, In-house sales staff, Product application literature
Proper motivation Total compensation, Split between salary commission, incentives design, fringe benefit
251
Channels for Foreign Markets
252
Distribution Strategy
253
Distribution Strategy
254
Grey Marketing
255
Dealer selection
256
Dealer Contract ?
257
Trade Marketing ?