INTERNATIONAL BUSINESS MANAGEMENT
LESSON 34
OPERATION AND LOGISTICS ACTIVITIES- ALLOCATION AMONG LOCATIONS
Allocating Among Locations
The scanning tools we have just discussed are useful for
narrowing alternatives among countries. They are also useful in
allocating operational emphasis among countries, but there are
other factors companies need to consider. We shall now discuss
three of them: reinvestment versus harvesting, the interdepen-
dence of locations, and diversification versus concentration.
Reinvestment Versus Harvesting
A company usually makes new foreign investments by transfer-
ring capital abroad. If the investment is successful, the company
will earn money that it may remit back to headquarters or
reinvest to increase the value of the investment. Over time,
most of the value of a company’s foreign investment comes
from reinvestment. If the investment is unsuccessful or if its
outlook is less favorable than possible investments in other
countries, the company may consider harvesting the earnings to
use elsewhere or even to discontinue the investment.
Reinvestment Decisions Companies treat decisions to replace
depreciated assets or to add to the existing stock of capital from
retained earnings in a foreign country somewhat differently
from original investment decisions. Once committed to a given
locale, a company may find it doesn’t have the option of
moving a substantial portion of the earnings elsewhere-to do
so would endanger the continued successful operation of the
given foreign facility. The failure to expand might result in a
falling market share and a higher unit cost than that of competi-
tors.
Aside from competitive factors, a company may need several
years of almost total reinvestment and allocation of new funds
in one area in order to meet its objectives. Over time, a company
may use the earnings to expand the product line further,
integrate production, or expand the market served from present
output. Another reason a company treats reinvestment
decisions differently is that once it has experienced personnel
within a given country, it may believe those workers are the best
judges of what is needed for that country, so headquarters
managers may delegate certain investment decisions to them.
Harvesting Companies commonly reduce commitments in
some countries because those countries have poorer perfor-
mance prospects than do others, a process known as harvesting
or divesting. For example, Marks & Spencer dosed its continen-
tal European stores to concentrate its efforts on improving
performance in its home U.K. market. J. Sainsbury withdrew
from the Egyptian market because its management did not
expect a turnaround in its poorly performing operation there.
Dana sold its U.K. facility to use funds to concentrate on
developing different automotive technologies. When Carrefour
bought Gigante’s; Mexican joint-venture interest, Gigante used
the proceeds to build U.S. supermarkets primarily to serve
Hispanic population dusters.
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Some indications suggest that companies might benefit by
planning divestments better and by developing divestment
specialists. Companies have tended to wait too long before
divesting, trying instead expensive means of improving
performance. Local managers, who fear losing their positions if
the company abandons an operation, propose additional capital
expenditures. In fact, this question of who has something to
gain or lose is a factor that sets decisions to invest apart from
decisions to divest. Both types of decisions should be highly
interrelated and gearec to the company’s strategic thrust. Ideas
for investment projects typically originate with middle managers
or with managers in foreign subsidiaries who are enthusiastic
about collecting information to accompany a proposal as it
moves upward in the organization. After all, the evaluation and
employment of these people depend on growth. They have no
such incentive to propose divestments. These proposals
typically originate at the top of the organization after upper
management has tried most remedies for saving the operation.
Companies may divest by selling or dosing facilities. They
usually prefer selling because they receive some compensation. A
company that considers divesting because of a country’s political
or economic situation may find few potential buyers except at
very low prices. In such situations, the company may try to delay
divestment, hoping the situation will improve If it does, the
firm that waits out the situation generally is in a better position
to regain markets and profits than one that forsakes its
operation.
A company cannot always simply abandon an investment
either. Governments frequently require performance contracts,
such as substantial severance packages to employees that make a
loss from divestment greater than the direct investment’s net
value. Further, many large MNEs fear adverse international
publicity and difficulty in reentering a market if they do not
sever relations with a foreign government on amicable terms.
Occidental Petroleum and Email and Elders decided to take
losses and leave the Chinese market, but the Chinese govern-
ment made their departures slow and expensive.
Interdependence of Locations
The derivation of meaningful financial figures is not easy when
foreign operations are concerned. Profit figures from individual
operations may obscure the real impact those operations have
on overall company activities. For example, if a U.S. company
were to establish an assembly operation in Australia, the
operation could either increase or reduce exports from the
United States. Alternatively, the same company might build a
plant in Malaysia to produce a product using cheaper labor;
however, doing that would necessitate more coordination costs
at headquarters. Or perhaps by building a plant in Brazil to
supply components to Volkswagen of Brazil, the company may
increase the possibility of selling to Volkswagen in other
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countries. As a result of the Australian, Malaysian, or Brazilian
projects, management would have to make assumptions about
the changed profits in the United States and elsewhere.
The preceding discussion assumes that although overall
company returns are difficult to calculate, those for the operating
subsidiary are fairly easily ascertained. However, this is not
always the case. Much of the sales and purchases of foreign
subsidiaries may be made from and to units of the same parent
company. The prices the company charges on these transactions
will affect the relative profitability of one unit compared to
another. Further, a company may not set the net value of a
foreign investment realistically, particularly if it bases part of the
net value on exported capital equipment that is obsolete at
home and useless except in the country where it is being
shipped. By stating a high value, a government may permit the
company to repatriate a larger portion of its earnings.
Geographic Diversification Versus Concentration
Ultimately, a company may gain a sizable presence and commit-
ment in most countries; however, there are different paths to
that position. Although any move abroad means some
geographic diversification, the term diversification strategy
describes when the company moves rapidly into many foreign
markets, gradually increasing its commitments within each one.
A company can do this, for example, through a liberal licensing
policy to ensure sufficient resources for the initial widespread
expansion. The company eventually will increase its involve-
ment by taking on activities that it first contracted to other
companies. At the other extreme, with a concentration strategy;
the company will move to only one or a few foreign countries
until it develops a very strong involvement and competitive
position there. There are, of course, hybrids of these two
strategies-for example, moving rapidly to most markets bur
increasing the commitment in only a few. The following
subsections discuss major variables a company should consider
when deciding which strategy to use. (See Table 9.3.)
Table 9.3 Product And Market Factors Affecting Dhoice
Between Diversification And Concentration Strategies
If the conditions under “prefer diversification” exit, a company is likely to benefit by moving rapidly into many
countries simultaneously; otherwise, the company might move to just one or a few foreign countries until a
substantial presence is developed there.
PREFER
PREFER
PRODUCT OR MARKET FACTOR DIVERSIFICATION IF: CONCENTRATION IF
1. Growth rate of each market Low
2. Sales stability in each market Low
3. Competitive lead-time Short
4. Spillover effect High
5. Need for production adaptation Low
6. Need for communication and distribution Low
adaptation
7. Program control requirements Low
8. Extent of constraints Low
Source: “marketing Expansion Strategies in Multinational Marketing,” from journal of marketing, vol. 43,
spring 1979, p. 89. reprinted by permission of the American Marketing Association
Growth Rate in Each Market When the growth rate in each
market is high, a company usually should concentrate on a few
markets because it will cost a great deal to expand output
sufficiently in each market. Further, costs per unit are typically
lower for the market share leader. Slower growth in each market
may result in the company’s having enough resources to build
and maintain a market share in several different countries.
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Sales Stability in Each Market A company may smooth its
INTERNATIONAL BUSINESS MANAGEMENT
earnings and sales because of operations in various parts of the
world. This smoothing results from the leads and lags in the
business cycles. In addition, a company whose assets and
earnings base are in a variety of countries will be less affected by
occurrences within a single one; for example, a strike or expro-
priation will affect earnings from only a small portion of total
corporate assets. Further, currency appreciation in some
countries may offset depreciation in others. Although diver-
sification is usually of secondary importance as a motive for
foreign expansion, it is nevertheless an added advantage from
operating abroad. Further, a company may be leery of depend-
ing too much on too few foreign locations.
The more stable that sales and profits are within a single
market, the less advantage there is from a diversification strategy.
Similarly, the more interrelated markets are, the less smoothing
is achieved by selling in each.
Competitive Lead Time We have discussed why Carrefour has
wanted to gain first-in advantages. However, so many resources
may be needed to capitalize on the first-in advantage that
companies may be unable to move quickly into many markets.
Of course, an alternative is to share ownership abroad, which
Carrefour usually does. However, sequential entry into multiple
markets is more common than simultaneous entry. If a
company determines that it has a long lead time before
competitors are likely to be able to copy or supersede its
advantages, then it may be able to follow a concentration
strategy and still beat competitors into other markets.
Spillover Effects Spillover effects are situations in which the
marketing program in one country results in awareness of the
product in other countries. These effects are advantageol1$
because additional customers may be reached with little
additional cost. This can happen if the product is advertised
through media sent cross-nationally, such as U.S. television ads
that reached Canadians. When marketing programs reach many
countries, such as by cable television or the Internet, a diversifi-
cation strategy has advantages.
Need for Product Communication and Distribution
Adaptation Companies may have to alter products and their
marketing to sell in foreign markets, a process that, because of
cost; favors a concentration strategy. The adaptation cost may
limit the resources the company has for expanding in many
High different markets. Further, if the adaptations are unique to each
High country, the company cannot easily spread the costs over sales in
Long
Low other countries to reduce total unit costs. For example, Ben &
High
High Jerry’s took a concentration strategy by moving into the British
High market with as rapid an increase in distribution as possible so
High that it could cover the high fixed costs of its local adaptations in
ice cream production and advertising.
Program Control Requirements The more a company needs to
control its operations m a foreign country, the more it should
develop a concentration strategy. This is because the company
will need to use more of its resources to maintain that control.
Its need for more control could result from various reasons,
including the fear that collaboration with a partner will create a
competitor or the need for highly technical assistance for
customers.
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 Extent of Constraints If a company is constrained by the
INTERNATIONAL BUSINESS MANAGEMENT
resources it needs to expand internationally compared to the
resources it can muster, it will likely follow a concentration
strategy. For example, Ben & Jerry’s first tried to enter the
United Kingdom and Russian markets almost simultaneously
but quickly dissolved its Russian operation. A company
manager explained the decision by saying, “We simply don’t
have the people and resources. Were a small company. You tie
up two or three senior managers and you have a measurable
effect n the company’s performance.”
Making Final Country Selections
Thus far, we have examined comparative opportunities on a
very broad basis. At some point, a company must perform a
much more detailed analysis of specific projects and proposals
in order to make allocation decisions. For new investments,
companies need to make on-site visits and detailed estimates of
all costs and expenses. They will need to evaluate whether they
should enter the market alone or with a partner. For acquisi-
tions, they will need to examine financial statements in detail.
For expansion within countries where they are already operating,
managers within those countries will most likely submit capital
budget requests that include details of expected returns. As we
indicated earlier, companies use a variety of financial criteria to
evaluate foreign investments. In addition, they rely on qualita-
tive analysis that includes such factors as expected competitive
response and the fit of new activities with existing ones. If, for
example, company’s large industrial customer decides to
produce in a particular country, the company’s decision may be
one of “how to enter” rather than “whether to enter” that
country as well.
Because companies have limited resources at their disposal, it
might seem that they maintain a storehouse of foreign
investment proposals that they may rank by some predeter-
mined criteria. If this were so, management could simply start
allocating resources to the top-ranked proposal and continue
down the list until it could make no further investments. This
is often not the case, however. Companies tend to evaluate and
decide on investment proposals separately. One factor is that
some overriding consideration may cause one location to be
considered above all others. For example, the Swiss pharmaceu-
tical company Novartis wanted a research lab in the midst of the
major portion of gene research. This research was in only one
place; Boston in the United States. In contrast, the U.S.
pharmaceutical company Eli Lilly decided to set up research
laboratories in both Europe and Asia and to hire scientists who
did not want to work in the Midwest of the United States. It
then compared locations in both regions. When a company
does not compare different locations, a positive decision usually
means the project meets some minimum-threshold criteria. Of
course, before a company makes a final decision, it has approved
the project at various levels of increased detail.
Two major factors restricting companies from comparing
investment-opportunities are cost and time. Clearly, some
companies cannot afford to conduct very many investigations
simultaneously. If these investigations are conducted simulta-
neously, they are apt to be in various stages of completion at a
given time. For example, suppose a company completes its
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investigation for a possible project in Australia but is still
researching projects in New Zealand, Japan, and Indonesia. Can
the company afford to wait for the results from all the surveys
before deciding on a location? Probably not. The time interval
between completions probably would invalidate much of the
earlier results and necessitate updating, added expense, and
further delays. Other time-inhibiting problems are government
regulations that require a decision within a given period and
changes in government regulations that impel companies to
react before their competitors react. For example, when the
government of India announced that foreign companies could
invest in Indian newspapers, foreign publishers had to react
quickly. Also, other companies may impose time limits on
partnership proposals.
During all of this evaluating and selecting, companies still have
the pressure of satisfying stockholders and employees. Few
companies can afford to let resources lie idle or be employed for
a low rate of return during a waiting period. This rule of
thumb applies not only to financial resources but also to such
resources as technical competence, because the companies reduce
their lead-time over competitors when they make decisions
slowly.
Looking to The Future
Will Locations and Location-Models Change?
International geographic expansion is a two-tiered consider-
ation: How much of a company’s sales and production should
be outside its home country? And how should outside sales
and production be allocated among countries? As yet, no
comprehensive model exists to answer these questions, and
perhaps differences among companies and dynamic environ-
mental conditions make such a model impractical. Meanwhile,
companies are apt simply to place more emphasis on certain
locales than on others as they see opportunities evolving. Typical
of this tendency was a greater emphasis on Asia by Royal Dutch
Shell. By increasing the portion of its capital budget on Asia, its
management expected Asia to grow from 20 percent of its
business to 30 to 35 ‘percent of its business over a 25 year
period.
The need for companies to allocate among opportunities
because of insufficient resources is liable to play an even more
important role in the near future. The receptiveness of more
countries to FDI and the global move toward privatization
have combined to create more opportunities from which
companies may choose. At the same time companies may not
have increased their resource bases concomitantly to enable
them to take advantage of all these new opportunities.
Because data availability should continue to improve global
environmental scanning will assume greater importance.
Companies will continue to need information because of the
global strategies of competitors and because of economic and
political volatility. However, the information explosion will
present new challenges as timely analysis may necessitate even
greater reliance on tools that reduce the number of alternatives
under consideration.
An intriguing future possibility is the near officeless headquar-
ters for international companies. Technology may permit
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managers to work from anywhere as they e-mail and teleconfer-

INTERNATIONAL BUSINESS MANAGEMENT

ence with their colleagues, customers and suppliers elsewhere.
Thus managers could live anywhere in the world and homes.
The use of offices at home is already occurring or companies’
domestic operations. However, we are not convinced of this
possibility. The same technology should enable managers to
travel less. But business travel has soared along with advances in
communications.
Notes -

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