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Lesson 1

Lesson 1. Challenges of International Business Management. Lesson 1 Introduction. Reading: Chap. 1 & 2, Text; Chap. 1, 2, 6 & 16, Ref. Book 1 Overview: Significance of International Business Modes of International Business International Management Models

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Lesson 1

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  1. Lesson 1 Challenges of International Business Management

  2. Lesson 1 Introduction Reading: Chap. 1 & 2, Text; Chap. 1, 2, 6 & 16, Ref. Book 1 Overview: Significance of International Business Modes of International Business International Management Models Cases & Scenarios:  Seeking Business Opportunities  Galanz, A Workshop of the World Nike’s Business Model  Consignment, Exclusive Sales, or Else?  Grey Area

  3. Lesson 1 Introduction Opening Case: Seeking Business Opportunity In the mid-1990s, David and Thomas Kirkham, two American brothers, inherited a sports car, Shelby Cobra, from their father. With creative design, elegant shape, dynamic styling, and high performance, it used to be the first-rate sports car in the world. Unfortunately, this kind of cars was put out of production long time ago. Seeing people buying the fiberglass-bodied replicas of Shelby Cobra, Kirkham brothers realized that people still loved such a car, and there could be a good business opportunity, waiting to be exploited. Though the fiberglass-bodied replicas in the showroom or on the road had much magnetic appeal of Cobra originals,

  4. (Case continued) their prices were very high, and the sales were quite limited. “Since people like this type of cars,” they thought, “Why not reproduce them by using aluminum as before?” The manufacturing requires specialized technology and professional talents in moulding aluminum products. The brothers were confronted with two difficult problems: Which type of manufacturers would have the needed precious resources? Where to find the low-cost manufacturers? (p11, Book 1)

  5. Shelby Cobra

  6. Shelby Cobra

  7. Kirkhams’ Solution： (1) Targeted airplane manufacturers; (2) Found Poland’s idled manufacturing plants used to produce M-G airplanes for Russia; (3) Set up a joint venture with Poland’s airplane manufacturer; (4) Kirkhams brothers had the car taken apart, and shipped to Poland. After 10 months, new cars were produced with aluminum. The costs were less than 1/10 of costs producing the cars using glass fiber. Now the new company has become the largest private employer in the region.

  8. Inspiration: A great idea makes huge success;  There are abundant business opportunities in the world markets.  Modern entrepreneurs, business executives and managers must have global perspectives and global mindset. It requires a leap of faith (信念的飞跃)

  9. 1.1 Significance of International Business  China’s dependence on foreign trade is high. The value of foreign trade accounts for65% of our GDP;  China is one of the largest host countries of FDI in the world. 2008 $92.3 billion  The value of imports & exports by foreign-related enterprises accounts for large part of China’s foreign trade  China’s companies are increasing its FDI.  The number of people working in foreign trade, foreign firms & exporting businesses reaches 100 million. Obviously, int’l business is crucial to our economic development.

  10. 1.2 Modes of International Business Case: Galanz, a Workshop of the World (p1-2, Book 1) (1) Which mode of entry did Galanz use to expand into international market? How important was this strategy to its growth? (2) Would you recommend Galanz’ business model to other firms? Why or Why not?

  11. (1) Modes of International Business a. Export direct and indirect export via trade Intermediaries  Export management co.  Export commission representative  Export commission house, or purchasing agent  Export merchant; Export broker (出口经纪人) b. Contractual Arrangements: Licensing & Franchising  Strategic alliance “Turnkey operations”: “build-operate-transfer” (BOT)  OEM (Original equipment manufacturing) c. Overseas Sales Division d. Foreign Production: joint venture, subsidiary/affiliate

  12. Q. (1) Which mode of entry did Galanz use…? For Galanz, export through OEM is the mode of entry. To Galanz, OEM is a fast track to international market, & an effective way of building its competitive edge. Through OEM, it is able to acquire new equipment at low cost, and upgrade its manufacturing capability. Stages of development: OBM ODM OEM ODM: Original Design Manufacturing OBM: Original Brand Manufacturing

  13. (2) Business Model It is a strategic definition of business logic, or the configuration of value-added activities, or a way of positioning the company in the value chain in order to generate a stream of revenues and profits. Its components may include: target customer segments, distribution channel, customer relationships, core capabilities, partner network, cost structure, and revenue source, etc. Galanz’ biz model It is characterized by its focus on labor-intensive assembling business,the lowest end of manufacturing chain.

  14. Case: Nike’s Business Model Nike makes a wide variety of high-quality shoes. The company catalogue lists over 800 models for use in about 25 sports. In 2002, Nike had 30% of the world’s market for training-shoes. Its sales were over $10 billion. Its “swoosh” logo is one of the most recognized global symbols. In an effort to keep ahead of the competition, Nike updates each shoe at least every 6 months. Most of these ideas are generated by its R&D center in Beaverton, Oregon, where physiologists and mechanical engineers study the stresses on an athlete’s feet and collaborate with stylists on new shoe ideas. Then Nike takes these technologies and designs and contracts with foreign factories for production. How does Nike’s biz model differ from that of Galanz?

  15. Business Model: Nike vs. Galanz R &D Nike: Dumb bell shape int’l sourcing Galanz: Olive shape R&DOEM Marketing Marketing Production Production

  16. Scenario 1.2 Consignment & Exclusive Sale (p25, Book 1) K, a Hong-Kong businessman, proposes to act as a consignee for China Arts Corp. (CAA) and sells cow toys to India. He demands a 5% commission on the sales value. (1) Should CAC accept K’s offer? (2) If K proposes to be an exclusive sales distributor, should CAC agree? (3) What environmental factor is illustrated to be important for international business decisions?

  17. Trade Channels? a. Exclusive sales, agency & consignment etc. (包销), (代理) (寄售) Relation between exporter & exclusive sales distributor: principal – principal relationship （法人与法人） Relation between exporter & consignee (代售人) : principal - agent （委托代理） b. Fairs & Exhibition c. Bidding & Auctions e.g. To be a supplier for the U.N., one must apply. The web site: www.uncso.org

  18. Answer： (1) CAC should refuse. India is a Hindu country, and the sale of cow-toys may offend the people. The exporter & consignee are a principal-agent relationship, not a seller-buyer relation. By accepting the offer, CAC is very likely incur losses. (2) Ignoring the negative impacts on its image & other markets, CAC could let K be an exclusive sales dealer because it is a buyer-seller relation between them. (3) Culture. What’s culture? It is a set of common perceptions, a conventional pattern of behavior, and a traditional life style of a society.

  19. Int’l biz must adapt to cultural differences. e.g. In Muslim nations, the laws of Islam prohibit usury. It would be illegal for credit card companies to operate there if it charges high interest rate on customers’ unpaid balances as it does business elsewhere. How can credit card companies adapt to the culture in the Middle East? Solution: Instead of charging interest rate, it imposes management fees.

  20. 1.3 International Management Models 1.3.1 Business Decision-Making Function The function for corporate decision-making can be written as： DM = f（RS, EC, PL，SC， T， G，… N） DM: Decision Making RS: Internal resources & skills of the firm EC. Economic & competitive factors PL: Political & legal factors SC: Social & Cultural Factors T: Technology G: Geographic Factors

  21. 1.3.2 Environmental Impact Model R: impact of international environment factors D: operational scale of the firm R T A 0 D Short-term Environmental Impact Model

  22. Long-term Environmental Impact Model R: impact of international environment factors D: operational scale of the firm R B h g w i f A K 0 D

  23. At point i and f, the impacts of environmental factors are reduced due to effectiveness of risk management. Point w indicates the maximum level of output for the firm’s economies of scale Average Cost 0 W Scale Economies of scale Diseconomies

  24. Discussion： Scenario: Grey Area (p11, Book 1) You are on a business trip in Southeast Asia. As you are departing from country A, the passport inspection officer at the airport tells you that there are technical problems, and it may take up to 5 hours to process your passport. You request him to give you special consideration because your plane will take off in about an hour. The official hinted that a contribution of $80 might help you to avoid the delay. How would you deal with it? Why?

  25. Business Brief: A Note on Special Payments (p7, Book 1) According to a recent report by the U.S. SEC, a practical distinction can be recognized between payments made to government officials to procure special & unjustified favors and those made to persuade low-level government officials to perform functions that they are obliged to perform as part of their governmental responsibilities but which they may refuse or delay unless compensated.

  26. Guideline: Distinguish bribery vs. tips crime trouble avoidance fee Official rules of game vs. hidden rules of game 正式规则 潜规则 However, don’t ask for trouble!

  27. 1.4 Selecting Mode of Entry 1.4.1 Qualitative Approach (p22, Book 1) Tabling Assessment Method Indirect Direct Contractual ForeignExporting Exporting Arrangement Production Foreign Conditions Economic growth:low yes yes yes high yes Geographic distance:near yes yes far yes yes ……

  28. 1.4.2 Quantitative Approach: NPV Method NPV: Net Present Value Choose the project with the greatest NPV. e.g. Based on estimation, NPVE (Export) = $8 million NPVD (Direct Investment) = -$20 million NPVL (Licensing) = $18 million NPVL is the largest and also positive, that is, NPVL > Max (NPVD ,NPVF) so, licensing would be the preferred mode of entry into the foreign market.

  29. Note: Selection decisions should be based on both qualitative and quantitative analyses. If both analyses provide a consistent result, the choice on the mode of entry can be easily made. What if the two analyses give conflicting results? The reasons for the inconsistency should be discovered to determine which result may be more reliable.

  30. Recapitulation: ”Seeking business opportunity” shows the need for global perspectives; International business encompasses foreign trade, FDI and multinational operations; Export, contractual arrangement, overseas sales division, and foreign production are four basic modes of global expansion; Biz model is the configuration of value-added activities; Trade channels include exclusive sales, consignment, agency; Cultural differences must be adapted to with principles and flexibility Selecting entry modes needs both quantitative and qualitative analysis.

  31. First Homework: Case Write-up of Aflac A hard copy is due at the beginning of the next class. This case write-up is an individual homework. It should be typed in letter 12 on double-spaced pages. The basic case material about Aflac is available in Chapter 3, Book 1. A case write-up is supposed to be analytic discussions of issues central to the case. Your analysis should address the discussion questions at the end of the case. Do not repeat case facts except to bolster your argument. Be analytically judgmental and evaluative.

  32. Other Requirements No late homework will be accepted. If you fail to submit this homework on time, you should write a case analysis on Wal-Mart Stores, Inc. for the make-up. The case material will be available in our class e-mail box. The more research you do on the cases, the better grades you are likely to receive. Up to five bonus points for Powerpoint work. An electronic copy of the Powerpoint and the case write-up must be sent to the TA via e-mail one day before the class. The best Powerpoint will be selected for class presentation.  After the class discussion of your case, you can receive bonus points if a short report is submitted to the professor.

  33. Next class: International Investment: Theory & Practice Reading: Chap. 3, Book 1; Chap. 3, Book 2 Cases: Nestle’s Global Drive (p26-27, Book 1) A Global Challenge for Kodak (p12-13) Aflac’s Success in Japan (p40-42) Reminder: A hard copy is due at the beginning of the next class. Up to 5 bonus points will be awarded if electronic copies of the Powerpoint and the case write-up are sent to the TA via e-mail one day before the next class. The best Powerpoint will be selected for class presentation. “No pain, no gain!”

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