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International Business Challenges


Welcome, everyone to International Business. So, today when I am talking to you in the
same time we are worried about the US – China trade war going on, which may have a
very serious effect on the world economy.
So, we can understand although neither we are largely dependent on any of them, but
still we have a very surplus domestic economy, but in spite of all this the worry still
looms large right! And no wonder that (the US) because of this facts the Indian stock
market is also not doing well right! Let me explain many more factors, but one of them
being the US – China (you know) trade war issue.
So, in the last lectures we talked about (you know) the nature and importance of
international business, what international business is all about? And what are the
different modes of entry when a firm tries to enter into a new market? What factors does
it need to consider and it should take care of? So, today we will talk about some of the
challenges of the international business and followed with the stage of
internationalization right! how companies are (moving) becoming more and more
international.
(Refer Slide Time: 01:36)
So, let us start with the challenges faced by the international business. So, (it is the) there
are (you know) 8 to 9 important points. So, if you see the first point it starts with the
international company structure right! So, what is the company structure and why it is
important, how it is a challenge let us see.
(Refer Slide Time: 01:54)
So, what it is saying, if the aim is to be competitive globally the first consideration is the
structure and location of the organization. So, what is the structure and where is the
company located? It can have a centralized or a decentralized system right!
So, what do you mean by a centralized system and what do you mean by a decentralized
system. So, as you can understand very simple that when you have all the power is
centered at one point and maybe there are different different (you know) spokes working
so, that is called as centralized.
And, a decentralized the power is given to each subsidiary or each unit of the company
located at different places. For example, let us say company ‘x’ is centralized if the every
policy is been decided at the company parent headquarters right!
They may be working in different countries maybe 50 countries – 100 countries, but the
polices are dictated at the parent headquarter; but, in a decentralized case what happens
the power is decentralized or given to the subsidiaries in the local units right! So, that
means, wherever they are operating the power lies in that particular location.
Example: Coca-Cola offers an effective multinational business structure the company is
organized into continental groups, right! each overseen by a president the central
presidents manage presidents of the smaller or regional subdivisions. So, there is a
central president who manages the regional ones right! Despite its diverse global
presence the Coca-Cola brand and product is controlled centrally and consistent around
the world. So, this is a centralized structure right!
(Refer Slide Time: 03:39)
What is the difference let us see one of the major difference through the diagram also
you can see that here this is the central point. He is controlling from everything from
here and here the (you know) everybody is on its own. The retention of powers and
authority with respect to planning and decisions making lies the top level of the
management in the parent at the headquarters.
So, the example of this is I have brought is burger king and McDonalds for example. On
the other hand, decentralization says the dissemination of authority, responsibility, and
accountability to the various management levels in the organization at different locations
right!. So, example Johnson and Johnson and TESCO, for example.
What you can do is you can take up find out more such examples from/through different
sources and understand what decentralized companies are make a list of decentralized
companies and make a list of centralized companies ok!.
(Refer Slide Time: 04:34)
So, this is a small Coca-Cola company organizational structure right! as I was saying
president, then there is manufacturing and the corporate staff, Coca-Cola international,
North American division, the bottling investment group and then it is again divided into
Latin American division, Eurasia and African division, European division, Pacific
division, Coca-Cola North America, Coca-Cola refreshments. So, in terms of product in
terms of country also they do have the structure divided.
The second important point that is a challenge today is the myriad/ (you know) the large
amount of number of foreign laws and regulations. So, because of the complexity of the
international business there are lots of regulations coming up right! and these regulations
are nothing, but a headache to the most of the foreign firms right!.
(Refer Slide Time: 05:20)
So, for example, tax implications to trading laws, Cyber security laws navigating legal
requirements is a central function for any successful (you know) international business.
Now, if your tax policy might not be the same in every country. So, every country have
their own tax policy.
For example, you see employment and labor requirements differ from country to
country. For instance, in European countries stipulate that a minimum 14 weeks
maternity leave to be offered to the employees, the expecting mothers, while on the other
hand in India it is up to 26 weeks right!
So, these rules and regulations differ right! I remember a very popular case of ITC very
important person in ITC, he was held responsible for violation of the FERA act and that
was a major controversy in those times right! but today FERA itself is completely is
obsolete and is no more it does not exists anymore right!.
Some of the other things are for example, the FEMA, the GSP, MFN, IPR laws etc.
which I have put in as in terms to understand the foreign laws and regulations. So, every
country has its own laws and regulations. So, if somebody is entering into this new
country they have to understand the laws of that country, otherwise if you try to hold
your (you know) policies that in the home country that you have and try to extend it to
the other countries the host countries it might be completely out of place.
(Refer Slide Time: 06:51)
International accounting standards are also very different, the different tax systems, rates
and compliance requirements makes accounting function a serious headache for
example, it is very challenging right!. Accounting strategy is the key to maximize
revenue we all know that and the location where your business is registered can impact
tax liability.
For example, many companies they run to a places like Singapore, Hong Kong because
of a better policy right! The tax policies are more friendly and even to start a new
business it is very simple.
So, these are more business friendly places whereas, in some other countries India has
slowly grown up in terms of ease of doing business, but still it is not up to the standard
right! it is still quite low in the entire rank. So, we have yet to do a lot of things in that.
So, international accounting being one of those factors which does affect how
complicated the entire business becomes right!
In many EU countries European Union countries, consolidated statements are prepared
using international financial reporting standards right! whereas, unconsolidated
statements use the national rules. So, different treatments. In Germany, another example
the tax accounts should be the same as the commercial accounts. Now, these are different
from again place to place. So, this difference in accounting standards makes it very
challenging for a firm when while it is doing business in the different locations.
(Refer Slide Time: 08:17)
Cost calculation and global pricing strategy; now, how do you price a product on what
basis would you price a product right!? Would you keep it the same in as you have in
your home country or you would make it different according the (you know) paying
abilities of the people in that country, their economic power and some other factors?
How would you do it? So, company must consider the cost to remain competitive while
still ensuring profit. Researching the price of direct local market competitors can give
you some idea. It gives you a benchmark to place yourself. You see one example
Swedish furniture giant IKEA, known in Europe for its low-cost values, struggled
initially in China due to the local competitor cost of labor and production.
We all know that Chinese labor is very cheap, it is like Indian labor right! and because of
this the company was unable to sustain the pressure. So, they relocated the production to
China and the company was then able to successfully cut prices and compete be
competitive in the Chinese market right!
So, how do you calculate your cost and what kind of pricing strategies you will maintain
is also a very big challenge in the international business context.
(Refer Slide Time: 09:38)
Today, the paying methods have proliferated they have increased tremendously. So, this
has made simple business much simpler right!. So, the proliferation of international
ecommerce websites has made selling goods overseas easier and more affordable. So, for
business and consumers both right!
So, determining an acceptable payment method and ensuring secure processing must be a
central consideration for businesses. So, the challenge is (if you) in many/ there are some
countries where they have tried to be cashless right! So, in some in such countries and if
you do not have that habit you do not have the technology to adapt to that then there
might be issue for the companies who are entering into this new firms.
So, some of the examples of universal payment methods are PayPal, Universal Payment
Cards which are exclusively for the merchants right! So, how would you sell; how would
you sell the product; how the customer would buy; how would you make the payment
that is a very big challenge.
(Refer Slide Time: 10:30)
This is one that is highly discussed the most challenging international business problem
is to protect against fluctuations in currency, how do we do that? How do you hedge your
funds? How do you manage the (you know) change in the fluctuation in the currency
every time right!
Currency fluctuates so fast right! it is nearly (you know) it is very very tough to forecast
and (you know) really have a catch on it. So, if a company uses trucks to move it’s
products example I have given and a currency fluctuates change the cost of fuel, this is a
direct impact on the shipping cost.
Again, you see many a times because of the change in the currency because of the rupee
getting weakend or gaining strength the export and the importers the exporters and the
importers both feel the heat, right!. If suppose it goes down the exporters are benefitted,
if it the rupee becomes stronger in terms against the US dollar the importers will gain
right! So, and the exporters will lose. So, these are very important. So, this fluctuation
current (you know) with this constant fluctuation of the currency is a very very important
parameter.
The next is communication difficulties and cultural differences. Now, effective
communication with colleagues, clients and customers abroad is essential obviously,
right! If you cannot communicate how would you do business and that to in a new place.
You have to understand the religious and cultural traditions, their emotions right! which
will help to navigate better potential communication problems. So, let us see with an
example.
(Refer Slide Time: 11:57)
So, this is a case of two – three (you know) companies. Parker Pen (you know) in Latin
America what it is mean intended its slogan is use Parker Pen and avoid embarrassment.
This was the intended slogan.
Now, what it meant in the literal language during translation? Use our Parker Pen, avoid
pregnancy. Now, how hilarious this sounds right!, but the local person we will
understand it is obviously, something missing something wrong, but then they will they
why should somebody spend so much of time to understand you also. So, this
communication gap is a big problem.
Pepsi in Germany come alive with Pepsi was a intended slogan, what does it mean?
Come out of the grave with Pepsi right! in China come alive with Pepsi means Pepsi
brings your ancestors back from the dead. Now, who wants it, right!? Fisher body in
Belgium; body by fisher, it means now when you translate corpse by fisher a dead body
corpse is a dead body by fisher.
Salem cigarettes in Japan; Salem-feeling free. Smoking Salem makes your mind feel free
and empty. Now, that people might take it as an insult, right! or an offense? So, one has
to be very careful and how do you communicate. So, there are umpteen number of
examples on international advertising and communication, where companies have found
wanting because of a problem in communication.
(Refer Slide Time: 13:24)
You see this is a simple example from the book! I have taken. Now, the same sign
gesture how does it differ in different places? In the USA and UK it is ok! fine Japan, it
means money; Brazil it is an insult it is like your insulting somebody by showing this
gesture and Russia it is a zero right! In India I think one can take it as a zero also
sometimes you may say it is splendid also. So, there could be two different as an Indian I
can say that.
(Refer Slide Time: 13:55)
Political risk is the next point which is related to the political uncertainty and instability
right! Now, that is really a one very big factor right! like the currency fluctuation. Now,
political risk every country for example, let us say some of the countries which are
always into war or into (you know) kind of terrorist problems are there. In such
conditions because of the high political risk, the interest rates for them also differs right!.
So, let us say before considering expansion into a newer unknown market, a risk
assessment of the economic and political landscape is critical. You need to understand
what is the political risk and what is the amount of uncertainty prevailing there. Now,
you see interestingly Facebook is banned in China partially in preference for national
social networks, the same with Google, right!. There is a competitor called Bidu who
works in (you know) as a replacement to Google in China.
In India the same had happened in 1978 when IBM exited from India it was because of a
control policy, how much of stake who would hold the government and again there was a
problem IBM was bringing the second grade products to India and Indian government
wanted them to bring the latest ones which IBM was not agreeing because they felt
Indian markets are not even ready for it. So, this has some of the political risks similar
risk associated right!
(Refer Slide Time: 15:19)
Lastly, the environmental issues like what production methods are you using and even
(you know) there are for example, issues like if you are using child labor and all these
are issues which are taken seriously, how much of environmental pollution are you
creating. So, the major environmental problems are pollution, warming global warming,
ozone layer depletion, acid rain and so many other things right! how do you dispose your
waste, loss of biodiversity etc.
Now, one example you see Philips has 22 service organizations that are collecting 40
percent of the lamps that contain mercury. Now, mercury is an obviously, a very
dangerous element.
So, what Philips is doing instead of dumping the waste into the soil or water or
anywhere, they are collecting this 40 percent of the lamps that contain mercury and the
company has a recycling rate greater than 95 percent in the market. So, this not only
doing good for the environment, it is also doing good for Philips itself, right!
Another case is Google started a project ‘Ara’ in which they found a way to maximize a
phones lifetime usage because people were after they were unable to use the phone, they
were dumping the entire phone because of a small mistake in one of the parts and reduce
the need to use new resources for new phones by using replaceable parts. So, if one part
is not working, they said you can use another part and you can repair the phone with
simple tools and skills right! So, this helped in minimizing the amount of it’s generated
e-waste.
So, these are some of the challenges today international business firms are facing and if
they do not follow it properly they would be criticized and they may be banned in some
countries even, because of their wrong policies.
So, one has to be very very careful because once you enter into a market, it is not that
simple. And, once you have entered and then suppose you face through such kind of
difficulties and suppose you are asked to change, reline your business or (you know)
even leave from that place it is a very costly affair ok!.
(Refer Slide Time: 17:23)
What are the approaches? What approaches do you follow in international business? So,
this is called a EPRG framework or EPRG model right! What does ‘E’ stand for?
Ethnocentric; what is it? Home country orientation. ‘P’ stands for polycentric or
polycentrism – host country orientation right!.
The third is regiocentrism; what is it? A regional orientation and finally, geocentrism – a
world orientation. So, geocentric, regiocentric, polycentric and ethnocentric these 4
approaches are called as the EPRG framework which is a (you know) it comes as a
question and people also (you know) try to figure out what it exactly means. Let us see
what they are.
(Refer Slide Time: 18:10)
Ethnocentric orientation of a firm considers that the products marketing strategies and
techniques applicable in the home market are equally they would be same or equal in the
overseas market as well are equally right! you can say are equally working or workable
right! in the overseas markets as well. So, ethnocentric orientation is more of a home
market orientation as it says here home country orientation.
So, example Patanjali Ayurveda and food product only focus on the domestic level after
that they sell in the global market. So, Patanjali ayurveda is very famously we know
from Baba Ramdev and all so, they focus on the domestic market right! and whatever
they do it here they try to extend to the other markets as well without much of a change.
(Refer Slide Time: 19:04)
The next is polycentric approach or orientation. Under this approach the companies
customize the marketing mix to meet the taste, performance and needs of the customers
of each international market.
So, as per the host market the products are changed right! The diamond industry for
export the diamond industry while they export in the global setting global level and
setting their branch offices, what they do is they change the product according to the
requirement of the host country right!.
Similarly, you must have seen in like the McDonalds and all, the company tried to
localize it is products according to the Indian market right! So, what the Indian people
wanted and what they prefer and what they avoided like the beef and all, so, they made it
according to the local market host market right! So, many a times the polycentric
approach is a very essential approach because the there might be huge difference in the
taste and preferences between the home and the host market.
The next is the regiocentric orientation: in this approach a company finds economic,
cultural or political similarities among regions in order to satisfy the similar needs of
potential consumers. So, for example, countries like Pakistan, India and Bangladesh are
very similar. They possess a strong regional identity. So, the approach would be to target
a particular kind of a region right!
So, you can see the parent company, then there is an host country and this is how
employees are selected from within the region that closely resembles the host country.
So, the company is trying to target a particular region right! in which they find there is a
lot of potential.
(Refer Slide Time: 20:47)
The last is the geocentric approach – under this approach the company analyses the taste
preference and needs of the customers in all the foreign markets and adopts a
standardized marketing mix. So, this is very difficult.
So, this is generally very difficult because you cannot have a standardized approach, but
there are some products which do have a standardized largely standardized, I will not say
it is completely standardized.
For example, Coca-Cola they adopted this strategy by selling it’s popular soft drink with
the same content packaging, branding and even to some extent their (you know)
advertisement themes world-wide. So, what is happening here the company is trying to
standardize and once if you can standardize the product then what happens is you can
have a large control over the price because of the huge economics of scale that prevail
over there right!.
(Refer Slide Time: 21:41)
So, these are the four approaches in international business. How do you internationalize
your company? How do you become international, so, what is the process? So, now, we
will come to that. So, internationalization is a process of increasing the international
activity of a firm. So, once you have understood the approach the EPRG framework then
the next is how do you become international so, right!.
So, it is says if you can follow this arrow it shows you the different the path right! So,
SME, internationalization, the business environment, entry modes, factors of entry
modes, marketing mix and then finally, launch. And, in every point you can see there are
some sub points attached to that right! For example, while internationalization what are
the motives right! in business environment, what are the internal-external environment
factors; entry modes, what are the different entry modes. So, how do you internationalize
yourself, you are the firm right!
(Refer Slide Time: 22:35)
There are different stages. So, the first stage is called the domestic company right! which
is like very similar to the home country in the EPRG framework. Then, the international,
the multinational company, the global and the transnational – so, there are five different
stages to internationalize your company.
(Refer Slide Time: 22:54)
Let us see the first one. So, the domestic company limits its operation, mission and
vision to the national political boundaries right! This company focuses its view on the
domestic market opportunities, domestic suppliers. So, it is entirely domestic.
So, but that is only possible when the country has a huge potential right! For example,
although I am not saying India can/should do it or something, but India has a large
domestic market. So, when companies are focusing on the domestic market right! and
limiting to that is the stage that we are talking about.
So, the domestic company limits it’s operations to the national political boundaries that
is within the range of India. This company focuses it is view on the domestic
opportunities, suppliers and financial companies etcetera. A domestic companies also
known as a local company. It is called a local company right!
An Indian company all Indian company are treated as domestic company, but all
domestic company may not be Indian ones. Some of them may be from some somewhere
else, but they have settled in India for a long time and today they are looked upon like a
domestic company.
(Refer Slide Time: 24:04)
In the stage 2, the international company is an enterprise which exists in one country, but
sells products in more than one country. So, this exists in one country suppose it exist’s
in India, but it is selling products in more than one country.
It holds the market mix constant and extends the operation right! So, what it is doing the
marketing mix is kept constant. So, the product, the price, the place and promotion they
are more or less tried to keep as constant as possible, but extend the operations to the
newer markets right! other countries.
International companies have less or hardly any FDI and make their product or service
only in the home country; that means, it is produced here and sold outside ok! In other
words, they are exporters and importers; mostly, they are exporters of the items right!
Indian firms exporting textiles, jute, spices, nuts, rice all round the world right!
So, this is an example where the product is more or less like a commodity, it is more or
less very similar and standardized it is made in the Indian market and it is sold in the
other markets as it is in the in the same way as it looks in the Indian market right!.
(Refer Slide Time: 25:20)
The third is a multinational cooperation which is an enterprise operating in several
countries, but managed from one country. So, right! it has investment in other countries,
but do not have coordinated product offerings in each country. More focused on adapting
their products and service to each individual local market, right!
So, it is like the host country (you know) there have different/ they are into different host
countries, but they are managed or coordinated or centralized from one country from the
parent right! The firm becomes fully fledged multinational companies with an assembly
of production facilities in several countries in regions of the world. Example – Nike,
McDonalds, Sony etc., they are true examples of for multinational co-operations right!
So, they are operating in several countries, but managed from one home country.
(Refer Slide Time: 26:09)
The global company is the final last one (where) which produces in home country and
focuses on marketing these products globally or produces the products globally and
focus on marketing these products domestically. So, what they are doing? In the global
company either produces in home and focuses on marketing these products globally or
produces the products globally and focuses on marketing them in the domestic.
So, let us say global firm pursues a unified strategy to coordinate various international
operations. Hilton and Hyatt hotels, Adobe, Cisco, 3M, Monsanto and American express
are some of the examples of a global company. So, these company have a two-way
movement right! they produce in home and may be focus outside or they collected from
outside and focused to the domestic market right!.
(Refer Slide Time: 27:04)
So, these are some of the international stages and the last one is the transnational
company. So, there are five stages. So, the 5th and the last one is the transnational. It is
essentially shed their home national identity and act as stateless. So, in other words they
do not identify itself with one national home like an MNC. So, they are free right!
Transnational companies are much more complex organizations and invest in the foreign
operations, R & D and marketing powers to each individual foreign market right! It is an
integrated global enterprise that links global markets at profit. So, Coca-Cola, HUL,
Starbucks, Colgate are examples of transnational companies. So, right! They do not
identify itself with one national home like an MNC. This is the major difference right!
So, will wind up here and in the next class we will continue (from) after stages we will
go we will move forward from there right!.
So, thank you very much.