Who exactly are 'they'. Shhh Conics, nobody's after you. 'They're' not after you.
By the way: Here are my notes. See what you can get from them.
Managing global business
FINANCIAL
Businesses that trade across international borders are exposed to increased customer payment problems. Problems arise due to different currencies, time lapses between orders and fulfilment. Different levels of credit risk and the practical problems of solving disputes between different jurisdictions.
♪ Methods of payment
Business that trade across international borders are exposed to increased customer payment problems. They may arise from currencies, time lapses between orders and payment and levels of credit risk.
These are the main methods of payment used by international businesses.
Clean payment- where a customer pays the business at the point of sale or as soon as the goods are delivered. Payment can be made by mail transfer, telegraphic transfer or internet payment systems. This removes credit risk for the business but no the customer.
Open account payment- allows customers to accumulate short term debt to the exporter that must be periodically settled.
Documentary collections- banks take on the role of intermediaries in the payment process.
Documentary credits- occur when the importers bank gives the exporter a document agreeing to pay for the goods once the customer has received them. The bank is therefore guaranteeing the customer and substantially reducing the credit risk for the exporter. The bank is guaranteeing a customer.
Credit cards - where purchases are unlikely to be ongoing, are a convenient way of payment
Counter trade- refers to the practice of settling accounts in non-monetary terms. Businesses may not agree to swap goods and services or engage in counter purchases, which mean that the exchange may not occur simultaneously.
♪ Credit risks
Credit risks often increase when dealing with foreign businesses, as it may be difficult to assess the credit worthiness of international customers. It is also difficult to chase up unpaid accounts in different legal jurisdictions.
With any commercial transaction, the seller should always check the customer’s credit ratings. Several agencies are able to provide independent assessments of the credit worthiness of foreign businesses.
Another form of credit risk involves transaction exposure associated with foreign exchange. (Transaction exposure refers to the potential effect of a change in the exchange rate on the value of an overseas sale) The Australian business can, however protect itself in a number of ways such as hedging.
♪ Hedging
International exchange rates fluctuate daily; international traders are faced with a situation where a movement in exchange rates could lead to significant differences in the value of a transaction. Hedging is the practice of protecting the business from adverse changes in exchange rates by entering into a contract at the present time to buy or sell foreign exchange at a specified rate on a given time in the future.
Currency hedging fixes the exchange rate at a particular level regardless of what the exchange rate will be in the future.
Qantas also uses derivative products and hedging tools to reduce the risk of adverse currency movements. Eg: 2004/05 Qantas had the second best fuel hedging program [70% of expected 2004/05 fuel needs were hedged at an average price of US$32 per barrel] however Qantas is now exposed to fuel prices as its hedging programme is reduced to 60% increasing operation costs by $1.2 billion in 06
♪ Derivatives
Derivatives are financial instruments whose value is derived from other commodities or financial instruments, such as share price, the price of a foreign exchange rate. A business might hedge foreign exchange exposure by using derivatives such as forward contract and options. There are 4 types of derivatives:
× Futures – an agreement to buy or sell an underlying asset at a specified date in the future for a specified price. Such contracts are traded on futures exchange which offers futures contracts on a variety of underlying assets such as commodity.
× Forwards – essentially the same as futures. Unlike futures however, forwards are not normally traded on organised exchanges, such as the Sydney futures exchange.
× Swaps – an agreement by 2 parties to exchange cash flows on an agreed amount over time.
× Options – give the holder the right, but not the obligation to buy or sell an asset at a particular price, unlike futures, forwards or swaps, options do not have to be used once purchased - they just allow you to do so – they can be used anytime before expiry.
♪ Insurance
It is wise for a business to protect itself against certain risks associated with international trade. Insurance insures Australian overseas investors not from financial risks but nationalism, war, civil unrests, revolutions, government seizure of their property and foreign exchange restrictions.
Qantas takes out insurance to protect itself against third party property damage or personal injury. Aviation war risk insurance has become a significant issue singe 9/11. The Aust govt provides an indemnity to Qantas above the commercial insurance for 3rd party war risk liability up to US$ 2 billion.
♪ Obtaining finance
A major problem for businesses particularly businesses is a lack of finance to fund international activities. International activities can be risky, and banks unwilling to provide finance. Businesses can shop around the globe to find the finance arrangement most suitable for them, however must always take note of any foreign exchange risk as well as any potential taxation implications arising from the transaction.
Global markets for equity have evolved more slowly than debt, with many businesses still preferring to list their shares on the home market. Never the less, it is increasingly common for larger businesses to list on multiply exchanges throughout the world. Eg: BHP billiton- Australia and Britain.
Much of Qantas have debt borrowed offshore. The Aust govt refusal to lift foreign ownership restrictions has limited Qantas’ access to foreign capital.
MARKETING
Marketing is the process of planning, promoting and distributing satisfying goods and services. The following are important aspects of both marketing and international marketing.
♪ Research of market
Businesses can conduct market research in overseas markets using similar technique to those employed in domestic markets, however should use more intensive research of market features, especially if the business is not familiar with the culture and market attributes in the overseas region. Each national market has its own characteristics and must be analysed separately. Some aspects of the market that should be researched are the:
political system
level of stability
legal system
trade documentation
However the Australian department of foreign affairs and trade does provide detailed reports on dome of Australia’s major overseas markets. Different social structures, attitudes and values will vary from country to country making assumptions difficult.
♪ Global branding
A global brand will also have the same positioning around the world; this can keep costs down however the marketing mix may vary from country to country. Translation of brand names into another language sometimes causes changes in names. E.g. the word diet in diet coke had a connotation of illness in Germany and Italy. The name in Europe was changed to coca cola light as a result.
It’s important to legally protect your brand before overseas expansion occurs, ensuring the same brand name is not used by competitors in foreign countries.
♪ Standardisation and differentiation
There is a major debate over whether a business should offer standardised products to all markets or change and adapt products to suit local markets
Standardisation means offering a common product on a worldwide basis. Standardised products offer global businesses economies of scale in production; savings in research and development and economies on marketing. Industrial products are more likely to be standardised than consumer goods eg: Machinery, heavy equipment and accounting services. These goods are usually sold to organisations rather than individuals therefore are not strongly driven by image and branding.
Qantas standardise most elements of the marketing mix, such as product design, brand name, product positioning, packaging and distribution. Most of these strategies are alliance based. They create a range of global products for existing customers.
The Oneworld name and logo appear on all member planes and ticketing, helping Qantas improve its corporate image.
Differentiation refers to a strategy where a business develops a marketing mix that makes it stand out from its competitors and suits the local tastes. It can be based on features such as quality, reliability, fashion, and product design or brand image.
Many global businesses are trying to use quality as a differentiating factor, such as Rolls Royce cars and Rolex watches.
Transnational corporations often market products that appeal to different customers in the same product category. However each brand is managed by completely different organisations that focus on specific target markets around the world.
OPERATIONS
Operations are the set of activities a business uses to transform different kinds of inputs into finished goods and services. Operations are closely linked with productivity and quality. The fundamental issues go back to where and how to produce different goods and services.
- Sourcing (vertical integration, make or buy)
One of the first decisions that need to be made is where and how to obtain the resources needed by the business to make its products. They can be sourcing, labour, raw materials and capital. Sourcing is the set of processes and steps a business uses to acquire the different resources it needs to make its own products.
Vertical integration /Make or buy
The level of business vertical integration is based on whether management decides to make the inputs or buy them from other suppliers. In developing a sourcing strategy determine the extension of business activities into stages of production that provide a business’s inputs or absorb its output. Vertical integration refers to the extent to which the business provides its own inputs or buys its own set of advantages and disadvantages.
- Global web(components produced in different countries)
TNCs that have a high degree of vertical integration often have a global web production, sourcing inputs to production from all over the world. Some businesses find that strategic goals are better met by locating production facilities in different countries.
As businesses have become more globally focused, they found that they could develop a competitive advantage by coordinating and integrating their operations across national borders.
TNC’s now use production sharing in which they may produce and/or assemble components in one or several countries for worldwide markets. This allows them greater flexibility and easier access to markets, by establishing a number of subsidiaries in various countries.
EMPLOYMENT RELATIONS
Organisational structure
Organisational structure refers to the way in which a business divides its activities among separate units and coordinates activities between those units. The structure defines how individuals and organisational units are grouped to carry out business activities
Centralised decision making occurs in the high level management.
Decentralised decision making occurs by individual subsidiaries.
While there is a greater trend to have a centralised approach, businesses rarely centralise all decision making. They look for an approach that will lead to greater efficiency and effectiveness.
Centralised Decentralised
× Helps to coordinate the operations of international subsidiaries, which is particularly important when the business is operating in many markets
× Subsidiaries are closer to markets they have a better understanding of local culture, politics, laws and competitors.
× Can result in products which are better suited to local customers.
× Local managers can adapt to changes in the local environment and react faster.
Staffing
Increased global labour markets give businesses greater opportunity to attract and retain the best quality employees.
The size of the staffing issue depends on the level of the business’s international activities. The employees must have the required skills necessary to perform their function. As the business moves to foreign subsidiaries, managers may come from the home country or the host country.
The home manager makes communication easier when coordination with HQ. However a host manager often improves the subsidiary’s understanding of the local market and its ability to adjust to changes in the local environment.
Shortage of skilled labour
Depending on where a business is establishing its foreign operation, there is likely to a difference in the supply of skilled labour. Many TNC’s have moved facilities to countries looking for inexpensive labour. However the skill level of workers and their productivity often tends to be low.
Many businesses operating in transnational economies argue that there is a lack in skills of managers qualified to run operations in a highly competitive global market. Managers in transnational economies tend to lack training in just about all areas of business management.
Hilton hotels began operating hotels in Eastern Europe they found that many local employees lacked the skills and attitudes necessary to provide high quality service.
Labour law variations
International business must ensure that it complies with local laws, which differ around the world these can impact on businesses costs and activities.
○ Wage and fringe benefits packages vary widely from one country to the next.
○ Maternity leave in some countries is up to 1½ years.
○ Equal Employment Opportunity or anti discrimination legislation in various countries. In some countries characteristics such as gender, religion, and colour are commonly used in hiring decisions whereas they are illegal in Australia.
○ Labour relations often reflect countries’ laws, culture and social structure. Germany has legislated that workers are to be represented on the board of directors.
Minimum standards of labour
Labour standards that act as a safety net to protect the world’s most vulnerable workers. These would include working conductions, wages, OH&S, and discrimination issues and could be overseen by international labour organisation [ILO]
This UN agency seeks the promotion of social justice, and internationally recognised human and labour rights. ILO governing body are fundamental to the rights of human beings at work, irrespective of levels of development of individual member states.
Child labour is the most important source of child exploitation and child abuse in the world today. Countries have different ages to which what they consider a child.
Ethnocentric/ polycentric/geocentric staffing system
Ethnocentric
Where a business tends to favour people from the business’s home country for higher level positions. This model can create conflict between the staff of different countries. This approach is used by businesses operating centralised decision making processes. It is believed that expatriate home country nationals are the most effective in transposing the corporate culture in foreign subsidiaries. Businesses also use ethnocentric staffing when qualified employees are not available locally.
Disadvantages
Expense of relocating managers and their family from their home country can increase the cost of the managers significantly.
Culture shock where workers feel disorientated, frustrated and helpless until they become accustomed to their new environment
The presence of home country managers may present barriers disallowing them to integrate into the local culture and fail to understand the needs of local customers and employees.
Polycentric
Where a business gives preference to people from the hoist country for local managerial positions. While local managers often know their market best, they can have different goals from the objectives of managers at the company’s headquarters. Businesses can use a polycentric approach for top and middle level management & for non-managerial staff. However larger companies run extensive training programs for host country managers to expose them to the corporate culture and business practices.
Geocentric
Where a business tries to fill positions based on the merit of employees regardless of nationality. This focuses on employing the best available person regardless of their nationality. The foreign operation may employ managers from the home, host or even third world countries. This policy is normally reserved for top level management & allows for adjustment to many businesses and cultural environments.
Expensive/Global managers are highly sought after and the combination of high demand and the shortage of supply lead to high salaries and associated packages.
Evaluation strategies with reference to a particular global market
The management process, businesses should evaluate the results of their strategies
× How effective have the strategies been?
× What adjustments, if any are needed?
Control is the monitoring of activities to make sure they are meeting objectives. Control also involves taking corrective action by changing strategies if objectives are not being met.
Modifications of strategies according to changes in global market
Once a business has evaluated its performance and identified its successes and failure, managers need to take some action. If the reason for the difference in performance and objectives is poor performance, managers can re-examine the business’s strategies, products, employees, or the structure of the business itself.
Management responsibility in a global business
ETHICAL PRACTICE
While there is no agreement on business ethics, some people believe that international standards of conduct for many businesses practices are found in several multilateral agreements adopted by governments around the world. Together these agreements cover areas of employment practice and policies, consumer protection, environmental protection, political payments and basic human rights.
Cultural differences often lead to ethical problems and often there are no right or wrong answers. Acceptable behaviour in one culture may be seen as unethical in another. This creates a dilemma for managers in foreign markets as they need to consider the ethics of the host nation and those of their home country.
○ Tax havens and transfer pricing
Tax havens are economies that impose very low corporate tax rates, or tax exemptions on certain types of business activities. Businesses can avoid or defer paying taxes. A business will prefer to receive the highest profits in the lowest taxed countries so they move goods to such nations.
Transfer pricing has been banned by many government. If transfer prices are set artificially low, taxation authorities can intervene to set more appropriate prices.
A transfer price is the price charged for a good or service traded among a business and its subsidiaries. When good and services are transferred between subsidiaries, the business receiving the product pays a transfer price, which is set artificially low to keep revenue and profit down.
Subsidiaries in countries with high corporate tax rates can reduce their tax burdens by charging a low price for their output to other subsidiaries, thus reducing the level of profits in the high taxing country and therefore reducing tax.
Subsidiaries in countries with low tax rates charge relatively high prices to other subsidiaries of the parent company. In this way income and profit is maximised in the low tax country.
○ Minimum standards of labour
Multinational corporations usually hire local personnel to be part of the workforce subsidiaries. Subsidiaries must abide by the laws of the country which they are operating in; this includes laws relating to employment and wages, and laws relating to appropriate standards to be applied when hiring workers. There may be situations where a global business may be tempted to employ underqualified or unqualified labour in an attempt to reduce costs. Employing labour without the minimum skills or qualifications can often create a safety hazard and put other employees at risk.
○ Dumping illegal products
Dumping refers to the practice of selling a product in an overseas market at a lower price than what the product would sell for in its home market. Usually the product that is being dumped is that it is not selling well in the domestic market. Dumping is the strategy of getting rid of stock.
☼ The problems with dumping occur if the country in which the product is being dumped also produces that product and the cheaper import I staking market share.
☼ Some businesses even try to recoup losses by dumping illegal products which may be banned in their home country, in developing countries.
○ Ecological sustainability
Ecological sustainability refers to achieving a balance between the production of goods and services and the use of the environment for this purpose. Businesses have an obvious impact on ecology. For businesses that commit themselves to ecological sustainability, they must minimise, if not cease any operation that has an impact on the environment that will eventually destroy or seriously affect the functioning of a particular environment which could affect how future generations acquire materials.
