International Business Case Study: QCF Level 6 Unit

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INTERNATIONAL BUSINESS CASE STUDY

QCF Level 6 Unit
Contents
Chapter Title Page
Introduction to the Study Manual v

Unit Specification (Syllabus) vii
Coverage of the Syllabus by the Manual xiii
1 Introduction to the Case Study 1

Introduction 2
Getting to Grips with the Scenario 4
Appendix: Delta Airlines 7
2 International Business Planning 21

Introduction 22
Planning Process 22
Individual Region/Country Annual Plans 27
Planning and Forecasting Techniques 30
Planning and Change 34
3 The World Trade Environment 37

Introduction 39
The World Trading Environment 39
Classifying the World 40
A New Focus Global Convergence 43
Theories of International Trade 45
The Composition of World Trade 49
International Institutions 54
Globalisation 57
4 Analysing the International Business Environment 63

Introduction 65
Political Factors 65
Economic Factors 66
Social/Cultural Factors 69
Technological Factors 73
Legal Factors 76
Ethical and Green/Environmental Issues 77
The Three Cs Framework 82
Using International Environment Analysis Techniques 84
5 The Micro and Internal Environment 89

Introduction 90
Internal (Situational) Analysis 90
Analysis of Competitive Market Structure 96
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Chapter Title Page
6 Defining Overarching Intent: Mission, Goals and Policies 107

Introduction 108
The Concept of Mission 108
Goals and Policies 111
Mission and Strategy Development 113
7 Selection and Evaluation of Strategies 115

Introduction 116
Ansoff Growth Matrix 116
Porters Generic Strategy Model 121
Bowman's Strategy Clock 123
Harrel and Keifer's Business Portfolio 125
Strategies for Hypercompetitive Markets: Reducing the Impact of
Competition 126
Marketing Mix Strategic Options 127
Strategic Direction and Implementation 135
8 Market Entry Strategies 139

Introduction 140
Market Entry Options 140
Selection of Entry Modes 144
The Entry Decision 148
9 Management, Organisation and the International Business 153

Introduction 154
Organisation and Management 154
Organisational Culture 160
International Human Resources Management Strategy 162
International Labour Relations 169
10 Finance and the Multinational Company 171

Introduction 172
Obtaining Funds Internationally 172
Transfer Pricing 174
International Investment Decisions 177
11 Implementation, Evaluation and Control 183

Introduction 184
Managing the Implementation Process 184
Performance Evaluation and Control 185
Techniques of Performance Management 189
12 Management and Change in International Organisations 195

Introduction 196
The Dynamics of Change 196
The Driving Forces of International Change 196
The Nature of Change 199
The Process of Change 201
Organisational Culture and Change 207
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Chapter Title Page
13 Analysing the Case Study and the Examination 211

Introduction 212
Conducting the Analysis 212
The Examination 216
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Introduction to the Study Manual
Welcome to this study manual for International Business case Study .

The manual has been specially written to assist you in your studies for this QCF Level 6 Unit
and is designed to meet the learning outcomes listed in the unit specification. As such, it
provides thorough coverage of each subject area and guides you through the various topics
which you will need to understand. However, it is not intended to "stand alone" as the only
source of information in studying the unit, and we set out below some guidance on additional
resources which you should use to help in preparing for the examination.
The syllabus from the unit specification is set out on the following pages. This has been
approved at level 6 within the UK's Qualifications and Credit Framework. You should read
this syllabus carefully so that you are aware of the key elements of the unit the learning
outcomes and the assessment criteria. The indicative content provides more detail to define
the scope of the unit.
Following the unit specification is a breakdown of how the manual covers each of the
learning outcomes and assessment criteria.
The main study material then follows in the form of a number of chapters as shown in the
contents. Each of these chapters is concerned with one topic area and takes you through all
the key elements of that area, step by step. You should work carefully through each chapter
in turn, tackling any questions or activities as they occur, and ensuring that you fully
understand everything that has been covered before moving on to the next chapter. You will
also find it very helpful to use the additional resources (see below) to develop your
understanding of each topic area when you have completed the chapter.
Additional resources
ABE website www.abeuk.com. You should ensure that you refer to the Members
Area of the website from time to time for advice and guidance on studying and on
preparing for the examination. We shall be publishing articles which provide general
guidance to all students and, where appropriate, also give specific information about
particular units, including recommended reading and updates to the chapters
themselves.
Additional reading It is important you do not rely solely on this manual to gain the
information needed for the examination in this unit. You should, therefore, study some
other books to help develop your understanding of the topics under consideration. The
main books recommended to support this manual are listed on the ABE website and
details of other additional reading may also be published there from time to time.
Newspapers You should get into the habit of reading the business section of a good
quality newspaper on a regular basis to ensure that you keep up to date with any
developments which may be relevant to the subjects in this unit.
Your college tutor If you are studying through a college, you should use your tutors to
help with any areas of the syllabus with which you are having difficulty. That is what
they are there for! Do not be afraid to approach your tutor for this unit to seek
clarification on any issue as they will want you to succeed!
Your own personal experience The ABE examinations are not just about learning lots
of facts, concepts and ideas from the study manual and other books. They are also
about how these are applied in the real world and you should always think how the
topics under consideration relate to your own work and to the situation at your own
workplace and others with which you are familiar. Using your own experience in this
way should help to develop your understanding by appreciating the practical
application and significance of what you read, and make your studies relevant to your
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personal development at work. It should also provide you with examples which can be
used in your examination answers.
And finally
We hope you enjoy your studies and find them useful not just for preparing for the
examination, but also in understanding the modern world of business and in developing in
your own job. We wish you every success in your studies and in the examination for this
unit.
The Association of Business Executives

June 2011
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Unit Specification (Syllabus)

The following syllabus learning objectives, assessment criteria and indicative content for
this Level 6 unit has been approved by the Qualifications and Credit Framework.
Unit Title: International Business

Guided Learning Hours: 210
Level: Level 6
Number of Credits: 25
Learning Outcome 1
The learner will: Understand the international business environment facing global operators.
Assessment Criteria Indicative Content
The learner can:
1.1 Identify and describe the key 1.1.1 The fundamental shift taking place in the world
challenges facing global economy and the inexorable move from a world of
businesses and organisations. nation states to a borderless world.
1.1.2 The independent regional and global economic
system with the opportunities created for businesses to
extend their reach, expand their revenues, drive down
costs and accelerate profitability.
1.1.3 The trends in the growth of economic and political
regional groupings such as the EU, NAFTA, ASEAN,
MERCOSUR, ECOWAS, and other trade blocs.
1.1.4 The changing balance of world trade with the
growth of the BRIC nations (China, India, Brazil and
Russia).
1.1.5 The advantages and benefits conferred by the
Information Telecommunication (ITC) revolution
sweeping the business and consumer worlds, and the
associated changes in logistics, distribution and supply
chains.
1.1.6 The accelerated flows of foreign direct investment
(FDI), leading to the dislocation between production and
consumption, ending the dependence on national
coherence.
1.2 Describe globalisation and 1.2.1 Define globalisation and its implications for
international trade and recognise regions, countries, markets and customers:
the key drivers. 1. The pros and cons of globalisation, i.e. prosperity
and impoverishment.
2. The key aim of globalisation: combining high cost
reduction pressures and high pressure for local
responsiveness.
1.2.2 The two main components: the globalisation of
markets (customers), and the globalisation of production
to deliver best possible value to all markets served by
the organisation.
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1.2.3 The key drivers of globalisation and international

trade i.e. ICT developments (internet, mobile phones),
multinationals, transnationals, urbanisation, global
consumers, together with the prevailing counter culture
as typified by the G20 protests, with the use of the
internet (social networks) as responses to globalisation.
1.2.4 The role of international institutions such as the
World Trade Organisation (WTO), World Bank,
International Monetary Fund (IMF), Organisation for
Economic Co-operation and Development (OECD), the
G20 and other facilitating/transitional/policy-making
bodies and forums.
1.3 Evaluate the impact of 1.3.1 The dynamic international environment as
emerging issues on international evidenced by the global financial crisis of 2008/09 and
activities. the issues associated with global warming.
1.3.2 The increasing impact of microprocessors,
telecommunications, transportation technology and the
internet on creating paradigm shifts in production,
consumption and supply chain relationships.
1.3.3 The growing role of nation states and regions in
monitoring and challenging the pace of change for
organisations and consumers.
1.3.4 The activities and policies of international
environmental organisations and NGOs.
1.3.5 The significance and growing importance of
Corporate Social Responsibility (CSR) globally.
Learning Outcome 2
The learner will: Know how to develop a strategic business plan for an international
organisation.
The learner can:
2.1 Explain the role of strategy in 2.1.1 The role of strategy, the issues of strategic choice:
the international context. defining what is necessary to achieve the corporate
objective(s), e.g. to most business organisations the
principal goal is to be highly profitable, and that
profitability comes from adding value and by lowering
costs, i.e. differentiation or low cost strategy (or both).
2.1.2 The concept of Strategic Business Units (SBUs)
and the value chain in the context of international
business.
2.1.3 The five key strategic decisions: export strategy,
international strategy, multi-domestic strategy, global
strategy, transnational strategy.
2.2 Identify and analyse strategic 2.2.1 The academic and business models used in the
outcomes using the relevant development of strategy and their application to the
academic and business models. creation and development of the business plan. Notably
these include:
Porters Generic Strategies, Ansoff Matrix, Boston
Consulting Group Matrix(BCG), General Electric (GE)
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Matrix, Shell Directional Matrix, Harrell and Keifer

(1993) Business Portfolio and Bowmans Strategy
Clock.
2.2.2 The strategic appraisal (audit) of organisations by
applying relevant frameworks such as Porters Five
Forces Model, McKinseys 7Ss, Value Chain, SWOT
and Stakeholders Analysis.
2.2.3 The relevant financial metrics and measures of
performance such as Kaplan and Nortons Balanced
Scorecard.
2.3 Formulate recommendations 2.3.1 The strategic options and their importance in
embracing domestic as well as implementing international operations, from exporting
international strategies. through to strategic alliances.
2.3.2 The basis for the stronghold position: cost and
quality, innovation, financial resources, timing and
knowledge.
2.3.3 Evaluation of the entry strategies options: simple
exporting through indirect and direct exporting, leading
on to overseas production and the establishment of
overseas subsidiaries.
2.3.4 A critical assessment of the applicability of joint
ventures, strategic alliances, mergers and acquisitions
Learning Outcome 3
The learner will: Understand how to evaluate the implementation of a strategic business
plan.
The learner can:
3.1 Examine the cross functional 3.1.1 The management structures which are appropriate
issues that affect the to the four strategic options (international, multi-
implementation of business plans. domestic, global and transnational).
3.1.2 The structural issues that underpin the effective
implementation within the four basic management
approaches (ethnocentric, polycentric, region-centric,
geocentric).
3.1.3 Key HR issues involved with dealing with
expatriate managers, such as the training and
development of local managers, performance appraisal,
and corporate acculturation.
3.1.4 International labour relations and the differing
employment laws and cultures.
3.2 Explain how international 3.2.1 The attitudes towards the concepts of control and
business plans are monitored, control systems on a regional level.
measured and controlled. 3.2.2 The identification of Critical Success Factors/Key
Performance Indicators.
3.2.3 The use of techniques such as Benchmarking.
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3.3 Explain the role of financial 3.3.1 International investment decisions, global financial
management in international markets, political and economic risk, transactional
business. taxation and transfer pricing.
3.3.2 The different accounting standards globally.
3.3.3 The key financial indicators of performance.
Learning Outcome 4
The learner will: Know how to evaluate and recommend organisational structures for
international operations.
The learner can:
4.1 Assess how cultural values 4.1.1 The body of knowledge on cultural diversity and its
play a major role in shaping effect on organisational practices and customers,
customs and practice in the notably Terpstra and Sarathys model of the
organisation. determinants of culture, and Hofstedes framework.
4.1.2 The relationship between cultures, the costs of
doing business in a country, and the understanding that
a culture is underpinned by a set of values and norms
that should be explained together with the relationship
between society and the nation state.
4.1.3 The extent of the need for cultural adaptation and
the level of cultural consistency across borders and
regions.
4.2 Identify and describe the 4.2.1 The various approaches to international
various methods and approaches organisational structures.
to international organisational 4.2.2 The role of organisational culture in
structures and make implementation of the structure.
recommendations relevant to the
4.2.3 The impact on key relationships both internally
needs of the organisation and the
and externally.
environment.
4.3 Describe and explain the 4.3.1 The role played by corporate HQ in establishing
linkages between corporate corporate objectives and strategies plus the
headquarters and the regional and development of the corporate business plan over the
local subsidiaries. longer period.
4.3.2 The impediments to co-ordination with an
understanding that formal and informal mechanisms
need to be established.
Learning Outcome 5
The learner will: Understand the importance of leadership, strategic direction and change
management within the international business context.
The learner can:
5.1 Explain the issues 5.1.1 The important role of change management for
underpinning motivational change developing international business.
and the creation of readiness for 5.1.2 The basic theories of change: Lewins change
this change. model of unfreezing, change and refreezing; the action
research model and its contemporary adaptations.
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5.1.3 The different types of planned change depending

on the magnitude of the change and the degree of
organisational involvement.
5.1.4 The drivers for change such as the re-defining of
traditional boundaries between industries/markets/
product categories e.g. mobile phones are now
cameras, computers.
5.2 Evaluate the strategic role of 5.2.1 The need for leadership in developing
leadership in developing internationally, the creation of a vision and the
successful international communication of this to diverse audiences.
operations. 5.2.2 The importance of team building as a change
agent internationally and its contribution to sustaining
momentum in the implementation of the vision.
5.3 Explain the role played by 5.3.1 The planning cycle and implementation issues.
planning in the shaping of the 5.3.2 The merits and pitfalls of top down versus bottom
future direction for the up planning theory.
organisation.
5.3.3 The methods used to forecast the future such as
scenario planning, expert opinion and the Delphi
technique.
Learning Outcome 6
The learner will: Understand the macro environmental factors that affect the international
organisation.
The learner can:
6.1 Evaluate the impacts of the 6.1.1 The impact of different political systems on
different political and legal international operations, from collectivism, individualism
systems that organisations and democracy to authoritarianism.
operate within. 6.1.2 The influence of different political systems in the
shaping of the economic and legal frameworks with
which the global operator must comply, with knowledge
of their origins.
6.1.3 Key elements of different legal systems in terms of
protection of employment, property rights, intellectual
capital, product safety, product liability and other
relevant areas of the law/regulation depending on the
specific situation.
6.2 Explain how countries are at 6.2.1 The measurement of economic development and
different stages of economic the categorisation of countries and regions accordingly.
development and how 6.2.2 The diversity of economic development and the
international business solutions structural difficulties within political and customs unions
will reflect these stages. with the even greater differences between unaffiliated
countries.
6.3 Evaluate the growing 6.3.1 The growing role and significance of corporate
importance of corporate social social/ethical responsibility and the impact of consumer
responsibility (CSR). movements.
6.3.2 The role of stakeholders from governments
through to individual customers in terms of trust, values,
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attitude to the environment, human rights and dignity,

transparency and accountability and governance.
6.3.3 The impact on CSR caused by global
communications driven by the growing penetration of
the internet leading to immediate flows of information
around the world.
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Coverage of the Syllabus by the Manual
Learning Outcomes Assessment Criteria Manual

The learner will: The learner can: Chapter
1. Understand the 1.1 Identify and describe the key challenges Chaps 3, 4
international business facing global businesses and & 10
environment facing global organisations
operators 1.2 Describe globalisation and international Chaps 3, 4
trade and recognise the key drivers &7
1.3 Evaluate the impact of emerging issues Chaps 3 & 4
on international activities
2. Know how to develop a 2.1 Explain the role of strategy in the Chaps 2, 5,
strategic business plan for international context 6&7
an international 2.2 Identify and analyse strategic outcomes Chaps 2, 5,
organisation using the relevant academic and 6, 7 & 11
business models
2.3 Formulate recommendations embracing Chap 2, 5,
domestic as well as international 6, 7 & 8
strategies
3. Understand how to 3.1 Examine the cross functional issues that Chap 9
evaluate the affect the implementation of business
implementation of a plans
strategic business plan 3.2 Explain how international business Chap 11
plans are monitored, measured and
controlled
3.3 Explain the role of financial Chap 10
management in international business
4. Know how to evaluate and 4.1 Assess how cultural values play a major Chaps 4 & 9
recommend organisational role in shaping customs and practice in
structures for international the organisation
operations 4.2 Identify and describe the various Chap 9
methods and approaches to
international organisational structures
and make recommendations relevant to
the needs of the organisation and the
environment
4.2 Describe and explain the linkages Chap 9
between corporate headquarters and
the regional and local subsidiaries
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5. Understand the importance 5.1 Explain the issues underpinning Chap 12

of leadership, strategic motivational change and the creation of
direction and change readiness for this change
management within the 5.2 Evaluate the strategic role of leadership Chaps 6 &
international business in developing successful international 12
context operations
5.3 Explain the role played by planning in Chap 2
the shaping of the future direction for
the organisation
6. Understand the macro 6.1 Evaluate the impacts of the different Chap 4
environmental factors that political and legal systems that
affect the international organisations operate within
organisation 6.2 Explain how countries are at different Chaps 3 & 4
stages of economic development and
how international business solutions will
reflect these stages
6.3 Evaluate the growing importance of Chap 4
corporate social responsibility (CSR)
Note about Chapters 1 and 13

These two chapters deal specifically with approaches to the case study in the examination
and do not, therefore, address any particular elements of the syllabus as set out above.
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Chapter 1
Introduction to the Case Study
Contents Page
Introduction 2
Approach to the Examination 2
The Case Study Approach 2
The Case Study Itself 3
A. Getting to Grips with the Scenario 4

Initial Reading 4
What does the Case Study Tell You 4
Making Notes 5
Appendix: Delta Airlines 7
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2 Introduction to the Case Study
INTRODUCTION
The method of assessment for the International Business Case Study module is a three hour,
open book examination based upon an actual organisation that has significant international
involvement. This chapter is aimed at giving you an introduction to the process and the final
chapter will give further information on preparing for the examination.
At the end of each chapter in this study manual, we shall present a number of activities
designed to help you develop the skills of analysis and evaluation of case study materials.
The cases themselves are drawn from past examinations and they are all available on the
ABE website. We have, though, reproduced in full one of these that on Delta Airlines (from
the December 2009 examination) in an appendix to this chapter, so that you can
immediately get an idea of the overall approach.
Approach to the Examination

The ABE will send you the actual case study upon which you will be examined approximately
four weeks before the actual examination date. This is to enable you to study the case and
ensure that you are thoroughly familiar with it before going into the examination room where
you will be given a number of questions to answer about it. The examination itself is an
"open book" examination that is, you can take any materials you like with you into the
examination to help you answer the questions. You can, therefore, make detailed notes
about the case study beforehand, and identify other sources of information that you think
may help you, and use them during the examination. Thus, you will not need to memorise
background information, models and analytical frameworks. Rather, these can be prepared
beforehand and you can then apply whatever materials and approaches are most suitable to
the questions about the case that you encounter in the actual examination. (Note that any
notes and other materials should not be handed in as part of your answers you will only be
marked on what you write during the three hours of the examination itself.)
It is important, then, that you make the best of the time between receiving the case study and
the examination date to prepare for the examination. The approach we recommend, and that
which is set out in this manual, is as follows:
Initial reading identifying the general background and main themes, and issues
described in the case, including clarifying all the terminology.
Detailed analysis working through the case in more detail to identify the nature of the
organisation, the underlying issues and potential solutions, and also to pick out
information that you can use to support your analysis.
Getting ready for the examination organising your notes and preparing for the written
examination itself.
We shall cover the first of these elements in this chapter, and detail the second two elements
in the final chapter of the manual.
Note that, as you work through this and the final chapter, examples are given to illustrate the
process of preparation and analysis, rather than the content. When you start working on
your examination case study for real, you will need to consider the whole broad range of
international business concepts as covered in the study manual and the recommended
further reading, as well as bringing in further ideas and concepts from other subjects studied,
and select from those according to the content and context of the actual case study.
The Case Study Approach

Case studies are used extensively in professional management training to give an insight
into "real life" situations. Also, the study of issues and solutions through the detailed
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Introduction to the Case Study 3
consideration of such situations has long been a feature of many globally acknowledged
business schools. It enables students to obtain experience from analysis of real
organisations in contemporary settings.
A case, though, is not just a limited and fixed description of a situation. It is dynamic in the
sense that it is the result of past events and changes in organisation, its finances or
personnel, and is subject to future influences from within and from outside the organisation
which may affect decisions.
In essence, you are the "case analyst" and are required to bring to the study a broad
knowledge of business principles and techniques, understanding of human behaviour in the
work environment, and ability to assess the pressures and influences that affect an
organisation. This means asking the questions:
What has happened in the past?
What is the current situation for the business itself and its business environment?
What are the emerging issues?
What should be done now and for the future?
One of the central themes of the case study approach here is that a plan should be prepared
so that not only the current situation can be understood but what the future for the
organisation should be. With this is in mind, the manual is structured around the framework
of a plan.
The Case Study Itself

Cases specifically directed to International Business can involve you in situations in
manufacturing, financial, distributive or service organisations in many parts of the world.
Within these varied spheres of operations, issues arise in similar ways for example, in
organisation, planning, personnel attitudes and relationships, procedures, systems,
techniques, laws and socio-economic pressures. You must be prepared to undertake your
analysis in any of these fields, from knowledge and experience acquired in your work and
previous studies.
Thus, the rationale for the selection of the organisation that is the subject of the case
depends firstly on the significance of the international dimension to their business. In
essence, that will usually mean looking at truly global organisations whose income and sales
are larger worldwide than in their domestic base. Another choice factor depends on the
international profile of the organisation. This can be determined by many factors including
their global profile (as, for example, the case of Marks and Spencer, used in December 2008)
or other significant aspects such as events leading to changes in their global businesses.
Another important choice factor is a need to offer variety and accessibility. In terms of variety
we are conscious that Toyota (June 2009) and Delta Airlines (December 2009) were both in
the broad field of transportation, albeit in different sectors of that market. Accessibility means
that the organisation that is selected has a clear market presence and that the industry
sectors within which it operates are able to be understood with few complications. We take
care in the selection of the subject organisation to avoid obscure and overly complex
businesses. Therefore, although the case may relate to an industry that is unfamiliar to you,
within the pre-examination period you should be able to research how such a business would
operate in real life.
As an example, we set out in the Appendix to this chapter the full case study, with the
questions in the examination, from December 2009. This should give you a general idea
about what a case looks like although don't try and work through it in any detail at this
stage and we shall refer to it at points through the manual.
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A. GETTING TO GRIPS WITH THE SCENARIO

Initial Reading
When you receive the case study, set some time aside for a first reading. This should be a
"read through" only do not consciously try to make any judgments at this stage. They will
come later. The object is to read it as you would read an article in a newspaper or business
magazine to get a general overall impression of what has taken place. The case provides a
scenario in which the current situation is presented, often set against a historical background
and setting out certain information about the personnel and other main factors involved.
Read it informally, without pausing, and delay your formal analysis so as to allow a period
during which you can digest what you have read. In this way, you give time for ideas to
develop. Do not be tempted to concentrate on a point which appears to you to have
immediate interest it is unlikely to be something which can be considered in isolation and
so it is better to obtain an overall impression of events at the first reading and study the detail
later when you look for issues, evaluate them and consider what to do. At the end of this
stage, you need to have a good understanding of the situation and you may need to clarify
some terms and expressions particular to the organisation and the industry/business sector.
What does the Case Study Tell You

Whilst each case is different in form and detail, there is a fundamental basic structure, which
enables you, the analyst, to assess the main activities involved. In a study of a global trading
organisation, for example, the main features presented may be:
Current situation within the company and the business environment
Organisation, objectives and strategies
History of change and development
Functional performances related to company strategies.
Try to visualise the company described in the case what is going on, what would it be like
to work there and what are the main defining characteristics. Even if you have no experience
of the particular industry, you will no doubt have some experience of similar situations and
the sort of issues that can occur, and this will help you bring in new thoughts and insights.
The initial reading should aim to pick out the general picture of developing events against a
background of the organisation and its corporate development over a period of time.
However, be careful of jumping to conclusions at this stage. For example, you may initially
think that the issues centre on human resources and staff attitudes and relationships. This
may be so, but you may find other issues within the organisation as a whole which will lead
you to take a wider view and understanding of what may be the challenges that the
organisation faces, what ought to have been done and what you consider should be done.
You should be looking for information about the organisation in the form of performance data
(financial or otherwise), management structures, processes and procedures, personnel, etc.
which will indicate the strengths and weaknesses of the enterprise. You also need to assess
the environment within which the business is operating to see what factors are impacting on
it both on its internal organisation and procedures, and its strategies and policies in relation
to the market.
Note that these features will be presented in different degrees of detail according to the
particular situation and this will give you a clue as to where the key themes and issues lie.
You will need to understand and evaluate these main features, assessing the degree of
emphasis given to the constituent parts, in order to identify the key issues and what
opportunities there are for action to be taken to remedy them.
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As you start to understand the situation, consider the extent to which the areas in which
these key themes and issues lie contribute towards the provision of an efficient service and
to organisational profitability. From the evidence given, ask yourself how far these two
objectives are fulfilled and the reasons for any shortcomings which you find.
A clear understanding of the situation within an organisation is a key step towards identifying
the problems (or issues) and asking why it has occurred, to what extent and how long it has
existed, and what are the results now and for the future.
Issues may be organisational, process or procedural, financial or a question of personal
relationships, but what we see initially are often the symptoms only.
Just as a doctor's first study of an illness is of the symptoms, so, in studying an organisation,
you may see only the symptoms arising from underlying issues within the organisation. For
example, issues of late delivery, apparently requiring an organisational upheaval in
distribution, may in fact be caused by inefficient inventory control allowing insufficient lead
times to allow for efficient production. Uncompetitive high prices may be due less to efficient
production processes than to a lack of standardisation, perhaps caused by a reluctance on
the part of design to consider the savings potential of standardisation or to the use of
acceptable commercial tolerances available in the supply market at lower prices.
Issues present symptoms and their solution normally dispels the surface symptoms. But be
wary there are cases where symptoms may still appear when the problem has been
solved. For example, a bad image created by the closure of an overseas manufacturing
plant may linger in the shape of a poor reputation. This does not necessarily apply to all
cases, but is an example of why the identification of a problem must depend on the need to
diagnose underlying issues rather than simply their symptoms.
Making Notes
At this stage, having obtained a general idea of the situation, you will find it useful to start
making notes of ideas, which come to mind. These need not necessarily be in any particular
order initially, but they will form the basis for a more formal arrangement later.
The following headings, for example, may be useful in describing the company's situation.
(a) Current situation
What sort of organisation are you dealing with?
Is it large or small how many employees are there?
What does it do the core business?
Where does it operate?
Who are the key players?
How long have they been there?
(b) Company organisation
How is the company controlled?
How are decisions made?
(c) Company strategy/policies
What are their aims?
What are the key current strategies
Are there any future plans
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(d) Company finances

What is the general situation with the company's finance?
Is it profitable?
(d) Company location
Where is the company situated?
Is there more than one site?
Does this cause logistical issues?
(e) Company staff
How many are there?
Over how many sites?
What sort of age groupings/nationalities?
(f) Company issues
What are the symptoms especially in relation to efficient service provision and
profitability
What particular issues have you identified so far?
After you have made notes and when you are sure you understand the scenario, the next
step is to start to analysis what you have established and then organise your findings.
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APPENDIX: DELTA AIRLINES

(Case Study from December 2009)
Preamble to the Examination:

1 Time allowed: 3 hours.
2 Answer ALL questions.
3 Questions carry different marks. Note the mark allocation and budget your time
accordingly.
4 Calculators, including scientific calculators, are allowed.
5 This is an open-book examination and you may consult any previously prepared written
material or texts during the examination. You must not insert such material into your
answer book. Only answers that are written during the examination in the answer
book supplied by the examination centre will be marked.
6 Candidates who break ABE regulations, or commit any misconduct, will be disqualified
from the examinations.
7 Question papers must not be removed from the Examination Hall.
Preamble to the Case Study:

As in real life, anomalies may be found in this Case Study. Please simply state your
assumptions where necessary when answering questions. The ABE is not in a position
to answer queries on Case data. Candidates are tested on their overall understanding
of the Case and its key issues, not on minor details. There are no catch questions or
hidden agendas.
After the publication of the Case Study subsequent developments may occur. The
examination is based on the published Case Study and students who do not mention
such developments will not be penalised. However, students may consider such
developments in their answers if they wish.
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Delta-Northwest
Delta predicted declines in international demand during the first quarter of 2009 as its
Northwest Airlines subsidiary announced that passenger load factors* were down seven-to-
nine points for the February and March periods. The company explained that the data points
are within [their] expectations for this environment but expressed uncertainty in predicting
further declines. We just dont know where to predict the bottom of the recession is going to
hit but were utilising all the levers that we can. (Lori Ranson, 2009)1 (See references at end
of case text.)
* Passenger load factor This term describes a comparative measure of an airlines
performance in terms of being able to fill the available capacity on its planes. The passenger
load factor (PLF) of an airline, sometimes simply called the load factor, is a measure of how
much of an airlines passenger carrying capacity is used. It is passenger kilometres fl own as
a percentage of seat kilometres available. This is a measure of capacity utilisation. As airlines
frequently have heavy fixed costs and are capital intensive, the efficiency with which assets
are used is crucially important. This is an important efficiency measure, but it does not
consider the pricing and the profitability at which the capacity is sold. Delta has one of the
highest PLFs of the airlines with operating bases in the USA.
In 2008, Delta Air Lines was one of the four largest passenger airlines in the world. From the
turn of the new millennium the company faced financial difficulties due to increasing price
competition from discount airlines, and in September 2005 the company was forced into
bankruptcy (see Appendix 1 for the companys 2005 Operating Statistics). The signs of
downturn became increasingly evident in 2004, as can be seen from the following table.
Delta Air Lines Inc. (millions of US$)
2006 2005 2004 2003

Net Operating revenues 13,303 13,305 13,879 16,741
Net Profit -790 -1,287 -1,230 815
Earnings per share ($) -6.4 -10.44 -9.99 6.58
From 2007, Delta followed a revised operating strategy involving a network shift towards
more profitable international routings. However, despite operational improvements, the
company continued to face threats to its profitability, the most prominent among these being
the price of oil.
Increasing worldwide demand, compounded by investor speculation, led oil prices to peak at
over $145 per barrel in the second half of 2008 (see table below), costing the company
billions of dollars during the first half of the year. In January 2009, however, oil prices
dropped to below $50 per barrel, which resulted in Delta losing around $500 million on oil
hedging contracts.
Approximate mid-year oil price 1997-2008 (US$ per barrel)
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
17 10 17 25 23 25 25 25 35 55 75 100
In late 2008, Delta and Northwest Airlines formally merged to form a new joint airline (Delta)
and at the beginning of December of the same year, the company announced that it would
cut an additional 6-8% of capacity in 2009. It was predicted that the merger could result in a
reduction in domestic capacity of up to 10%. Delta also said that it would eliminate an
undetermined number of jobs. Delta President Ed Bastian called the cuts dramatic and said
that the total seat capacity, domestic and international, over the two-year 2008-2009 period,
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will be reduced by 20%. This was considered a required step, due to the downturn in both
business and leisure travel. (The Wall Street Journal, 2 December 2008)
During this time, Delta shares had rallied to around $8.48, partly on the back of the market.
However, further decline was to set in shortly afterwards and into 2009 as shown in the
following graph.
Delta Share Price in US$ from May 2007 to February 2009
Deltas Operations
Mission
According to the companys website, the mission of Delta is to build on its traditions and
always meet customers expectations while taking service to ever higher levels of
excellence. Within this aspiration, the company stands for safe and reliable air
transportation, distinctive customer service, and hospitality from the heart.
Delta and Northwest Services
Delta Air Lines operated services to more worldwide destinations than any airline, with Delta
and Delta Connection flights covering 306 destinations in 58 countries. During the period
2007 to 2009, Delta added more international capacity than any other major United States
(US) airline and was the leader across the Atlantic with flights to 37 trans-Atlantic markets.
Delta offers more than 517 weekly flights to 57 destinations covering Latin America and the
Caribbean.
Deltas marketing alliances allowed its passengers to earn and redeem SkyMiles on nearly
16,409 flights offered by SkyTeam and other partners. Delta was a founding member of
SkyTeam, a global airline alliance that provided customers with one of the worlds most
extensive networks of worldwide destinations, flights and services (see Appendix 1 for
membership composition). Including its SkyTeam and worldwide codeshare* partners, Delta
offered flights to 841 worldwide destinations in 162 countries.
* The term codesharing is an aviation business term which was first coined in the 1970s and
is an interline partnership where one carrier markets the air-service and places its designator
code on another carriers flights. This arrangement allows carriers an opportunity to provide
flights to destinations not in their basic route structure.
Northwest Airlines operated hubs at Detroit, Minneapolis/St. Paul, Memphis, Tokyo and
Amsterdam, and carried out approximately 1,400 daily departures. Northwest was a member
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of SkyTeam. Northwest and its travel partners served more than 1,000 cities and in excess of
160 countries on six continents.
The Delta - Northwest Airlines Merger

In late 2008, Delta and Northwest formally merged to form a new joint airline called Delta
and in 2009 it was the largest airline in the world, by both enterprise value and available seat
miles. In the previous April, the companies had announced an agreement in which the two
carriers would combine in an all-stock transaction with a combined enterprise value of $17.7
billion and a total of 786 aircraft.
Previously, the management of airlines had largely resisted industry-changing deals, in part
because of concerns over integration problems and a generally poor record for airline
mergers. However, Deltas CEO, Richard Anderson, said that consolidation could make
sense for Delta if its done thoughtfully from a position of strength. Northwests CEO,
Douglas M. Steenland, called further industry consolidation inevitable. Other factors
favouring consolidation were the high fuel prices and the possible impact on demand of
recession.2
Following the anti-trust overview by the US Department of Justice, the deal was not blocked
but approved as expected, due to the minimal overlap between the two airlines routes and
very little threat to competition in the industry. By the end of September 2008, both Deltas
and Northwests shareholders had approved the merger and at the end of October, the
United States Department of Justice approved Deltas plan to acquire Northwest.
Government lawyers concluded that the merger would likely drive down costs for consumers
without curbing competition. It was considered that the proposed merger was likely to
produce substantial and credible efficiencies that would benefit US consumers.
By 2009, Delta was the second largest airline in the USA and had a fleet of mostly Boeing
aircraft. Cities it served stretched from limited markets in Japan and South Korea to several
destinations in South America and Europe and eastwards to the United Arab Emirates and
India. Northwest had hubs in Detroit, Minneapolis and Memphis and offered high capacity
flights to many small cities across the Great Plains as well as extensive long haul services to
Asia and Europe. It had strong codeshare relationships in several US West Coast focus
cities. Recently, Northwest added hundreds of Airbus aircraft to their fleet which had
consisted predominantly of Boeing and Douglas aircraft.
While US network carriers had shed more than 150,000 jobs and lost more than $29 billion
since 2001, the combination of Delta and Northwest was considered to have created a
company with a more resilient business model, better able to withstand volatile fuel prices
than either company could on a stand-alone basis. Combining Delta and Northwest was the
most effective way to offset higher fuel prices and improve efficiencies, increase international
presence and fund long-term investment in the business.
The merger was expected to generate more than $1 billion in annual revenue and cost
synergies due to more effective aircraft utilisation, a more comprehensive and diversified
route system and cost synergies from reduced overhead and improved operational efficiency.
It was anticipated that there would be one-time cash costs not exceeding $1 billion to
integrate the two airlines. The result would be a stronger, more durable financial base and
one of the strongest balance sheets in the industry, with expected liquidity of nearly $7 billion.
Under the terms of the transaction, Northwest shareholders received 1.25 Delta shares for
each Northwest share they owned. This exchange ratio represented a premium to Northwest
shareholders of 16.8% based on 14 April 2008 closing prices.
Richard Anderson, Deltas CEO, stated at the time: We said we would only enter into a
consolidation transaction if it was right for all of our constituencies; Delta and Northwest are a
perfect fit. Today, were announcing a transaction that is about addition, not subtraction, and
combines end-to-end networks that open up a world of opportunities for our customers and
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employees. We believe that by partnering with our employees, including providing equity to
US-based employees of Delta and Northwest, this combination is off to the right start.
Together, we are creating Americas leading airline an airline that is financially secure, able
to invest in our employees and our customers, and built to thrive in an increasingly
competitive marketplace.3
In response, Northwests CEO, stated: Todays announcement is exciting for Northwest and
its employees. The new carrier will offer superior route diversity across the USA, Latin
America, Europe and Asia, and will be better able to overcome the industrys boom-and-bust
cycles. The airline will also be better able to match the right planes with the right routes,
making transportation more efficient across our entire network. In short, combining the
Northwest and Delta networks will allow the strengthened airline to realise its full global
potential and invest in its future.4
The Delta-Northwest combination was considered to be pro-competitive. There was little
overlap in the non-stop routes served by the two airlines. There was only direct competitive
service on 12 of more than 1,000 non-stop city pair routes then fl own by both airlines. The
merger was judged to have created a stronger, more efficient global competitor. Discount
carriers, which carried around one third of domestic passengers, and other network airlines,
remained competitors in the airlines markets.
Delta and Northwests complementary networks and common membership in the SkyTeam
alliance were anticipated to ease the integration risk that had complicated some airline
mergers. The carriers participated in a joint SkyTeam frequent-flyer programme with common
customer lounges and airline partner networks. Furthermore, they shared a common IT
platform, which was partially integrated through the existing alliance between Delta and
Northwest. The combination of Delta and Northwest also enabled an accelerated joint
venture integration with Air France/KLM, creating the industrys leading alliance network.
Northwests Activities
Airline Alliances
Long-term alliance partnerships are an effective way for an airline to enter markets that it
would not be able to serve alone. Alliance relationships can include codesharing, reciprocal
frequent-flyer programmes, through luggage check-in, reciprocal airport lounge access,
joint marketing, sharing of airport facilities and joint procurement of certain goods and
services.
A commercial alliance agreement is designed to connect carriers domestic and international
networks and provide for codesharing, and such things as reciprocity of frequent-flyer
programmes, airport club use and other cooperative marketing programmes.
In September 2004, Northwest, together with KLM and Continental, joined the global
SkyTeam Alliance. The addition of Northwest, KLM and Continental made SkyTeam the
worlds second largest airline alliance. The eleven members of the SkyTeam Alliance:
Northwest, KLM, Continental, Delta, Air France, Alitalia, Aeromexico, China Southern, CSA
Czech Airlines, Korean Air and Aeroflot, and three associate members: Air Europa, Copa
Airlines, and Kenya Airways. The Alliance currently serves over 427 million passengers
annually, with more than 16,400 daily departures to 841 destinations in 162 countries.
Regional Partnerships
Northwest formed airline services agreements (ASAs) with three regional carriers: Pinnacle,
Mesaba and Compass. In accordance with the ASAs, these regional carriers are required to
operate their flights under the Northwest (NW) code and operate as Northwest Airlink.
The purpose of these ASAs is to provide a service to small cities and a more frequent service
to larger cities, increasing connecting traffic at Northwests domestic hubs. The business
terms of these agreements involve capacity purchase arrangements. Under these
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arrangements, Northwest controls the scheduling, pricing, reservations, ticketing and seat
inventories for Pinnacle, Mesaba and Compass flights. Northwest is entitled to all ticket,
cargo and mail revenues associated with these flights. The regional carriers are paid for
certain expenses based on operations and receive reimbursement for other expenses.
Cargo
Northwest is the largest cargo carrier among US passenger airlines, based on revenue, and
the only one to operate a dedicated freighter fleet. In 2007, cargo accounted for 6.7% of the
companys operating revenues, with approximately 76% of its cargo revenues resulting from
cargo originating in or destined for Asia. Through its cargo hubs in Anchorage and Tokyo, the
company serves most major air freight markets between the USA and Asia with a dedicated
fleet of Boeing 747-200 freighter aircraft. In addition to revenues earned from the dedicated
freighter fleet, the company also generates cargo revenues in domestic and international
markets through the use of cargo space on its passenger aircraft.
In October 2005, Northwest Airlines Cargo joined SkyTeam Cargo, the largest global airline
cargo alliance. The eight members of SkyTeam Cargo, Northwest Airlines Cargo, Aeromexico
Cargo, Air France Cargo, Alitalia Cargo, CSA Czech Airlines Cargo, Delta Air Logistics, KLM
Cargo, and Korean Air Cargo, currently serve more than 728 destinations in more than 149
countries on six continents. This alliance offers customers a consistent standard of
performance, quality and detailed attention to service.
Other Travel Related Activities
MLT Inc., an indirect wholly-owned subsidiary of Northwest, is one of the largest vacation
wholesale companies in the USA. MLT develops and markets Worry-Free Vacations that
include air transportation, hotel accommodation and car rental. In addition to its Worry-Free
Vacations charter programmes, MLT markets and supports Northwests WorldVacations
travel packages to destinations throughout the USA, Canada, Mexico, the Caribbean, Europe
and Asia, primarily on Northwest Airlines.
Northwest is subject to the regulations of the US Department of Transport (DOT) and the
Federal Aviation Administration (FAA) because it holds certificates of public convenience and
necessity, air carrier operating certificates and other authority granted by those agencies.
The FAA regulates flight operations, including air space control and aircraft standards,
maintenance, ground facilities, transportation of hazardous materials and other technical
matters.
Northwest operates its international routes under route certificates and other authorities
issued by the DOT. Many of Northwests international route certificates are permanent and do
not require renewal by the DOT. With respect to foreign air transportation, the DOT must
approve agreements between air carriers, including codesharing agreements, and may grant
antitrust immunity for those agreements in some situations.
Northwests right to operate to foreign countries, including Japan, China and other countries
in Asia and Europe, is governed by aviation agreements between the USA and the respective
foreign countries. Many aviation agreements permit an unlimited number of carriers to
operate between the USA and a specific foreign country, while others limit the number of
carriers and flights on a given international route.
SkyTeam
Formed in 2000, SkyTeam is the second largest airline alliance in the world, partnering
carriers from four continents. SkyTeam also operates a cargo alliance called SkyTeam Cargo.
Through the worlds largest hub network, the Sky Team alliance provides its hundreds of
thousands of passengers with a global flight network which comprises several thousand
annual flights to 728 destinations located in more than 149 countries around the world.
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In a joint statement following SkyTeams formation, the airlines CEOs stated that it would
alter the competitive landscape for airline alliances to provide more choices, better service
and improved benefits. SkyTeams route system covered all the major destinations in the
Northern Hemisphere, where nearly 80% of the worlds traffic flies.
SkyTeams integrated information technology network enables passengers to contact
SkyTeam members call centres, city ticket offices, or airport ticket offices, to find out flight
schedules, service details (such as aircraft type and meal information), booking and
departure confirmations, seat assignments and published fares. Passengers are also able to
find all of this information about a flight by logging onto the SkyTeam website. In airports
around the world, passengers connecting from one partner airline to another are able to save
time by checking in only once.
Frequent flyers earn miles in their existing accounts when flying with any of the partner
airlines. Miles can be exchanged for a reward ticket on any SkyTeam airline. In addition, top-
tier flyers on each of the alliance airlines automatically attain SkyTeam Elite and Elite Plus
status with enhanced benefits. Elite and Elite Plus status are supplementary to the current
frequent flier programme offerings of all member airlines.
Cargo customers benefit from the alliance partnership through reserved cargo space and
marketing agreements.
Regulatory Factors in the Industry

Operations to and from foreign countries are subject to the applicable laws and regulations of
those countries. Additionally, slots for international flights are subject to certain restrictions on
use and transfer.
On 30 March 2008, a new Air Transport Agreement between the USA and the EU Member
States came into effect and created new competitive opportunities and competition on routes
between the USA and Europe. For example, it enabled Northwest to commence services to
London Heathrow Airport, subject to the availability of slots.
In November 2007, the DOT issued a proposal to increase by 100% the minimum amount of
compensation that airlines must pay to consumers who have been denied boarding on
oversold flights.
Under the direction of the United Nations International Civil Aviation Organization (ICAO),
world governments, including the USA, continue to consider more stringent aircraft noise
certification standards. A new ICAO noise standard was adopted in 2001 that established
more stringent noise requirements for newly manufactured aircraft after 1 January 2006.
Airlines are subject to Federal Aviation Authority (FAA) jurisdiction pertaining to aircraft
maintenance and operations, including equipment, dispatch, communications, training, flight
personnel and other matters affecting air safety. To ensure compliance with its regulations,
the FAA requires all US airlines to obtain operating, airworthiness and other certificates,
which are subject to suspension or revocation for cause.
Airlines are subject to regulation under various environmental laws and regulations, including
the Clean Air Act, the Clean Water Act and Comprehensive Environmental Response,
Compensation and Liability Act of 1980. In addition, many state and local governments have
adopted environmental laws and regulations to which airlines operations are subject.
Environmental laws and regulations are administered by numerous federal and state
agencies.
Most, if not all, airlines depend on automated systems to operate their business, including
internal airline reservation systems, flight operations systems, telecommunication systems
and commercial websites. These websites and reservation systems must be able to
accommodate a high volume of traffic and deliver important flight information, as well as
process critical financial transactions. Substantial or repeated failures in website reservation
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systems or telecommunication systems could reduce the attractiveness of an airlines

services versus its competitors and materially impair its ability to market its services and
operate its flights.
Airlines rely extensively on third-party providers to perform a large number of functions that
are integral to their business, such as the operation of certain regional carriers, provision of
information technology infrastructure and services, provision of maintenance and repairs and
performance of aircraft fuelling operations, among other vital functions and services. Failure
of these parties to perform as expected, or unexpected interruptions in the airlines
relationships with these providers or their provision of services, could have an adverse effect
on finances and operations.
Airline Industry Risk and Competitive Factors

Because fuel costs are a significant portion of operating costs, substantial changes in fuel
costs materially affect operating results. Fuel prices continue to be susceptible to: political
unrest in various parts of the world; Organization of Petroleum Exporting Countries (OPEC)
policy; the rapid growth of economies in China and India; the levels of inventory carried by
industries; the amounts of reserves built by governments; disruptions to production and
refining facilities; and the weather, among other factors.
In 2005, Hurricane Katrina and Hurricane Rita caused widespread disruption to oil
production, refinery operations, and pipeline capacity in parts of the US Gulf Coast. As a
result of these disruptions, the price of jet fuel increased significantly and the availability of jet
fuel supplies diminished during the fall (autumn) of 2005. These, and other factors that
impact the global supply and demand for aircraft fuel, may affect financial performance due
to its high sensitivity to fuel prices. For example, a one cent change in the cost of each gallon
of fuel would impact operating expenses by approximately $1.4 million per month (based on
2007 mainline and regional aircraft fuel consumption).
The airline industry is intensely competitive. Competitors include major domestic airlines as
well as foreign, regional, and new entrant airlines, which have varying financial resources
and cost structures. Revenues are sensitive to numerous factors, and the actions of carriers
in the areas of pricing, scheduling and promotions can have a substantial adverse impact on
revenues.
Industry revenues are also impacted by the growth of low cost airlines and the use of internet
travel websites. Taking advantage of low unit costs, driven in large part by lower labour costs,
low cost carriers, and carriers who have achieved lower labour costs, are able to operate
profitably while offering substantially lower fares. Internet travel websites have driven
significant distribution cost savings for airlines, but have also allowed consumers to become
more efficient at finding lower fare alternatives than in the past, by providing them with more
powerful pricing information. Such factors become even more significant in periods when the
industry experiences large losses, as airlines under financial stress, or in bankruptcy, may
institute pricing structures intended to protect market share, or raise cash quickly, irrespective
of the impact on long-term profitability.
A significant portion of operations may well be conducted in foreign locations. As a result,
operating revenues and, to a lesser extent, operating expenses, in addition to assets and
liabilities, will be denominated in foreign currencies. Thus, fluctuations in foreign currencies
can significantly affect operating performance and the value of assets and liabilities located
outside of the host country.
The industry is exposed to changes in interest rates. An increase in interest rates would likely
have an overall negative impact on earnings, as increased interest expense would only be
partially offset by increased interest income. From time to time, financial instruments may be
used to hedge exposure to interest rate fluctuations. However, these hedging strategies may
not always be effective.
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The airline industry is seasonal in nature. Due to seasonal fluctuations, operating results for
any interim period are not necessarily indicative of those for the entire year.
The airline industry is labour-intensive, and collective bargaining agreements (CBAs) provide
standards for wages, hours of work, working conditions, settlement of disputes and other
matters.
The Airline Deregulation Act of 1978, as amended, eliminated domestic economic regulation
of passenger and freight air transportation in many respects. Nevertheless, the industry
remains regulated in a number of areas. The DOT has jurisdiction over international route
authorities and various consumer protection matters, such as advertising, denied boarding
compensation, baggage liability and access for persons with disabilities.
Open Skies Agreement

In April 2007, the US and the European Union (EU) approved an open skies air services
agreement that provides airlines from the USA and EU Member States open access to each
others markets, with freedom of pricing and unlimited rights to fl y beyond the USA and
beyond each EU Member State.
Under the open skies agreement, which went into effect on 30 March 2008, every US and EU
airline was authorised to operate between airports in the USA and Londons Heathrow,
Gatwick and other airports. As a result of the open skies agreement, Delta announced an
expansion of its transatlantic route network with three new daily nonstop flights to London
Heathrow from Detroit, Minneapolis/St. Paul and Seattle.
References
1 Lori Ranson, US airlines brace for shift of premium traffic to the back cabin, AIRLINE
BUSINESS, 2 February 2009.
2 2008: The Year of the Big Airline Merger?, New York Times, 9 January 2008.
3 The Merger, Delta.com, 15 April 2008.
4 The Merger, Delta.com, 15 April 2008.
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Appendix 1
Deltas Operating Statistics - 2005
Employees: 47,000+
Delta Daily Flights: 1,534
Delta Connection Inc. Daily Flights: 2,533
Daily Flights + Partners: 6,795
Delta Destinations: 500 worldwide destinations in 105 countries
Passengers Enplaned in 2005: 118,853,189
Delta Connection Inc. Carriers: Atlantic Southeast Airlines (ASA)

Chautauqua Airlines
Comair
Freedom Airlines
Pinnacle
Shuttle America
SkyWest
SkyTeam Alliance: Aeroflot

AeroMexico
AirEuropa
Air France
Alitalia
China Southern
Continental Airlines
CSA Czech Airlines
Copa Airlines
KLM Royal Dutch Airlines
Kenya Airways
Korean Air
Northwest Airlines
Codeshare Partners: Alaska Airlines

American Eagle
Avianca
China Airlines
Royal Air Maroc
Major US Hubs: Atlanta

Cincinnati
New York (JFK)
Salt Lake City
Major International Gateways: Atlanta to Europe and Latin America

Cincinnati to Europe and Latin America
Los Angeles to the Pacific
New York (JFK) to Europe and beyond
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Appendix 2
DELTA Profit and Loss Account as at 31 December (in US$ millions)
PERIOD ENDING 2008 2007 2006 2005

Total Revenue 22,697 19,154 17,171 16,191
Operating Expense (31,011) (18,058) (17,113) (18,192)
Operating Income (Loss) (8,314) 1,096 58 (2,001)
Total Other Income (Expenses) Net (22) 1,375 (6,156) (826)
Earnings Before Interest And Taxes (8,336) 2,471 (6,098) (2,827)
Interest Expense 705 652 870 1,032
Income Before Tax (9,041) 1,819 (6,968) (3,859)
Minority Interest - - - -
Income After Tax (8,922) 1,612 (6,203) (3,818)
Preferred Stock And Other Adjustments - - (2) (18)
Net Income Applicable To Shareholders (8,922) 1,612 (6,205) (3,836)
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Appendix 3
DELTA Balance Sheet as at 31 December (in US$ millions)
2008 2007 2006 2005

Cash & Equivalents 4,255 2,648 2,034 2,008
Short-Term Investments 212 138 614 0
Total Debtors/Receivables 2,582 1,066 915 819
Total Inventory 388 262 181 172
Prepaid Expenses 637 464 489 512
Other Current Assets 830 662 1152 969
Total Current Assets 8,904 5,240 5,385 4,480
Property, Plant & Equipment 20,627 11,701 12,973 14,280
Goodwill Net 9,731 12,104 227 227
Intangible Assets Net 4,944 2,806 89 74
Other Long-Term Assets 808 572 948 978
Total Assets 45,014 32,423 19,622 20,039
Total Current Liabilities 11,022 6,605 5,769 5,265
Total Long-Term Debt 15,411 7,986 6,509 6,557
Other Liabilities 17,707 7,719 20,937 17,865
Total Liabilities 44,140 22,310 33,215 29,687
Total Shareholder Equity 874 10,113 (13,593) (9,648)
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Appendix 4
Northwest Airlines
Accounts as at 31 December US $millions, except per share data
Statements of Operations
2007 2006 2005 2004 2003

Operating revenues
Passenger 9,428 9,230 8,902 8,432 7,632
Regional carrier 1,405 1,399 1,335 1,083 860
Cargo 840 946 947 830 752
Other 855 993 1,102 934 833
Total operating revenues 12,528 12,568 12,286 11,279 10,077
Operating expenses 11,424 11,828 13,205 11,784 10,342
Operating income (loss) 1,104 740 (919) (505) (265)
Net income (loss) 2,093 (2,835) (2,464) (862) 248
Cumulative effect of accounting (69)
Net income (loss) 2,093 (2,835) (2,533) (862) 248
Eps (Basic) $ 21.33 (32.48) (29.36) (10.32) 2.75
Balance Sheets
2007 2006 2005 2004 2003

Cash and cash equivalents 3,034 2,058 1,262 2,459 2,757
Total assets 24,517 13,215 13,083 14,042 14,008
Long-term debt 6,961 4,112 1,159 8,411 7,866
Long-term obligations 127 11 361 419
Pension/other benefits 3,720 185 264 4,095 3,756
Liabilities subject to compromise 13,572 14,328
Preferred redeemable stock 277 280 263 236
Stockholders equity (deficit) 7,377 (7,991) (5,628) (3,087) (2,011)
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International Business Case Study

Delta and Northwest Airlines
Answer ALL questions
Q1 Using suitable frameworks, evaluate the international business environment facing the
airline industry as a whole. You are expected to draw upon examples from the case to
support your analysis.
(25 marks)
Q2 Compare and contrast the strategies and performances of Delta and Northwest.
Discuss the extent to which you consider these have influenced the decision to merge
the two organisations. In your answer, include a full financial analysis and evaluation.
(40 marks)
Q3 Discuss the options for future business strategies that you consider to be appropriate
for the merged company and evaluate the likely impact of airline alliances such as Sky
Team. In your discussion, include suggestions of how the organisation can forecast the
future environment.
(35 marks)
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21
Chapter 2
International Business Planning
Contents Page
Introduction 22
A. Planning Process 22
The Planning Framework 23
Approaches to Planning 25
Benefits of Planning 26
Difficulties of Planning in International Markets 26
B. Individual Region/Country Annual Plans 27

Elements of the Annual Business Plan 28
C Planning and Forecasting Techniques 30

Scenario Planning 30
Associated Techniques 32
What if? Questions 33
D. Planning and Change 34

What Changes will be Necessary? 34
Control and Evaluation 35
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22 International Business Planning
INTRODUCTION
The focus of the International Business Case study is the plan. This is central to international
operations as the plan is the basis of how companies decide what they are trying to achieve
and how they might get there. It involves the development and agreement of objectives and
the consideration of different strategic options.
In this chapter we will review the planning process and consider the main elements and
decisions of strategic international business plans. This chapter will be the framework for the
rest of the study manual.
We start by exploring the need for a planned approach, the different planning stages and the
key elements of international business plans, together with some of the difficulties associated
with planning for international markets. We concentrate on the key decisions in the
international business and some of the major factors that will serve to influence and shape
these decisions. Throughout, we emphasise the additional complexities and issues that
arise compared to developing purely domestic plans. Important options for the international
business include, for example, the importance of non-domestic sales to the company, the
range of countries, selection of individual countries and modes of market entry. Once these
decisions have been made, the business must further consider how the strategic options will
be put in place.
A. PLANNING PROCESS
The process of business planning is concerned with forecasting the future and deciding what
changes to implement in order to take advantage of the opportunities which exist and to
minimise the main problems faced.
It is crucial for companies of all sizes that they plan their activities. It is very wasteful to rely
on reaction as a management process for example, opportunities might come and go
before the reactive company adopts a business strategy aimed at meeting the needs of a
specific international market. In large and complicated organisations, planning becomes
even more important as a means of co-ordinating and integrating the geographically spread
organisation.
So, what is the basis on which planning takes place?
Objectives are perhaps the most important foundation for the planning process. The
organisation needs to decide what it wants to achieve. However, this is bound up with other
processes. For example, what can be achieved will, at least in part, be determined by the
means available for getting to those objectives. These means we refer to as strategies, and
if poor quality strategies are selected, it will not be possible to achieve the results wanted
good sales and profits. The objectives that can be realistically set will, therefore, be strongly
interrelated with the strategies that are identified.
Other factors are, of course, influential in the actual results that are achieved, including:
The quality of the implementation
The accuracy of forecasting the future
The nature and intensity of competitive actions.
We shall consider these factors in later chapters
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International Business Planning 23
The Planning Framework

The process of developing an international business plan is shown diagrammatically in
Figure 2.1. You will recognise that the main elements of the framework are essentially the
same for international planning as those found in purely domestic business.
Figure 2.1: The International Planning Process
1. Identification and analysis of business opportunities

Company mission statement and stakeholder expectations
Assessment of company resources and capabilities
2. International business objectives
3. Development of strategic options
4. Selection of strategic options
5. Implementation of strategies
6. Evaluation and control
1. Analysis of strengths and weaknesses; the company mission statement and

stakeholder expectations
As in all strategic planning, the process starts with the analysis of strengths,
weaknesses, opportunities and threats. This involves the identification and analysis of
markets in which the company can effectively compete and therefore also includes an
assessment of company resources and capabilities. Through research and intelligence
gathering activities, the business must seek to achieve a strategic fit between the
companys capabilities and the opportunities presented by a dynamic environment.
(We shall discuss the analysis of business opportunities in the Chapters 4 and 5.)
At this stage, the company should also consider its mission statement and stakeholder
expectations. These concepts serve both to shape and constrain business strategies.
In the international market remember that stakeholders will include not only domestic
country stakeholders, but also those of any host country in which the international
business operates, including, for example, local employees, pressure groups, host
country governments and host country communities. Obviously having such a
potentially wide range of stakeholders to consider in international markets makes this
task that much more difficult.
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2. International business objectives

This stage of planning involves the company determining what it wants to achieve.
Without clear objectives, an organisation is unable to delineate and select between
strategies, nor to evaluate the extent to which desired outcomes have been achieved.
Remember that objectives should ideally be Specific, Measurable, Achievable,
Realistic and Timed (the SMART criteria).
When it comes to international business the company must not only decide what sales
and profits it wishes to generate from international operations, but also the related
issue of, for example, what degree of involvement and commitment the company
wishes to achieve for its international operations.
(Objectives, along with mission statements, in international business are considered in
Chapter 6.)
3. Development of strategic options
This stage in the development of the international business plan involves identifying the
broad strategic routes between which a company can select in order to achieve its
objectives. There are a number of ways of thinking about strategic options and a
number of models of strategic alternatives have been developed. Perhaps one of the
best known of these, however, is again one that you will probably be familiar with and
indeed can be used in both domestic and international markets, namely the Ansoff
Growth Matrix. We look at the use of this, and consider other issues to do with
strategic options, in Chapter 7.
4. Selection of strategic options
Having identified the strategic options, the next step is to select those that are most
appropriate. A number of considerations are important here. Obviously the options
must match the companys resources and capabilities and the companys mission
statement and stakeholder expectations. The options must also be assessed with
regard to factors such as risk and investment requirements.. Needless to say, the
options selected should be those that enable the company to meet its international
business objectives in the most cost-effective way.
5. Implementation of strategies
The implementation stage involves decisions about the nature and application of
operational activities designed to meet the businesss objectives. This involves
acquiring and deploying the necessary resources financial and human and
establishing the organisational structures and management systems which enable
those resources to be appropriately applied in the pursuit of the companys objectives.
It will also include designing and implementing the appropriate marketing mix for the
environment within which the business will be operating.
We shall look at the issues involved in all aspects of implementation and operation in
Chapters 9 11.)
6. Evaluation and control
The final stage in the framework is the assessment of the extent to which the plan has
worked and objectives have been met. Control involves the measurement and analysis
of performance against evaluative criteria established as part of the objectives, and the
taking of corrective action. We look at this element in Chapter 12.)
Recently, research and literature on planning strategies in practice has illustrated the fact that
very often actual strategies arise in very different ways to the text book planned fashion of a
sequence of logical and intended steps as set out above. Instead of planning being a linear
and systematic approach, it is suggested that much strategy arises as a result of companies
actions over time. There are many reasons why this happens, but the intended strategy can
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be changed as a result of changes in the business environment such as cultural and political
changes that in turn require changes to the intended and planned strategy.
Of course, it could be argued that such changes should themselves be planned for in the
intended strategic plan through the use of contingency planning. Any surprises that force
the business to change plans in mid-stream, therefore, could be looked at as a failure or
deficiency in the planning systems. However, a number of factors make such surprises and
changes to intended strategies more prevalent these days, and more importantly, more
appropriate to effective business operations. These two factors are the increasingly dynamic
nature of the international business environment together with the ability of organisations to
access ever increasing amounts of detailed information through on-line systems and thus
make speedy decisions.
Taking the first of these, the dynamic nature of the international business environment, the
speed and pace of change in this environment puts an increasing premium on companies
being flexible in their planning systems rather than developing plans and then sticking to
these whatever the circumstances. The pace of change in the environment requires that
management be alert and responsive to these changes and be able to incorporate them in
modified strategies. Indeed, speed of response and flexibility are key facets in competitive
international business strategy. Such emergent strategies, as they are often referred to, are
based on the notion of organisational learning over time.
Effective strategies, therefore, are based on managers being sensitive to environmental
signals through environmental scanning and by evolving strategy in small-scale steps to
match these. Clearly, there is a danger in this approach that companies are pulled off target
and away from their intended objectives and strategies, a process sometimes referred to as
strategic drift. This can result in companies simply muddling through a series of crisis
changes as the organisation is battered by the vagaries of a stormy environment. Needless
to say, such an ad hoc approach to planning is not to be recommended.
Approaches to Planning
The way in which organisations approach the issue of planning may differ as follows:
Planning and the organisational hierarchy
There are three main ways in which the planning process may be undertaken:
(i) The top-down planning approach is one in which the most senior managers
prepare broad strategic plans and then rely on local managers at country level to
implement the plans.
(ii) Bottom-up planning is the reverse process. Here, managers at country level
prepare their plans, which are then passed on to the central headquarters for
senior managers to adjudicate. This approach uses local knowledge and
encourages local involvement, but can be time-consuming before the final plan is
agreed. It can also be frustrating if the local plan is extensively modified or even
rejected in total.
(iii) In an attempt to gain from the positive features of top-down and bottom-up
planning, some companies use goals-down, plans-up planning. This approach
aims to achieve a blend of consistent strategic planning through setting
objectives or goals and deciding the main strategic options at the corporate level,
with locally developed and implemented plans.
Moving towards strategic planning
Even though there are differences, the development of a planned strategic approach to
domestic markets and to international markets might well evolve through approximately
the same stages. These stages are:
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(i) Unplanned stage The company manages in a reactive way without a planning
process or a formal written plan.
(ii) Budgeting stage The company develops a plan, but the plan is primarily
composed of numbers that have little justification from business research or
market opportunity analysis. The figures in the budget reflect financial forecasts
of sales, cash flows and profits. These figures are often projected from past
results. The great weakness with this approach is that it makes little attempt to
forecast what customers will want to buy in the future.
(iii) Annual business plan stage This approach to planning shows a considerable
improvement on the budget stage. In an attempt to gain more accurate forecasts
of the future and to involve managers actively in the planning process, the next
stage in planning is reached. The plan is developed across the business
functions of production, finance and marketing but is often limited in time-scale to
the next financial year.
(iv) Strategic planning stage This approach to planning takes a longer-term
perspective. Whereas the earlier approaches will be based on a one- or two-year
cycle, strategic planning will operate over five to ten years or maybe longer. This
longer-term plan is much more appropriate for international business because it
often takes a long time after entering a country market before substantial market
shares are established.
An important step in good strategic planning is to build the more detailed annual
planning into the overall strategic direction. If this is achieved, it avoids the
annual plan being a tactical implementation of something that is always remote
from the long-term strategic plan.
Benefits of Planning
The benefits of planning include the following:
The company is encouraged to be proactive rather than reactive. It tries to anticipate
environmental change, changing buyer needs and wants and competitor activities. It is
most unlikely that the company will forecast the future with total accuracy, so it will
therefore have to react to some unforeseen events, but it is obviously better to plan
proactively and take the benefits from this approach and to confine reactive activities to
those areas that were not anticipated.
Planning encourages the involvement of many international personnel in a process of
analysis, discussion and decision. The end result should be one of improved decision-
making about the need for future activities. It should also provide some sense of
ownership in the final international business plans.
The clear statement of time-scaled objectives, and the strategies to be employed to
achieve those objectives, should prevent misunderstandings and delays in the
implementation of plans in different country markets around the world.
There is the opportunity to develop consistent business information systems to help
inform decision-making.
The evaluation and control of implementation will be easier if there is a consistent
process and written-down plan.
Difficulties of Planning in International Markets

If there are many benefits to international business planning, there are also many difficulties.
In fact, international planning poses several difficulties and complexities over and above
those encountered in purely domestic business. Some of the reasons for this added difficulty
and complexity are listed below:
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The planning process is often done at a distance from where the plans are
implemented.
Planning may be done in the context of an unfamiliar environment.
Related to the above, the planning must take account of the needs of different cultures.
Information is more difficult to obtain especially in developing markets.
The political environment is often much more uncertain.
Different stakeholder expectations have to be dealt with.
Evaluation and control are more difficult.
B. INDIVIDUAL REGION/COUNTRY ANNUAL PLANS

A companys overall corporate plan sets the broad objectives and strategies for a companys
international business operations. At the corporate level, strategic decisions regarding
international business encompass areas such as the degree of commitment to international
markets in the context of the overall business, the selection of regions or countries to be
involved in, the methods of entry and broad decisions regarding the shape of the
international business mix, including issues such as the extent of standardisation versus
adaptation. Within this context, the annual plan prepared for each country in which a
company operates provides the mechanism for implementing overall corporate strategies,
whilst at the same time reflecting and accommodating the needs of the different countries
and situations.
Because the annual plan considers the local environment and customer needs of specific
markets, it enables the business to develop business programmes that reflect these local
environments and customer needs. Essentially, the annual plan enables the management to
adapt the business to meet the specific demands of each market under consideration,
including tasks of essentially a more tactical nature compared to those found in the overall
corporate international plan. So, for example, within the general framework of a policy set at
corporate level encompassing, say, the promotional element of the business mix, we wouldnt
expect the details of media scheduling to be exactly the same in every market in which the
business operated. Effective implementation requires these more detailed aspects to be
considered and incorporated within plans for each country.
The business plan helps analyse each individual countrys specific requirements and the
competitive environment before translating these into specific action programs. Developing a
plan for each country ensures that the business has anticipated and understood the
following:
Individual market needs and market trends.
Competitive market structure and competitive strengths and weaknesses in the market.
The specific business objectives, strategies and tactics that would be most effective in
a particular market.
The required structure and balance of the business operations to be used in each
particular market.
The required budget and resource implications.
The key issues in the implementation process.
Without an annual business plan for each market, the business is unable to control and co-
ordinate activities across markets and the overall business strategy is unlikely to be
implemented effectively.
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Elements of the Annual Business Plan

Remembering that the organisation should have already established overall corporate and
business objectives and strategies, a detailed annual business plan is required for each
market. The main elements of this detailed plan should include the following:
Analysis
For each individual country market, the business should start with a detailed analysis.
This analysis should encompass the following:
(i) Market size and trends.
(ii) Business environment and trends, political, economic, social/cultural,
technological, legal and environmental/ethical (PESTLE analysis).
(iii) Competitor and competitive market structure analysis.
(iv) Internal analysis, product portfolio, market share, strengths and weaknesses and
current performance levels.
(v) Customer analysis including needs and motives, segmentation, purchasing
patterns and processes, purchasing timings, customs and practices.
All of these elements are important in developing the plan for a particular country
market inasmuch as the analysis will highlight the local issues, and in particular, the
needs of customers in their local environment. Ultimately, the business will possibly be
seeing and dealing with customers as individuals and therefore will need to adapt the
elements of the business and programmes to meet the specific demands of the
individual markets under consideration.
Based on this analysis stage, and again against the framework of overall corporate and
business strategies, the business can now proceed to the next element of the annual
business plan, namely the production of a detailed SWOT analysis for each market in
question.
SWOT analysis
For each market, the business must prepare a detailed SWOT appraisal. You should
be familiar with the meaning and use of SWOT analyses and this will be covered in the
Chapter 5. In the context of the annual business plan, the SWOT analysis should
identify those opportunities and threats that will affect decisions about business
objectives and programmes in a particular market over the planning horizon of the
forthcoming year.
Business objectives and strategies
Once again, remember that the objectives and strategies are those that would be
pursued over the forthcoming year in each market. This element of the annual
business plan should encompass:
(i) The specific objectives and sub-objectives relating to specific products, segments
and customers. These objectives should be specific, measurable, actionable,
realistic and timed (SMART) and should include objectives for sales, profits and
market share.
(ii) The selection of specific market segments and targets.
(iii) The strategies for competing i.e. the basis of differential advantage to be used.
(iv) The desired product and brand positioning.
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Programmes for implementation of the business plan

This element of the plan should include detailed programmes for the implementation of
business activities in a country and, again, should relate to specific products, segments
and customers.
Unlike the corporate plan which is concerned with broad thrusts of strategy and
decision-making (such as the selection of country markets, methods of entry and
issues concerning the degree of standardisation or adaptation of the business
elements), at the individual country level, the annual plan will include much more
detailed programmes for each element of the business operations.
You should remember that individual country annual plans represent an opportunity to
meet the needs of customers in their local environment and therefore to adapt the
elements of the business operations in a more tactical manner to meet the specific
demands of each market under consideration.
The implementation element of the annual business plan should encompass each of
the elements of the business operations including, where appropriate, the extended
business operation elements for services. For example, the sort of detail included in an
annual marketing plan can be illustrated if we consider what the plan might contain with
regard to, say, promotional elements. The plan might encompass the following aspects
with regard to the promotional programme:
(i) Detailed promotional objectives for each product/market/customer, for example,
to increase brand awareness of our brand amongst target customers from its
current 10% to 20% within 12 months.
(ii) Detailed advertising and promotional programmes, for example, details of
advertising campaigns, (advertising platforms, media selection and planning,
including timing and frequency), advertising research, point of sale material
programmes, details of PR and publicity activities and details of sales promotion
campaigns,
(iii) Detailed budgeting requirements and spend patterns for the elements of the
promotional campaign.
(vi) Detailed timing and scheduling activities for the programme over the year
including, for example, agency briefings, timings of press conferences, the
distribution of point of sale and other promotional material.
(v) Detailed evaluation and control activities for the different elements of the
promotional mix for example, advertisement pre-testing research, recognition
and awareness tests.
If we take into account the fact that these detailed programmes would be required to be
planned for each element of the business operations and, where appropriate, for each
product, market segment and/or customer, you will appreciate how much more detailed
the annual country marketing programme is compared to the overall corporate and
marketing strategy plans. Again, we should also remember that this amount of detail is
necessary in order to ensure that the needs of customers in their local environment are
met, together with the specific demands of each market.
Specification of tasks, responsibilities, costs and budgets
This element of the business plan should include detailed outlines of the specific tasks
to be performed together with the allocation of these tasks to functions and, ultimately,
individuals. Weaknesses in this area of task allocation are, in fact, among the major
reasons for ineffective implementation of business programmes. Examples of
weaknesses in implementation include a failure to communicate with, and, as
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importantly, agree the responsibilities of, those individuals charged with ensuring that
the required business tasks are performed.
It is important that those charged with these responsibilities understand what they are,
and moreover, have the resources and skills to achieve them. Failure to communicate
and agree responsibilities may mean that no one takes responsibility for the actions
outlined in the business plan, with the obvious consequences that are likely to result.
In addition to ensuring that tasks and responsibilities are allocated and agreed, it is
also important to ensure that costs and budgets have been assessed. In particular, it
must be ensured that the required financial resources are available at the right time to
implement the approved plans.
C PLANNING AND FORECASTING TECHNIQUES

In environments which are relatively stable, and forecasts of the future can be based on what
has happened in the past, the tools of scanning and trend analysis are useful. However, an
organisation may be faced with sudden discontinuities, such as the introduction of a new
technology which renders its products obsolete like video recorders when programmes are
available on-line. or major uncertainties, such as oil price rises, which can be difficult to
foresee. In these circumstances, planning needs to take into account a range of different
scenarios, forcing managers to 'think the unthinkable' for example what would happen if the
Germany withdrew from the Euro!
Scenario Planning
Strategies and strategic planning are inherently concerned with the future. Because of this
the strategic planner is often concerned to assess the future as an input to developing
corporate strategic plans. This is particularly true in the area of environmental analysis in
corporate planning. The corporate planner must attempt to assess how the environment of
the organisation might be configured in the future so as to develop corporate plans to take
account of these envisaged configurations. A technique which has been widely used in this
respect is the technique of using scenarios in developing plans for the future.
Scenarios comprise of detailed and plausible views of how the business environment of an
organisation might develop in the future couched in such a way that the corporate planner is
able to develop a range of strategic objectives and actions to best deal with the envisaged
futures.
It is important to stress that scenarios are not the same as forecasts. Forecasts are made on
the basis of assumptions that the future can be predicted whereas scenarios are generated
on the assumption that it can't.
Scenarios are especially useful in the following circumstances:
(a) Where it is important to take a long-term view of strategy
(b) Where there are a limited number of key factors influencing strategic options
(c) Where there is a high level of uncertainty about such influences.
Unlike a forecast, which tries to predict precisely what the future will be, scenarios represent
simply plausible narratives of how the future might turn out.
Building Scenarios
The basic approach of scenario planning is to identify existing trends and key uncertainties
and then combine them in a number of scenarios that are internally consistent and within the
realm of the possible. The purpose of the scenarios is not to cover all future eventualities,
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but to identify the boundaries of future outcomes and to stimulate creative thinking and
opportunities for managers to look ahead.
There are three steps in scenario planning which precede the building of the scenarios
themselves:
Determining the parameters of the analysis, such as the time frame, the scope and the
stakeholders whose actions need to be considered.
Identifying existing trends and conditions that will significantly affect the organisation's
future within the time frame.
Identifying key uncertainties, such as the possibility of a fundamental technological
breakthrough or the effect of a change in government policy.
By combining the trends and uncertainties we can develop internally consistent, wide-ranging
scenarios. One approach is to put all the positive elements into one scenario and all the
negative elements into another and then to consider whether they are internally consistent.
These extreme scenarios offer starting points from which to develop different, but consistent
alternative future scenarios. Each of these alternatives needs to be consistent and to have
some probability of occurring.
So, how are scenarios built and used in the corporate planning process? Using the example
of an oil company we can first consider the steps in building scenarios.
(a) The first step in building scenarios is to establish the purpose of the scenario i.e.
what is the scenario to consider and be used for? The purpose may be wide-ranging
(such as "what will the energy market look like in the future?"), or more focused, to
support key decisions facing the organisation (such as "should we invest in developing
solar-powered energy sources?").
(b) The second step is to identify the strategic issues or drivers of change in the
environment i.e. the factors in the environment which may affect the future with
respect to the purpose of our scenario and about which we are uncertain... Usually
these factors are readily identifiable: continuing our example, key drivers about which
we are uncertain might include oil costs, discovery of new reserves; and environmental
protection legislation,. The number of factors identified at this stage of scenario-
building should be kept relatively small, since the number of possible scenarios can
quickly become unmanageable. Those drivers selected should be those that have the
greatest impact on possible future strategies for the organisation and about which we
are most uncertain. Clearly the selection of strategic issues or drivers of change is
crucial to the development of scenarios and therefore should ideally use the most
expert and informed managers inside (or sometimes even outside) of the organisation.
Membership of the scenario-building team is a crucial factor.
(c) Having identified the key driving factors in our scenario analysis, the next step is to
identify different possible plausible futures by factor. Again continuing our
example, the scenario team can assess, say, the likely future possibilities regarding
environmental protection legislation.
(d) The fourth step is then to combine to build scenarios of plausible configurations of
factors, considering the possible range of permutations and combinations of the driving
factors selected so as to build "complete pictures" of a possible future. The planner
can then develop plausible configurations of developments of driving factors from the
previous stage, developing and fleshing out the narrative of the predicted scenarios
and assessing possible likely outcomes for each.
When this has been done then the corporate planner can begin to assess the likely
implications of the scenarios developed for corporate strategic plans. This may encompass
determining objectives to deal with future scenarios, assessing strategic options for the
future, and in particular for developing possible contingency plans.
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These, then, are the main steps in developing and using scenarios in the corporate planning
process. There are a number of other considerations in the process, such as determining the
membership of the scenario-building team; the timescales for scenarios; and the number of
scenarios to be developed. All of these affect the nature and effectiveness of process.
Scenarios have proved to be a useful approach to dealing with unpredictable and volatile
environments where conventional techniques of forecasting have proved ineffective and
inappropriate. Again, it is important for the planner to remember that scenarios are not
forecasts, but they can be a very creative and useful approach to trying to assess the
implications of an uncertain future environment.
Associated Techniques
There are a number of further techniques which can be used as part of scenario planning, or
in their own right, to help analyse and plan for uncertainties in the future.
Cross-impact analysis
This approach seeks to identify a set of key trends and asks the question "if A occurs,
what impact will this event have on other trends?".
Demand/hazard forecasting
This sets out to identify major events which would have an impact on the organisation.
Each event is rated for its convergence with other major events taking place in society
and its appeal to the public:
(a) the greater the event's convergence and appeal the more likely it is to happen;
(b) the higher-rated events are the ones which management takes more account of.
Expert Opinion
In the expert opinion method, appropriate managers within the organization and
external experts in the particular area (either geographical or market/sector) assemble
to discuss their opinions on what will happen to the market in the future. Since these
discussion sessions usually resolve around hunches or experienced guesses, the
resulting forecast is a blend of informed opinions. This process is often used as a basis
for scenario planning.
Delphi Method
In a similar way to expert opinion, the Delphi Method also gathers, evaluates, and
summarises expert opinions as the basis for a forecast, but the procedure is more
formal than that for the expert opinion method.
The Delphi Method has the following steps:
Step 1 Various experts are asked to answer, independently and in writing, a series
of questions about the future of the market or whatever other area is being
forecasted
Step 2 A summary of all the answers is then prepared. No expert knows how any
other expert answered the questions
Step 3 Copies of the summary are then given to the individual experts with the
request that they modify their original answers if they think it necessary
Step 4 Another summary is made of these modifications, and copies again are
distributed to the experts. This time, however, expert opinions that deviate
significantly from the norm must be justified
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Step 5 A third summary is made of the opinions and justifications, and copies are
once again distributed to the experts. Justification in writing for all answers is
now required
Step 6 The final forecast is generated from all of the opinions and justifications that
arise from step 5.
The process can be conducted in real time by using on-line collaboration across the Internet.
Both expert opinion and the Delphi method have been used in circumstances where the
nature of the market means that there is no relevant history, such as in a new market
concept, or the number of variables in the business environment make forecasting difficult.
In the UK. the Monetary Policy Committee which meets monthly to set the Base (Interest)
Rate is a form of Expert Opinion. It is designed to give an independent view thus reducing
the impact of political views on this key area of the economy.
These methods are extremely relevant for large global corporations, especially with regard to
establishing medium and long term plans. For example, Airbus and Boeing would both have
certainly used them in developing their new aircraft for the 21st century and it is interesting
that both companies ruled out the possibility of supersonic aircraft, although they took
different approaches with the introduction of the A300 and Dreamliner aircraft respectively.
What if? Questions

We can consider the consequences for international business strategies by playing the What
if? game. For example, if you took the SLEPT plus C environment framework and asked
What if? concerning each of the factors, it would set you thinking about a number of
possible future scenarios. The following is one approach to this, although you will probably
be able to develop some equally plausible scenarios for yourself.
What if socio-cultural change?
If the cultural values that have been significantly different in the past become more
Westernised through exposure to, say, US films and television and a market forces
type society, will this make it more or less difficult for Western companies to penetrate
Asian markets?
What if legal change?
If Islam becomes a more dominant religious force in certain parts of the world, will this
influence the relative importance of Islamic law in adjudicating international trade?
What if economic change?
If China and India continue their rapid economic growth, will they become the dominant
economic forces in the world, replacing the USA, Japan and Europe? If this happens,
in which markets will Chinese and Indian companies come to dominate? Which
markets in China and India will be significant opportunities to companies from other
countries?
What if political change?
If countries in various parts of Africa, Asia and South America become more capable,
through political change, in the economic management of their countries, will this
create new opportunities for international business managers?
What if technological change?
If the pace of technological change increases, will smaller companies be able to
survive? If technological innovation becomes concentrated on Japan and the US, what
impact will this have on the international business strategies for companies in Europe
and in other parts of the world?
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What if currency changes?

If the Chinese Yuan continues to appreciate against the US dollar, what consequences
will this have? Will it make it more and more likely that foreign direct investment will be
from China into the US rather than the other way round? What would be the nature of
the investment.
Will the European single currency make exporting more convenient to Europe? Will it
be more beneficial to other European companies or to non-European companies?
D. PLANNING AND CHANGE

In the development of strategic plans in international business, we have to take account of
future change. The strategies that are being implemented now are based on analysis that
took place in the past. It is, though, highly probable that some of the assumptions that were
used in the formulation of the strategy will prove to be incorrect. In addition, new elements
such as new top managers or the opening of new major world markets (as has happened
over recent years in Central and Eastern Europe and in India and China) can mean that new
strategies need to be formulated.
What Changes will be Necessary?

In a world in which major change seems likely, but will be difficult to predict with consistent
accuracy, international business managers need to continuously improve their whole
strategic approach to order to achieve sustainable competitive advantage.
Analysis will need to provide a better and, importantly, a quicker assessment of the
environment, covering all aspects of the political, economic, social, technological, legal
and ethical factors impacting of the organisation worldwide. Research will need to be
at the heart of this and information systems will need to cope with large flows of
information from some countries and very poor flows of information from other
countries. Business managers will need to become more international to minimise the
problems caused by self-reference criteria.
The development of strategies will need to take account of different types of option.
For example, joint ventures and strategic alliances have been popular means to speed
the process of international expansion and to share the costs of major new product
development. However, it is not certain how enduring joint ventures and alliances will
be. If they break up, what new structures will be put in their place? If strategic
alliances are used, how will this influence the evolution of worldwide competition?
It is likely that companies will have to take particular account of how to gain and sustain
competitive advantage in situations in which technological advantages will be swiftly
countered. Differentiation through excellent customer service, through creatively
appropriate marketing and through innovating effectively will become very important.
As some companies become more and more significant in the world marketplace, the
need to develop and implement competitive strategies that are co-ordinated across
country markets will become more important. Market segmentation will be crucial and
assessment of the way in which the global market can be segmented efficiently and
effectively, both within and across country boundaries, will be central.
In the implementation of international business strategies, companies will need to
develop a more international culture. This will mean more experienced, truly
international, international managers. The equidistant manager might be a long way
off, but certainly the ethnocentric manager influence needs to be substantially reduced.
To be successful in the world marketplace, international businesses need to balance
the financial implications of their strategic options and of the implementation of their
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preferred option. We have looked at the financial implications as we have moved

through the international business strategy process. In the future, the likelihood is that
the increased scale of international operations will make the appraisal of financial risk
and return even more important than it currently seems to be.
Control and Evaluation

The annual business plan should include details of expected operating results including
sales, profit, financial ratios and other softer elements of business performance, such as
customer service levels, and brand awareness,. It is against these expected operating
results that the business can establish and implement key control standards together with
any details of actions required where operating results are not being achieved.
Again, at this level of the business planning process, control mechanisms and actions should
be detailed, specifying exactly what action will be taken, under what circumstances, and by
whom. In the measurement of the annual business plan, it is best to have at least quarterly,
and preferably monthly, reviews to ensure that plans are on course and also that plans can
embody the most up-to-date information on any changes that have occurred.
PRACTICAL ACTIVITIES
1. The planning framework is central to the case study and forms a framework within
which to assess the current situation and evaluate options for the future. To practice
the overall approach involved in drawing up a business plan, draw up a structured plan
to cover your study of the International Business Case Study Unit.
2. For an industry that you know well identify the key factors that will affect it in the next
ten years. Draw up different scenarios to assess the impact of these factors.
3. E-Readers such as the Kindle from Amazon and other similar products will undoubtedly
have an impact upon the traditional bookselling and publishing business. Using the
forecasting techniques discussed in this chapter, try to predict the future for the market
globally and draw up possible scenarios.
4. Now consider the case of Delta Airlines (as set out in chapter 1) or any of the other
examination case studies on the ABE website. Work through and consider the
business plans which lie behind the organisation's operations in respect of:
What the business objectives of the organisation are and whether they are
appropriate in the circumstances described
What approaches would be appropriate to developing the business plans
What the relationship is between the corporate plans and any separate plans for
individual regions or countries.
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37
Chapter 2
The World Trade Environment
Contents Page
Introduction 39
A. The World Trading Environment 39

A Shrinking World 39
Uncertainties/Turbulence 40
The Internet and Mobile Communications 40
B. Classifying the World 40

Classifying by Gross National Product 40
Classifying by Stage of Economic Development 41
C. A New Focus Global Convergence 43

Drivers of the Global Approach 43
Forces Working to Keep Markets Localised 45
D. Theories of International Trade 45

Theories of Advantage and Factors of Production 46
The Competitive Advantage of Nations Porter's "Diamond" 47
International Product Life Cycle 48
E. The Composition of World Trade 49

World Trade Shares 50
Trade Barriers 51
F. International Institutions 54
The World Trade Organisation (WTO) 54
International Monetary Fund 55
The World Bank 55
International Telecommunication Union 56
International Maritime Organisation 56
The Commonwealth 56
European Bank for Reconstruction and Development 57
(Continued over)
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38 The World Trade Environment
Organisation of Economic Co-operation and Development (OECD) 57

Organisation of Petroleum Exporting Countries 57
G. Globalisation 57
Influences on Globalisation 58
Arguments for and against Globalisation 59
Emerging Issues Uncertainties and Turbulence within the Global Environment 60
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The World Trade Environment 39
INTRODUCTION
This is the first of three chapters examining the environment of international business. It is
essential that you understand the background within which business is conducted across
national borders, since it provides the context for developing business strategies and plans.
This is a key feature of all the case studies set in the International Business examination. In
the next two chapters we shall consider the external, internal and competitive environments.
Here, we start by looking at world trade.
A. THE WORLD TRADING ENVIRONMENT

The world trading environment has changed substantially over the years, and indeed will
continue to do so. The international business organisation needs to understand how different
forces and factors have shaped the current world trading environment and how this
environment might change in the future.
Perhaps one of the most significant developments in the world trading environment since
World War II has been the growth of what is often termed internationalism. Quite simply,
individuals, organisations, governments and whole societies have become increasingly open
to the exchange of goods, services, people and ideas, etc. with other parts of the world. The
growth of international trade and business is in large measure due to this increased
openness to, and acceptance of, internationalism.
As the world has grown more affluent on the back of burgeoning international trade, so
factors such as increased travel, international communication networks and more
cosmopolitan consumers and lifestyles have fuelled the growth of internationalism.
Another key factor in this growth, however, has been the increased recognition and
acceptance of the need for, and value of, open and improved international relations between
countries. For obvious reasons, a major impetus to this recognition and acceptance was the
terrible consequences and effect of the Second World War itself. Immediately after the
Second World War, therefore, international co-operation began to develop, reliant to a
considerable extent on the United States, in an effort to encourage the orderly reconstruction
of the world economy. For a variety of reasons, the United States, backed by the United
Kingdom, took active responsibility for helping the crushed economies of Germany and
Japan to re-emerge. The Marshall Aid Plan and the Bretton Woods Agreement are examples
of early efforts to help the world economy and to promote the growth of international relations
and trade. Admittedly, with many hiccups and problems along the way, this desire to build
international relations and trade has continued over the post-war years and up to the present
day.
A Shrinking World
In more recent years, since the 1970s, another set of factors has increasingly affected the
world trading environment. This is the speed and ease of travel and the growth of global
communication technologies. These have resulted in what is often referred to as a shrinking
world. This, in turn, has had a number of effects on the pattern and nature of world trade; for
example, the speed at which transactions can occur between business and customer has
been substantially increased.
Communications are now virtually all electronically based and facilitated. Initially, it was the
more developed economies that have benefited from these developments at the expense of
the lesser-developed countries. However, with the continuing fall in the cost of technology,
global communications have become easily within the reach of those lesser-developed
countries and the world has started to see a major shift in the patterns and power in the
trading and economic environment.
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Uncertainties/Turbulence
Always an uncertain environment in which to trade compared to the domestic market, the
world trading environment has become more turbulent and dynamic in recent years. There is
a high degree of political and economic uncertainty when conducting business across
international boundaries. Changes can occur very rapidly. Take, for example, the collapse of
the Soviet Bloc and the removal of the Berlin Wall as a prelude to the reunification of Eastern
and Western Germany.
Both businesses and governments try to remove some of these uncertainties and turbulence
through, for example, trading agreements, political treaties and so on. But the speed at
which social, technological, political and economic changes take place in the world trading
environment has been itself increased by some of the developments already discussed such
as global communications, speed of travel and so on. There is no doubt that the world
trading environment of the future will continue to be uncertain and turbulent for business.
The Internet and Mobile Communications

These now ubiquitous technological development have already affected world trading
patterns and practices and we shall return to this area, therefore, at several points during the
later chapters. Global trading through the Internet is now a dominant force on the nature,
patterns and practices of world trade. In particular, though, these technologies facilitate both
the ease and speed of conducting transactions across national boundaries. Communication
is now more or less instant around the world and this has led to an explosion of information
across the globe. Increasingly, individuals can access up-to-the-minute information (and
misinformation) about anything that is going on anywhere in the world. This has opened up
the whole world into one global market where consumers (or at least, potential consumers)
can see the latest developments and often have the means to buy from whichever
companies and countries can satisfy their needs, doing all this from the comfort of their own
homes.
B. CLASSIFYING THE WORLD

There are over 200 countries in the world. In a changing world, changes in nation states
sometimes happen quite easily and sometimes with great difficulty. Namibia emerged in
1990 after a considerable struggle to gain independence from South Africa. Yugoslavia was
ripped apart during the 1990s, with the end result of establishing country divisions taking the
best part of two decades. On the other hand, the division in 1993 of Czechoslovakia into two
countries, based on Czech lands and Slovakia, was negotiated peacefully. Political instability
continues to this day throughout Africa and the Middle East.
Classifying by Gross National Product

It would be possible to rank all the countries in the world according to the total size of their
gross national product (GNP). GNP data is available for most countries in the world, making
it one of the most widely available statistics, and this makes it helpful in comparative
analysis.
To facilitate comparison, it is necessary to convert the total GNP for every country to a
common currency. It is usual to use US dollars ($), but you should note that, as exchange
rates vary, often considerably, the process of conversion causes some distortions and can
give different rankings from one time period to another.
GNP figures give an indication of the likely business opportunities in a country. In a very
general way, countries with high GNPs will provide larger market sizes than countries with
lower GNPs. However, the figures themselves can be misleading as some countries include
certain items, whereas others omit them.
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A more useful approach than using total GNP is to compare countries on the basis of per
capita GNP (GNP per person in the total population). This allows account to be taken of the
number of people living in a country to give a more realistic view of spending power. Using
this basis, we can divide countries into high income and low income countries. We need to
take some dividing line between high and low. This is open to debate, but if, say, $5,000 per
capita were taken, we would obtain the breakdown shown in the following two tables.
Examples of High Income Countries
Australia Libya
EU countries (exc. Portugal) New Zealand
EFTA countries Oman
Israel Saudi Arabia
Japan United Arab Emirates
Kuwait United States of America
Examples of Low Income Countries
Afghanistan Ethiopia Pakistan
Bangladesh Gambia Malaysia
Brazil Ghana Uganda
Myanmar (Burma) India Vietnam
Chad Kenya Zaire
Classifying by Stage of Economic Development

Classification by GNP or per capita GNP gives a general indication of the overall wealth of a
country and its citizens and is useful for identifying the potential size of markets. However,
this tells us little about the economic development of the country and its potential as a trading
nation in its own right, competing on the world stage.
There are a number of different ways of grouping countries by stage of economic
development. For our purposes we do not need to go into great detail, but one of the most
common ways of classifying by stage of economic development is into lesser-developed
countries (LDCs), newly industrialised countries (NICs) and highly industrialised countries.
Lesser-developed countries (LDCs)
This group includes most of sub-Saharan Africa, some of Asia and South America.
These countries are poor, have low GNPs and often lack many of the conditions for
economic development. In particular, they might lack capital, trained and well educated
workers and managers, natural resources (for example, good agricultural land, energy
sources, and raw materials), a developed infrastructure of transport and
communications and political stability.
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On the face of it, LDCs offer little encouragement for business. They are often
associated with greater environmental uncertainty as political regimes can change
abruptly, and this, linked with low market size, discourages long-term investment by
international companies.
There are, however, some market opportunities and sometimes the hope of growth in
the future. Opportunities can result from the spending associated with economic aid
packages from richer countries or projects financed through loans from institutions like
the World Bank.
Newly industrialised countries (NICs)
This group includes China, India and Brazil, together with the so-called "tiger
economies" of South East Asia and the Far East (including South Korea).
In the past, there were considerable variations in the industrial development of the
NICs. For example, during their development some countries, such as Brazil, ran into
substantial economic difficulties, resulting in high inflation rates, balance of payments
difficulties and the imposition of government controls on foreign exchange. However,
they have been growing rapidly since the mid-1990s and are now exerting a major
influence on the world economy.
NICs can offer considerable business opportunities. Their growth has opened up
massive opportunities for consumer and industrial products which the highly
industrialised countries have been keen to exploit.
However, NICs also pose something of a threat. In the process of growth, they have
aggressively developed their production capabilities as well as their approach to
exporting, taking export markets from other established exporters and even penetrating
domestic markets of the more developed nations. In addition, NICs usually provide a
low cost base for production. Increasingly, production and other operations are being
moved to these countries, boosting their GNPs and enabling them to develop their own
capabilities to compete on a more equal footing. At the same time, employment
opportunities and GNP in the more advanced countries have fallen, forcing them to
move increasingly into more sophisticated products and services with higher amounts
of added value.
Highly industrialised countries
One manifestation of the major industrialised nations is the so called G8 countries
comprising, Canada, France, Germany, Italy, Japan, the United Kingdom, Russia and
the United States who, as the eight wealthiest nations in the world, meet once a year
to discuss economic and political issues.
This group of countries is especially attractive to business. They have high levels of
income spent on a variety of consumer and industrial goods and, whilst there are
various restrictions placed on exports to these countries (including tariffs, quotas,
technical standards and health and safety requirements), they are usually much more
open to international trade than the LDCs and NICs.
The sheer attractiveness of this group of countries also results in them being very
difficult markets. The existing companies fight hard to maintain market share and they
are usually very aggressive towards new entrants into their markets. The Japanese
market is usually portrayed as particularly difficult. This is partly the result of very
competitive domestic (i.e. Japanese) companies, partly the result of strong cultural
differences between Japan and the rest of the world, partly the result of Japanese
restrictions, and partly the result of poor quality marketing by companies attempting to
enter the Japanese market.
What has traditionally been this established grouping of the wealthiest nations has
changed somewhat in recent years with the emergence of the NICs as truly competitive
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nations on the world stage. The G8 is set to become the G20 and include a far wider
representation. However, the power of the major trading nations the USA, Japan and
Western Europe, sometimes referred to as the "Triad" remains strong.
C. A NEW FOCUS GLOBAL CONVERGENCE

Most companies start by selling to their local or regional markets. There is then a
development, as the domestic market becomes saturated, towards an international focus,
based on the following pattern:
Domestic sales
Domestic sales with a few exports, usually resulting from reacting to orders received
Domestic sales plus exports, where exports are seen as important to the company and
it will become more proactive in seeking such opportunities
The development of international markets by investing in other countries i.e. setting
up sales offices, distribution depots and production units
The development of an international approach that looks at world opportunities, a
global approach.
Note that the trend is not necessarily a linear one through the various stages in terms of the
growth of a company. In very large countries like the United States, companies can become
very large, but still not have a complete coverage of their national market, whereas in much
smaller countries, for example, Finland, Sweden or Switzerland, companies can quickly
develop in their own national market and then seek to grow through export markets well
before the American company. Also, whilst many companies experience a gradual
development towards more sales to non-domestic markets until they reach a point in which
international sales are more important than domestic sales, other companies quickly develop
a strategic approach that seeks to achieve international success.
There are a number of forces that have encouraged the development of this global approach.
However, not all forces are moving companies in this direction and there are significant
factors pushing in the opposite direction.
Drivers of the Global Approach

We can identify eight major forces:
Similarity in market needs
Some markets cannot be adequately segmented within country boundaries. The
market for jeans or pop music, for example, is widespread and is not restricted to any
particular country. Despite significant basic cultural differences, the product appeals to
a worldwide audience. In business-to-business markets there are increasingly similar
needs around the world for computer systems, telecommunications solutions and for,
say, business travel.
The high cost of new technologies
New technologies are usually much more expensive to develop than the ones that they
replace. Old electro-magnetic telephone systems are being replaced by high cost
electronic ones driven by costly software systems. Previously, the electro-mechanical
system costs could be recovered by sales within the country. This is no longer possible
as the costs are too high. The result is that fewer companies can afford the high
research and development costs and few have the operational capability to sell across
the world on a sufficient scale to break even on the initial costs. Those that do are the
companies that have to take a much wider world view a global approach.
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Communication and transport systems

The development of communication and transport systems that enable rapid message
transmission, personal transport and freight delivery around the world has resulted in
the feeling that the world is becoming a global village. Whilst this is an exaggeration,
it is undoubtedly true that the differences in the world are being reduced by
international air travel and international voice and data transmission.
Controlling costs
Increasingly, survival in a tough world depends on driving down costs whilst
maintaining or improving quality. Lower costs are increasingly achieved through
buying, sometimes called sourcing, products from low-cost countries, particularly newly
industrialised countries such as China or others in the Far East or South East Asia.
Other companies have established their own factories (or joint ventures) to take
advantage of lower labour costs and lower land costs.
Competition
There is a need to develop a more sophisticated approach to competition strategy and
the extent of increasing internationalism is very much influenced by the actions of
competitors. If competitors are more efficient because they operate globally, then this
becomes a strong driving force. With some companies using a co-ordinated global
strategy, those competing on a simple national level are at a disadvantage. Companies
are being forced to look at markets together, to attack in some and to defend in others.
Transference of experience and learning
The ability of large companies to transfer experience from one market to another and
learn from business activities in different parts of the world means that they are able to
apply that knowledge quickly in other parts of the world. They can learn how to do
things, and how to do things cheaper, to obtain competitive advantages and
improvements in efficiency in all parts of their operations. The opportunities to
standardise, make economies and to transfer good practice from one market to another
encourage moves to a more and more international approach.
The development of world region markets
European colonisation of large parts of the world had a profound impact on the patterns
of world trade over the period from the 16th to the mid-20th century. In some senses,
for the developed countries of Western Europe, this trade was almost an extension of
domestic selling in that their markets were essentially the colonists in another country.
However, the patterns and links between countries built up during this period have
endured to provide worldwide markets for both the former colonising powers and the
ex-colonies themselves.
Regional groupings like the ASEAN group of countries in South-East Asia and the
European Union have similarly encouraged a wider focus. The development of the
Single European Market has led companies in Europe to consider countries with which
they had never traded before as being their natural markets.
When this is linked with the pattern of trade resulting from the history of European
colonisation, you can see the opportunity for a more global approach.
Quality
Quality has become a major factor in market success. Good quality has always been
important, but in increasingly competitive market places, the goal is a zero defect, total
quality every time philosophy. Japanese companies spearheaded this approach and
their success has meant that others have had to follow suit.
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A further factor here is the increasing use of benchmarking. This is the process of a
company comparing its performance across a range of indicators with others in the
same or similar industry. The aim is to achieve continual improvements along the path
to the goal of excellence. The approach of drawing comparisons with the best
performing companies inevitably causes the company to look at international
competitors.
The reason why quality necessitates a global approach is that high quality demands
excellent systems. It is easier to spread the costs of those systems if the sales volume
is high, hence the need for a wider than domestic approach.
We should note, though, that developing approaches to take advantage of these drivers is
not, of itself, a guarantee of success. As with all business, it is necessary to develop
sustainable differentiation to achieve success. Whilst lower costs need to be gained, it is
difficult to sustain lower costs than the competition over a long period of time. Technologies
change, markets change and, therefore, past cost advantages can disappear. Companies
have to develop superior systems and superior brand and company images to make
customers prefer their product.
Forces Working to Keep Markets Localised

Whilst these drivers toward global business are strong, you should not form the impression
that the trend is inevitable in all aspects. There remain a number of forces that work to keep
markets localised:
Market differences There will always be particular differences between markets.
For example, different countries have different climates and different cultures warm
clothing is necessary in Scandinavia, but cool clothing in Central Africa, and the
demands for air conditioning units is low in temperate climates compared to countries
that experience hotter weather.
History Companies will have different market shares and different competitive
positions in different country markets. It is often difficult to standardise these
differences to go for a global approach.
National controls/barriers to entry As we shall see later in the chapter, most
countries have tariff or non-tariff barriers (NTBs). These restrict entry and increase
costs and delays, all resulting in difficulties in the development of global business.
Management myopia and organisational culture In some companies, the wider
international and global opportunities are not seen because management is too
wrapped up in its domestic market. The global approach requires vision, international
experience and a good understanding of managing complicated organisations.
D. THEORIES OF INTERNATIONAL TRADE

International trade, of course, is not new; nations have been trading, and often fighting to
trade, with other nations for thousands of years. The simple reason for this is that trade, and
especially international trade, brings wealth and economic growth. Furthermore, few
countries if any, can be totally self-sufficient in all the goods and services that are needed to
be consumed within a country. The only solution is to do without or trade with other nations.
Sometimes, of course, nations trade with other nations for non-economic reasons, for
example, to develop international relations with other countries for strategic and political
reasons, or perhaps even to help other nations develop their economies. The primary
reasons for international trade, however, are essentially economic. Perhaps as we would
expect then, it was the economists who first provided a rationale and a set of theories to
explain the reasons for, and the patterns of, world trade. We shall begin by examining the
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economists earliest theories of trade before moving on to consider more recent theories,
including the emergence of more market and competitor-based theories.
Theories of Advantage and Factors of Production

Perhaps the first recognised theory was that developed by Adam Smith based on the notion
of absolute advantage. This theory was further refined in Ricardos theory of comparative
advantage.
Absolute advantage
This states that if one country can produce, for the same costs, more products than
another country, there is an advantage to be gained by specialising production in the
higher-output country. In effect, the costs per unit are lower.
Comparative advantage
Attributed principally to David Ricardo, the important idea here is the economists
concept of forgone opportunity. In producing, say, aeroplanes, the opportunity to
produce consumer durable products will be missed. The ideal approach is to
concentrate on those products and services that give the best relative position.
To take an extreme example, country X might have an absolute advantage over
country Y in every type of product and service. Country X should concentrate on those
items that give the best returns i.e. those items in which it is able to add most value. It
is probable that country X will concentrate on complicated manufacture requiring a
talented and well educated and trained workforce. Country Y will produce more
straightforward products and services. Country X will gain because it produces more
high added value items. Country Y will gain because it will have access to the products
produced by country X at lower prices than country Y could achieve.
The major legacy that these early economists left was the justification, ever since, for the
protagonists of free trade. Important and influential though these early theories were, they
did have shortcomings, particularly as countries and international trade itself began to
develop further. Changes in the patterns of international trade led to two further additions to
the economists theories of international trade, in particular, the so-called productivity theories
and the factor proportions theory.
Productivity theories
There are various explanations for trade flows that look in detail at the productivity of
factors of production. Early theories concentrated on the productivity of labour. If one
country had people who produced more products or services, their costs would be
lower. Trade would flow from this country to the other less productive countries.
The weakness with the labour productivity theory is that labour is not the only factor of
production. In the 20th century, the full range of factor costs or factor output per time
period is still important. However, this needs to be balanced by the different factor
inputs. Some companies can compensate for high labour costs by applying capital to
increase the use of machinery. In addition, those companies tend to specialise in
advanced innovative products with high levels of service. Germany and Sweden, both
high-cost labour countries, are examples of this approach.
Factor proportions theory
This theory assumes different factor proportions for different products. It also assumes
that different countries will have different amounts of resources (i.e. factors of
production). For example, if the UK wishes to gain more exports, it might wish to
consider investing in education and training to develop a workforce capable of
generating the kinds of added-value, knowledge-based products and services likely to
be demanded in the future.
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The problems with these standard theories of factor comparative advantage are that they
assumes:
(i) That there are no economies of scale.
(ii) That technologies everywhere are identical.
(iii) That products are undifferentiated.
(iv) That the pool of national factors is fixed.
(v) That factors such as labour and capital do not move between nations whereas, for
example, the Single European Market is designed to allow the free movement of
factors of production across the national boundaries of the member countries of the
EU.
(vi) That all companies follow the same strategy.
They also makes no allowance for the competitive forces that operate within industries.
The explanations of the classical economists were much more appropriate for the 18th and
19th centuries. During this time, industries were more dependent upon local supplies of raw
materials and production was more labour- and less skill-intensive. Most industries were
fragmented and there was little concentration of power. Business acted in a way that was
close to the economist's concept of the perfect market.
Especially since the latter half of the 20th century, industries have become more knowledge-
based, with higher levels of capital employed relative to labour. Industries are no longer
forced to exist close to raw material supplies. Japanese industries rely on raw materials
transported hundreds and thousands of miles. Industries are now, usually, composed of a
few large companies along with many smaller companies. The concentration of power
generally follows the Pareto principle of the 80:20 rule. In these situations, strategic
decisions by the major companies (sometimes they are referred to as players) can change
the industry shape, and can influence which countries export and which ones import the
goods that they manufacture.
The Competitive Advantage of Nations Porter's "Diamond"

In order to explain some of the changes in the patterns of world trade which we have seen in
recent years, a number of comparatively new theories of international trade have been
developed which reflect the nature of competitive strategy as a basis for the nature and
patterns of world trade.
Michael Porter studied the factors which are associated with success in international
markets. He identified four interlocking elements (referred to as "Porter's Diamond"), which
underpinned the success of organisations from a particular country in international markets.
Factor conditions those necessary inputs of resources, which the organisation
needs in order to support its activities (in particular those which are due to natural
resources). These include climate, an appropriate labour force and the relevant skills
and knowledge that have been developed over time, for example in a location with a
long history of engineering production. For example, India has a growing and
potentially dynamic population under 35. This is further enhanced by the fact there are
within this age group a large number of well-trained, industrious people who are paid at
lower levels than in Europe and the United States.
Home market demand conditions the demands of independent purchasers of the
company's products that make it necessary for it to continually innovate and improve
them. For example with regard to the IT market, In India there is a booming domestic
market, which has attracted many multinational companies particularly around
Bangalore where Indias own Silicon Valley is located.
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Other related local industries which support and collaborate with the company,
thus enhancing its competitive potential.
Local rivalry this develops strong competitive characteristics which are needed to
tackle the home market, and can then be applied to worldwide markets.
In addition to these four major elements, Porter also identifies other significant factors,
including:
Governmental behaviour in the form of intervention to encourage growth and the
creation of jobs in areas of high unemployment, for example by granting subsidies and
investment in development areas, or even by non-intervention. Much of Chinas
spectacular industrial growth has been underpinned by the creation of special
economic areas by the government.
The element of chance which applies to companies as much as to individuals, i.e.
being in the right place at the right time.
The development of expertise which enables the company to become competitive
and thus to grow.
International Product Life Cycle

The standard product life-cycle (PLC) concept was applied in the 1960s by Raymond Vernon
to international markets. The basic idea was that there is a trickle down of product
availability from advanced countries to the less advanced countries.
It assumes that advanced countries will innovate products and services. Over time, these
new products will mature in their domestic markets and will, then, be introduced into the
developing and the less-developed countries. In these countries, the PLC will start with the
introduction phase, etc. Thus, products would be developed in, say, the US, but the PLC for
that product would be straddled across the export of the product to less developed markets.
Figure 3.1: The trickle or cascade approach
Advanced Country
(e.g. US)
Developing
Countries
Less Developed
Countries
This approach has been much less likely to happen since the 1990s. Many companies now
take a strategic approach to product development and product launch, with products often
being launched, in a co-ordinated way, into several markets at once. This more modern
approach has been referred to by Keegan as the shower approach.
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Figure 3.2: The shower approach
Co-ordinated
Launch Programme
Advanced Country Developing Less Developed

(e.g. US) Countries Countries
In addition, the concept of the international PLC does not take account of other changes in
the late 20th century:
(i) New products and services are being developed in many different countries, not just
advanced countries.
(ii) There are fewer demand differences between countries. We have not moved to the
global village, but there are considerable signs of convergence.
(Note that, despite these reservations about the international PLC, there is little doubt that
the original concept of the product life cycle will operate for each product in each country
market.)
E. THE COMPOSITION OF WORLD TRADE

The overall growth in world trade contains some significant changes in its composition.
Some of the more important changes include the following.
From primary to secondary products
Shortly after the Second World War, trade in primary commodities accounted for a
substantial proportion of world trade. So, for example, nations traded their raw
materials with other nations, including, for example, wool, cotton, timber, basic food
commodities such as wheat, rice and so on, and energy commodities such as coal and
oil.
Certainly commodities still represent a large proportion of world trade between
countries, but since the Second World War, trade in manufactured products began to
increase substantially as a proportion of world trade. This increase included trade in
products for manufacturing, such as components and machinery etc., and also
products intended for final consumers ranging from clothing through to electrical
products, cars and so on. By the 1970s and 1980s trade in manufacturing products
had become the major element of world trade.
More recently, this trade has been increasingly accounted for and fuelled by trade in hi-
tech products including, for example, computers and information technology,
biochemical products, genetic engineering and so on. In short, world trade is
increasingly being dominated in terms of manufacture of products by hi-tech industries.
Service trade
Alongside this growth in the trade of manufactured and hi-tech products has been the
growth in the trade of services. As economies have become more advanced, so
service industries within those economies have become more important, to the extent
that in some highly industrialised countries, such as the United States and the United
Kingdom, service industries are now economically more important than manufacturing
industries.
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Corresponding to this growth in service industries has been a growth in international

trade in services and service products. Admittedly, certain services have always been
traded internationally for example, the United Kingdoms trade in financial and
insurance services has long been a major part of its trade in world markets.
Increasingly, however, international trade in services has expanded to include, for
example, transport, tourism, telecommunication and consulting. A specific example is
the relocation of call centres to lower cost and English speaking countries such as the
Philippines and the Indian Sub Continent. Many service organisations now operate on
a global basis and this growth in the marketing of services in world trade is set to
continue and increase.
World Trade Shares

Linked to the changing patterns of trade in manufactured, commodity and service products
are the changing patterns in the composition of world trade which have taken place in the last
decades of the 20th century. Shares of world trade can be categorised and analysed in
different ways, and we shall examine these by reference to three criteria country,
geographic area and economic categories. Each of these provides some useful and
interesting insights into the changing patterns of world trade.
Share by country
Shortly after the Second World War, and despite the devastation of the levels of trade
with the rest of the world wreaked by this, the United Kingdom was still a major player
in world markets. Since the 1950s, however, and needless to say, much to the concern
of interested parties in the United Kingdom, its share of world trade has continuously
fallen. In contrast, the shares of some countries that for long periods of history, and
indeed up to the 1950s, had relatively small shares of world trade have continued to
increase over this period. In fact, as UK shares have fallen, some of these other
countries have been major beneficiaries. So, for example, firstly Japan and Germany
increased their share as their industries were re-established after the war, followed by
countries such as South Korea and Taiwan in the 1980s and 1990s, and most recently
has seen the booming economies of China, India and Brazil becoming important.
Admittedly, world trade continues to be dominated by the Big Three (or Triad as they
are often referred to) of the United States, Western Europe and Japan, but other
countries continue to make inroads into the world shares of the Big Three. Quite
simply, over time, patterns of world trade, as measured by shares of volume and value,
evolve and change.
There are numerous and often complex reasons for these changing patterns of share
by country. For example, not surprisingly, shares change as competitive advantages
change between countries. Generally speaking, the more competitive a country is in
the production and marketing of particular products and services, the more likely this
country is to increase its world share in these products and services.
Interestingly enough, changing patterns of world trade shares are linked to the area
previously discussed of changing patterns of trade in commodities, manufactured
products and services. Remember that the fastest growth in world trade in recent
years has been in manufactured products, and in particular, hi-tech products, followed
more recently by a growth in international services. Obviously, countries that have
concentrated on and/or have an advantage in hi-tech or service industries have
increased their shares of world trade at the expense of countries that have
concentrated on commodity products. In part, this explains the success of Japan in
gaining larger shares of world markets in the 1960s and of China in the 2000s.
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Share by economic category

We noted earlier that we could classify countries by their stage of economic
development, distinguishing between lesser-developed countries, newly industrialised
countries and highly industrialised countries.
Perhaps as one would expect given our discussion of the growth in trade accounted for
hi-tech and service products, when considering the composition of world trade by
economic category, once again the highly industrialised countries have in fact
increased their share of world trade. Admittedly, there are some notable exceptions to
this, particularly in the case of the newly industrialised countries as already mentioned.
Taiwan and South Korea and more recently China and India, have increased their
share of world trade substantially, but overall, these are indeed exceptions. The lesser-
developed countries in particular have lost out with respect to their share of the rapid
growth of world trade, needless to say, adding to their already often severe economic
problems.
Share by region
Regions can also, of course, classify the world. These regional groupings may be by
geographical location, e.g. Western Europe, Africa, North America, Latin America, Asia,
etc, or, for example, by political or economic groupings, such as the European Union
(EU), NATO countries, and MERCOSUR.
Changing patterns in the composition of world trade are more variable and harder to
isolate in this way than when analysed by our previous two categories. So, for
example, Asia as a geographical area has been a major player in the expansion of
international markets and this is reflected in the increased share of world trade in this
region. In comparison, Eastern Europe as a region has tended to lose out in shares of
world trade. One thing we can say is that there is a close relationship between
economic groupings of countries (particularly those which have formed trading bodies)
and their share of world trade, so, for example, countries which belong to the European
Union, the Asian Pacific Economic Co-operation, members of the Association of South
East Asian Nations and so on have, because of the power and concerted planning
associated with such trade bodies and groupings, tended to increase their share of
world trade compared to those countries and regions which have not formed such
bodies.
Trade Barriers
Many of the theories of world trade, and particularly those of Adam Smith and Ricardo,
sought not only to explain the rationale of international trade, but also the benefits and
therefore the importance of this trade being unrestricted or free. As we shall see shortly, this
explains the commitment of many governments to developing free trade by removing
restrictions and the formation of world trade bodies and institutions to promote and facilitate
the growth of such free international trade.
Notwithstanding this, however, and notwithstanding, as we shall also see later, concerted and
continuing attempts to remove them, there exist a number of barriers to international trade
which serve to make such trade more difficult and sometimes impossible between nations.
Before we look at some of the world trade bodies that exist specifically to promote freer world
trade, we need first to understand some of the main reasons and types of trade barrier,
together with the notion of dumping in international trade.
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Reasons for Erecting Trade Barriers

Countries, or rather governments, may erect trade barriers for a number of reasons. Some
of the most frequent reasons are as follows:
Protection of home markets/industries and employment. In some instances, barriers
might legitimately allow an infant industry to establish itself before the full forces of
competition can shake it, perhaps to breaking point. In other instances, the barriers
might allow the domestic industry to become inefficient, resulting in domestic
consumers paying higher prices and having less up-to-date products and, perhaps,
lower levels of customer service.
Strategic (military and key infrastructure) reasons.
Retaliatory reasons based on aspects such as political and economic.
As bargaining levers to secure desired objectives in international relations with other
countries.
These, then, are some of the reasons (or rather justifications) for introducing and/or
increasing trade barriers. The main categories and types found in international markets are
outlined below.
Tariffs
Tariffs are taxes or duties that are placed on imports and their use is widespread around the
world. The purposes of tariffs vary from a means of raising revenue for a government to
creating barriers to entry into the domestic market.
The main types of tariff are as follows.
Ad valorem This is the adding of a surcharge as a percentage value of the goods
say, for example, 9% to the landed price of the product at the port of entry. Luxury
goods, such as prestige motorcars, are often highly taxed in this way in many
countries.
Specific duty This is a duty charged on the physical specifications of the product
for example, two dollars per ton of steel. In this instance, the duty falls more heavily on
lower priced, less-value-added variants of the same product type. A special steel might
have a much higher market value than ordinary steel. With a specific duty, both would
be charged at the same rate. Obviously the percentage increase in price is higher for
the ordinary steel than it is for the special steel.
Special and temporary tariffs In some instances, countries will apply surcharges to
increase the price level for specific goods. This may be to protect particular domestic
industries or, sometimes, may be applied as an anti-dumping measure.
In addition, compound or mixed duties, which are combinations of ad valorem and specific
duty may be applied.
Non-Tariff Barriers (NTBs)
Whilst there has been a general reduction in the range and levels of tariffs, non-tariff barriers
have tended to increase. For example, the Single European Market eliminated tariffs
between the 27 member states, but is still wrestling with the need to harmonise NTBs.
The main types of non-tariff barrier are as follows.
Public procurement policies This is the selective and discriminatory buying policies
on the part of governments and state-owned-industry. In many countries, there is
either an explicit or implicit buy our own national products policy.
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In the EU, no favouritism can be shown to national or local suppliers. Goods and
services have to be selected either at the lowest tendered price or by an agreed best
value formula.
Quotas Under this type of barrier, only specified amounts of particular goods are
allowed to be imported during a time period (usually, over a year). Once this amount is
filled, no more goods can be imported until the next time period.
This restricts the potential market for exporters and makes it easier for domestic
producers to gain market share. In addition, the exporter is faced with the uncertainty
of not knowing whether the quota is full or not. If the quota amount has been reached,
the exporter will have to wait until the next time period when the quota resumes.
Technical standards Many countries have technical requirements applying to
specific goods within the domestic market. Sometimes these can be used to make it
easier for domestic suppliers than those seeking to gain entry. The domestic suppliers
might understand the regulations better, perhaps continually changing the regulations
to keep the balance of advantage on their side.
Health and safety standards These can be used in much the same way as
technical standards.
Dumping and Anti-Dumping
Although generally speaking, barriers to trade are, in economic terms at least, largely
indefensible, there are sometimes good reasons for imposing them, at least in the short term.
One situation where barriers to trade might be justified is in the case of anti-dumping
legislation that is enacted to protect a market from unfair competition.
Dumping occurs when a product is sold in another country at a price below its actual costs.
There may be some difficulty in establishing what the actual cost is it can be argued that it
should include all costs (i.e. direct and indirect costs) although it is generally agreed that, in
the short term, the price should cover the direct, attributable costs of producing a specific
quantity of product.
There are three main types of dumping:
Sporadic This happens from time to time, usually as a result of surplus inventory or
stocks. A company might prefer to find an export market to unload the surplus rather
than risk unsettling the domestic market in which the company has a major interest.
Predatory This is a type of competition strategy in which a company seeks to
destabilise a market with the objective of gaining market share by selling at very low
prices. Once the domestic producers are driven out of business, the company can
increase prices and recover profit levels.
Persistent This is the continued sale of products at very low prices. This was a
particular problem with ex-COMECON countries where, in countries like Poland,
Hungary and the USSR, central planners established prices and costs arbitrarily. Costs
and prices showed no relationship to conventional western accounting practices.
Most countries have anti-dumping legislation. In the main, this revolves around particular
commodities steel, coal and basic industrial chemicals, textiles and agricultural produce.
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F. INTERNATIONAL INSTITUTIONS
At the end of the Second World War, many economies were totally crippled and some
countries such as Germany and Japan were totally crushed. In an effort to help these
countries, and thereby the world economy, a number of international bodies and institutions
were formed, principally with the objective of helping this worldwide reconstruction, but
underpinned very much by the philosophy of promoting the growth and return of free world
trade. Since their establishment, some of these bodies and institutions have had a major
influence and impact on world trade and continue to have an important impact still today.
Of particular significance and importance are the General Agreement on Tariffs and Trade
(GATT), more recently known as the World Trade Organisation (WTO), the International
Bank for Reconstruction and Development (often referred to as The World Bank) and the
International Monetary Fund (IMF). Each of these is discussed below.
The World Trade Organisation (WTO)

GATT was set up after World War II in an effort to avoid the difficulties of the 1920s and
1930s. During the inter-war years the world recession had been compounded by countries
individual policies on importing and exporting that were aimed at ensuring their preferential
position in the international market place. GATT aimed to create order and predictability in
world trade with the objective of encouraging the development of this trade around the world.
GATT as it stands today is not just one treaty agreed in 1948 but also a large cluster of
around 180 that over the years have shaped its constitution and thus its direction, its
membership and its mission. There have been seven negotiating rounds, each lasting an
average of nine years, which clearly demonstrates the complexities of the issues that GATT
tried to address in a fast changing world trading environment.
Following the approval of the Final Act of the Uruguay Round of GATT in 1993, the World
Trade Organisation (WTO), a permanent body with a status commensurate with that of the
International Monetary Fund or the World Bank, effectively replaced GATT.
It is the responsibility of the WTO to monitor agreements to reduce barriers to trade, such as
tariffs, subsidies, quotas and regulations that discriminate against imported goods.
The aim of the WTO is to create order and predictability in world trade. The principles that
are embodied in the WTO are:
Reciprocity The idea is that if one country reduces its tariffs against another
countrys exports, then it can expect the other country to reduce the tariffs against its
exports.
Non-discrimination Under the terms of membership, nations agree to apply their
most favourable tariff rate to other WTO signatories. It is, however, possible to have
preferential rates that may be used to encourage trade with particular nations. For
example, the UK may wish to use a preferential rate with Commonwealth countries,
particularly those that are less developed. The highest degree of preferential status is
the most favoured nation (MFN) status and is accorded on a bilateral basis.
Fair trade This principle prohibits export subsidies on manufactured goods and limits
their use on primary products.
Whilst the aim and principles of the WTO are relatively simple, the complexities surrounding
their application and indeed their influence must not be underestimated.
Since the establishment of GATT, more and more groups of countries have looked to become
unified from an economic viewpoint, the European Union being perhaps the most successful
to date. Increasingly, the dimensions of the Pacific trading markets are changing as a
response to shifts in regional trade flows. Economic indicators are pointing to an increasing
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interdependence among these nations. At the same time, Europe continues to debate the
strengthening and extension of its economic ties.
The impact of the WTO can appear to be most significant at a national level. However, its
potential impact at an organisational level is something that should not be overlooked.
The WTO is not without its critics. Since the turn of the century, anti-globalisation protestors
have held a series of demonstrations, often turning into riots, in the cities where the WTO
was holding its next round of meetings. There were a number of reasons for these protests,
but essentially, a number of critics feel that the WTO represents the interests of the highly
industrialised countries, and particularly of the United States, at the expense of the lesser-
developed countries. This, they suggest, continues to repress these developing countries,
despite the WTOs commitment to raising the living standards for all the people of the world.
There are also those who believe that the WTO represents the epitome of commercial greed
and capitalism and hence are determined to destroy it. Yet others believe that world trade
helps destroy the environment. These demonstrations have been so successful in attracting
attention to the various causes they represent that a more socially responsible attitude will
have to be taken into account in any future considerations by the WTO.
International Monetary Fund

The IMF is an organisation of 184 countries, working to foster global monetary cooperation,
secure financial stability, facilitate international trade, promote high employment and
sustainable economic growth, and reduce poverty. It is responsible for ensuring the stability
of the international monetary and financial system the system of international payments
and exchange rates among national currencies that enables trade to take place between
countries. The Fund seeks to promote economic stability and prevent crises; to help resolve
crises when they do occur; and to promote growth and alleviate poverty.
The idea for the IMF was developed at the Bretton Woods Conference in New Hampshire, in
the United States, towards the end of World War II in 1944. The IMF was designed to
provide a stable framework for international currencies. Members of the IMF subscribed to a
quota based on expected trade patterns. One quarter of the quota was to be paid in gold or
dollars and the rest in local currencies. The funds were to be used to provide support for
currencies during fluctuations in exchange rates and thus provide stability in the foreign
currency exchange rates that are so important to the development of world trade.
The original intention of the IMF was to provide a support system for fixed exchange rates
between countries. However, in 1971, the US abandoned the gold standard and devalued
the dollar, the end result of which was the development of flexible or floating exchange rates
instead of the fixed rate system.
The structural problems of developing countries often pose grave difficulties for the IMF in
finding acceptable ways to support the developing country whilst at the same time
safeguarding the funds of the IMF. In the 1980s, the IMF had to cope with severe difficulties
experienced by a number of lesser-developed and newly industrialised countries, for
example, Mexico, as a result of their substantial accumulated debts that they were unable to
pay. In the 1990s, the IMF had major new pressures resulting from the collapse of the USSR
when many countries in Central and Eastern Europe needed economic and foreign currency
support during their reconstruction. Further pressures have been put on the resources of the
IMF by the fallout from the banking crisis of 2007-2008 and the debt positions of many
European countries.
The World Bank

The World Bank, officially called the International Bank for Reconstruction and Development,
was also founded in 1944. Its initial role was to assist the redevelopment of countries
crippled economically by World War II. Since the completion of this role, the World Bank has
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played a major part in developing the economies of the poorer countries, particularly new
countries emerging into independence from their former colonial status, such as Nigeria and
India (from the UK) and Mozambique and Angola (from Portugal).
The World Bank finances several hundred major projects each year. Loans must be repaid,
with interest, and are subject to guarantee by the government of the borrowing country. The
projects range from developments in agriculture, to telecommunications, to population
planning, and there are international business opportunities to be gained from World Bank
projects.
The World Bank is also not without its critics. Again, the main criticism is that their large debt
repayments and interest charges have effectively crippled many of the lesser-developed
countries who have been recipients of World Bank funds in earlier years economically. In
fact, some countries will never be able to repay the interest, let alone the capital and so their
debts will simply accumulate. Recently, steps have been taken to address this problem.
Some countries have had their debts reduced, and more recently, the United States and the
United Kingdom have cancelled some of them completely.
International Telecommunication Union

The purposes of ITU are to maintain and extend international cooperation between all its
Member States for the improvement and rational use of telecommunications of all kinds, to
promote and enhance participation of entities and organizations in the activities of ITU, to
offer technical assistance to developing countries in the field of telecommunications, to
promote the development of technical facilities, the extension of the benefits of new
telecommunication technologies and the adoption of a broader approach to the issues of
telecommunications in the global information economy and society by cooperating with
intergovernmental and non-governmental organizations .
International Maritime Organisation

The purposes of IMO are "to provide machinery for cooperation among Governments in the
field of governmental regulation and practices relating to technical matters of all kinds
affecting shipping engaged in international trade; to encourage and facilitate the general
adoption of the highest practicable standards in matters concerning maritime safety,
efficiency of navigation and prevention and control of marine pollution from ships". The
organisation is also empowered to deal with administrative and legal matters related to these
purposes.
The Commonwealth
The Commonwealth is a voluntary association of 54 independent sovereign states,
comprised of a variety of faiths, races, languages and cultures. The Commonwealth's
2 billion people account for 30% of the world's population. Members have a common
working language and similar systems of law, public administration and education. Mainly
membership is based around colonies of the former British Empire, however there are
members such as Mozambique and Rwanda, who were not former British colonies but feel
that that being members can best serve their interests on the global stage.
The Commonwealth aims to advance democracy, human rights and sustainable economic
and social development both within its member countries and beyond.
The Commonwealth's structure is based largely on unwritten and traditional procedures and
not on a formal charter or constitution, being guided by a series of agreements on its
principles and aims. These are Declarations or Statements, which have been issued by
Commonwealth Heads of Government at various summits. Together, they constitute a
foundation of Commonwealth values and a history of concern in global affairs.
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Every two years, the heads of government of Commonwealth member states convene at a
meeting commonly referred to as the Commonwealth Heads of Government Meeting
(CHOGM). Whilst the CHOGM is conducted in a more informal setting than other
international summits, major strategic issues affecting the Commonwealth are discussed.
CHOGM 2009, for example, was dominated by discussions on climate change many
Commonwealth states are small, low lying islands, particularly vulnerable to the rising sea
levels associated with climate change.
European Bank for Reconstruction and Development

The EBRD was established in 1991. It provides project financing for banks, industries and
businesses, both new ventures and investments in existing companies. It also works with
publicly owned companies, to support privatisation, restructuring state-owned firms and
improvement of municipal services.
Organisation of Economic Co-operation and Development (OECD)

The OECD groups 30 member countries sharing a commitment to democratic government
and the market economy. With active relationships with some 70 other countries, and Non
Governmental Originations (NGOs) such as Oxfam and Medecin Sans Frontiers and civil
society, it has a global reach. Best known for its publications and its statistics, its work
covers economic and social issues from macroeconomics, to trade and education.
Organisation of Petroleum Exporting Countries

OPEC is an international Organization of eleven developing countries, which are heavily
reliant on oil revenues as their main source of income. Membership is open to any country,
which is a substantial net exporter of oil. OPEC's eleven members collectively supply about
40 per cent of the world's oil output, and possess more than three-quarters of the world's
total proven crude oil reserves. OPEC's objective is to co-ordinate and unify petroleum
policies among member countries, in order to secure fair and stable prices for petroleum
producers; an efficient, economic and regular supply of petroleum to consuming nations; and
a fair return on capital to those investing in the industry.
G. GLOBALISATION
Market expansion is concerned with extending the area in which a business operates, so that
more potential customers are aware of the products or services being provided. As we have
seen, exporting as a method of market expansion is usually the first step towards
international trading. This is often followed by the business setting up locations in other
countries, where its products are manufactured as well as marketed, in order to take
advantage of the local availability of raw materials, or of cheap labour, thus reducing
transport costs.
Trade has expanded worldwide, so that we have now reached the stage of global industries.
These have been defined by Porter as those in which
"the strategic positions of competitors in major geographic or national markets are
fundamentally affected by their overall global positions".
A global firm is one that can secure major benefits in all areas of operation, with the ability to
site production plants and distribution networks in whichever region of whichever country
offers the best advantages.
This has led to nation states actively competing to attract foreign investment, and global
corporations such as Toyota and General Motors are acquiring an economic power to rival
the countries in which they operate.
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Influences on Globalisation
There is no doubt that the trend towards globalisation has been one of the most significant
developments in international business during the last decade. More and more companies
have become, and many more would like to become, global in their operations. What then
are the factors that have served to drive this growth and spread of globalisation? Some of
the more important factors include the following:
Deregulation of trade/Open markets
We have seen earlier how increasingly world trade has become deregulated. As a
result, more and more markets have opened up to the aspiring global business. Even
markets that have traditionally been very difficult to move into, such as China and some
of the former Communist Eastern Bloc countries, are now open. Japan, at one time
highly protected against foreign companies, has opened up in recent years.
Global competition
Partly as a result of freer world trade, we have seen the growth of global competitors.
Even companies that have traditionally been very insular in their outlook and approach
to business have woken up to the recognition that increasingly their competitors
operate in global markets. One approach to dealing with local competition is for
companies to go global themselves.
Risk spreading
We have seen that the global business environment is much more dynamic and
complex. In particular, financial and other global trading systems mean that markets
can change overnight. For example, recently the Asian economies, from being strong
growth economies, almost overnight began to experience major problems with falling
share prices, company bankruptcies and so on. So sudden were these changes that
some authors have referred to it as the Asian meltdown. A company can hedge
against the risks caused by such market and economic fluctuations by operating in
several markets/parts of the world. Global operations enable the business to spread
the risks of sudden downturns and changes in economies and markets.
Economies of scale/Experience curve effects
Usually, global business involves increases in the scale of operations of an
organisation. As such, it enables a company to achieve potentially large economies of
scale and/or experience curve effects that would be restricted if only domestic markets
or relatively few overseas markets were targeted. We noted earlier that new product
development and the associated research and development costs for many products
these days are substantial. Very often these substantial costs can only be recouped if
the resulting products are marketed on a global basis.
Supply chain management
A further impetus to developing global strategies by organisations has been the desire
to manage the supply chain more effectively, so, for example, some companies have
been prompted to go global in order to secure access to low-cost labour or raw material
supplies. Sometimes companies are prompted to go global in order to gain access to
skills that are simply not available in domestic markets, such as research and
development , design, IT and manufacturing skills.
Global enabling technologies and skills
These perhaps facilitate the growth of global business and strategies rather than
prompt it. Increasingly, global business strategies may be developed through access
to new technologies and skills. So, for example, developments in information
technology and databases facilitate the growth of global strategies and positions.
These databases enable the construction of detailed customer profiles across the
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globe by cross-matching this intelligence to other databases, such as economic data,

socio-economic groupings, geodemographic data and so on. The business can identify
global segments and their characteristics.
The global village
None of the above factors would be sufficient to encourage and facilitate the growth of
global strategy if customers were not receptive to global strategies and companies.
The growth of international business itself has in large measure been due to changing
customer needs and wants, and in particular an increased receptiveness and desire for
global products and services. We have only to turn on the television to see how the
world has shrunk, a phenomenon that many refer to as the global village..
These, then, are some of the key factors that have helped drive the growth of global
business strategies. You must always be aware, however, of some of the key factors tending
to inhibit this growth or at least which are considerations before decisions about
commitments to a global strategy are made.
Cultural factors
Although we have mentioned the growth of the global village, cultural differences still
exist in different parts of the world with these differences often being substantial.
Businesses cannot simply override these cultural differences.
Customer tastes and needs
Related to, and often underpinned by, cultural factors, the growth of global business is
restricted by differences in customers tastes and needs in different parts of the world.
Other environmental factors
Finally, a global approach is restricted where there are differences in some of the key
environmental forces and factors that we have already discussed. So, for example,
legal, political and regulatory forces must be considered.
Arguments for and against Globalisation

Pursuing global strategies has a number of advantages for a company, which go beyond
mere economies of scale, although this is itself, an important factor. There are other many
benefits.
Cost reduction
Costs may be reduced through the economies of scale that arise due to the sheer
volume of trade available on a worldwide scale.
Sourcing and/or operating from lower-cost countries also allow costs to be reduced, as
does a reduction in the duplication of development, production and marketing costs.
Greater flexibility to exploit differences in factor costs between countries, or in
exchange rates, is also available to global companies.
Improvements in quality
Exposure to a global market and the competition within it often has the effect of making
a company improve its systems and procedures, and also the quality of its products, in
order to compete.
This can be achieved through concentrating materials and personnel resources so as
to satisfy the higher-level demands often found in new markets and with international
customers, as opposed to domestic markets and consumers, who have a much greater
choice of suppliers.
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Improved customer satisfaction and enhanced company/brand image

Marketing on a global scale leads ultimately to having brand names, which are
themselves, recognised worldwide. This, in turn, added to the improved quality which
accrues, as above, creates an enhanced company image.
Success in the global marketplace, as in so many other areas, creates its own success.
A company that has embarked upon a global strategy is able to use the same market
mix in different countries. This then results in greater global recognition by customers,
backed up by greater availability of both products and services, provided the company
identifies "horses for courses" and takes account of cultural factors.
Increased competitive leverage
Global strategies enable a company to enter new markets by means of low cost
advantage, due to economies of scale, etc. as we have just seen. They also allow a
company to compete where there is the greatest potential for increased sales and
profits, for example in opening up new markets in countries such as China.
Having a greater number of markets in which to operate increases a company's
opportunities to attack its competitors, and also provides the option of moving out of a
market which is saturated or is suffering from a depression and transferring attention to
other markets which are currently more buoyant. In other words, it allows the company
to have a portfolio of opportunity where a balance can be struck between different
markets, rather as an investor in the stock market seeks to have a balanced portfolio of
stocks and shares, so that falls in one company can be offset against rises in another.
In contrast there are arguments against globalisation particularly in the way it is seen as the
blending of cultures and critics see that western influences, especially American, has
pervaded over culture producing one big "McWorld". In certain societies this is seen as
cultural assault.
Economically it is felt that globalization does not give any benefit to many LDCs with
the global brands creating sweat shop conditions.
The power of the global manufacturers also inhibits the development of home
industries within the LDC nations.
Emerging Issues Uncertainties and Turbulence within the Global

Environment
The international environment is by virtue of its scope very complex with relationships that do
not seem obvious. The following examples demonstrate this clearly.
The Global Financial Crisis 2007- 2008
The bursting of the bubble in the US housing market built upon risky lending policies
(so called NINJA mortgages) of the US Financial System quickly led to a global
financial crisis. This was because the risky debt had been sold on in the form of
financial instruments to many banks and financial institutions in the G8 nations. This
crisis highlighted the globalisation that had taken place in financial markets and has led
to governmental discussions within bodies such as the G20 aimed at the regulation of
the global financial sectors.
There have also been other related instances of weaknesses in the financial sector
with regard to unregulated cross border activities, notably the savings crisis caused by
the Icelandic Banks offering relatively high interest rates on savings compared to other
countries. This attracted a huge inflow of personal savings, mostly from the United
Kingdom and the Netherlands, and enabled dramatic increases in the standard of living
for the 300,000 inhabitants of Iceland on the back of a growth in the Icelandic Banking
sector of 900% in eight years. With their new found wealth, many Icelanders took out
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loans and invested in other countries based upon a strong currency and lower
borrowing rates in other countries. The Icelandic Banks themselves invested in US
banks and when one of them, Lehman Brothers, failed in 2008 they lost money. This
led to a sudden devaluation of the Icelandic currency which meant that the foreign
loans suddenly became more expensive to service both at a personal and a corporate
level. The banks found their liquidity compromised and, being an inherently small
country (unlike the UK), were unable to continue and failed, being taken into effective
government control with debts equivalent to eight times the GDP of Iceland. In turn,
this has led to friction between the Icelandic government and the governments of the
UK and the Netherlands as the latter seek to recover the savings investments of their
inhabitants which had totalled 3.9 billion Euro.
The Emergence of China as a Major economic Force
As the following article shows, the economic status of China is causing concerns.
G20 to tackle US-China currency concerns

At a meeting in Seoul in November 2010, leaders of the G20 group of
major economies have agreed to avoid "competitive devaluation" of
currencies. Agreement had been reached on "indicative guidelines" to
tackle trade imbalances affecting world growth. Tensions had been high
between some delegations over how to correct distortions in currency
and trade.
The agreement fell short of a US push to limit trade deficits. There are
fears that the conflict, chiefly between China and the US, may threaten
global growth.
US President Barack Obama said there should be no controversy about
fixing imbalances "that helped to contribute to the crisis that we just went
through".
"Exchange rates must reflect economic realities," he said. "Emerging
economies need to allow for currencies that are market-driven." It is felt
that China's currency, the Yuan, is artificially weak and gives Chinese
exporters an unfair advantage as well as leading to Beijing amassing
huge foreign reserves.
However, Chinese officials argue that Beijing has an "unswerving"
commitment to reform its currency regime, but that global economic
stability is needed to achieve it.
China is moving into a position of actually increasing domestic
consumption, rebalancing its economy.
However, the agreement to develop new guidelines to prevent so-called
"currency wars" fell well short of the 4% limit on national trade deficits
and surpluses proposed by the US, which had been blocked by China
and Germany the world's two largest exporters.
The G20 leaders also gave their backing to reforms designed to give
emerging economies such as China a bigger say in the International
Monetary Fund.
In their communiqu, leaders said they were delivering "a modernised
IMF that better reflects the changes in the world economy through
greater representation of dynamic emerging markets and developing
countries".
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The Impact of Information Communication and Computer Technology (ICCT)

The pace of advance within this area continues to increase and to be a key force in
globalisation. As the Acer case study (June 2010) clearly shows, governments are now
taking major initiatives to stimulate the adoption of the new digital technologies. In the
commercial sector, ICCT companies are seeing traditional markets changing as the
blurring of technologies has led to integration of different uses and solutions onto a
single platform. The latest mass technology is the so called Ultra Mobile
Communication device as exemplified by the iPad from Apple and other similar devices
from other global manufacturers. Manufacturers are looking to the establish mass
markets for their products in emerging economies.
Equally, the recent growth of social networks has greatly increased the interaction
between individuals and groups, not only for social purposes, but also to exchange
information and views notably about products and organisations. Companies such as
Avon Cosmetics are using social networks to support their business activities, and
many organisations are using the internet to develop two way communication channels
with consumers over and above using it simply for advertising or selling.
You will find it useful to have a clear understanding of the role and work of the major
institutions impacting on world trade.
1. Research the last meetings of the G8 and identify the current concerns of the world's
leading nations in respect of international trade.
2. Research the latest position on the World Trade Organisation's attempts to develop the
position of the world's poorer nations in world trade the Doha Development
Agreement.
3. To what extent do you agree or disagree with the anti-globalisation protesters that
these institutions serve the interests of the rich nations at the expense of the poorer
nations.
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63
Chapter Four
Analysing the International Business Environment
Contents Page
Introduction 65
A. Political Factors 65
B. Economic Factors 66
Economic Resources 66
Economic Indicators 67
C. Social/Cultural Factors 69
Defining Culture 69
Culture and Business 71
D. Technological Factors 73
Availability of Information 74
Technology Life Cycles and Development Costs 74
The Internet 75
E. Legal Factors 76
The Law and Business 76
F. Ethical and Green/Environmental Issues 77

Nature of Ethical Issues 77
Approaches to Ethical Issues 78
Encouraging Ethical Behaviour 80
Environmental Issues 81
Pressure Groups 81
G. The Three Cs Framework 82

Country 82
Currency 83
Competitors 84
(Continued over)
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64 Analysing the International Business Environment
H. Using International Environment Analysis Techniques 84

Example of PESTLE Analysis for Bombardier Aviation 85
Example of 3 Cs Analysis Applied to the Acer Corporation 86
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Analysing the International Business Environment 65
INTRODUCTION
We continue our examination of the environment of international business here by looking at
the broad external environment.
You should be completely familiar with the initial approach to this from your other studies
the PEST or PESTLE analysis. We shall be using the latter here and considering the
international environment in terms of:
Political factors
Economic factors
Social (or social/cultural) factors
Technological factors
Legal factors
Ecological / Ethical factors.
In addition to the PESTLE factors, there are a number of additional elements which we need
to consider in respect of the international environment. These are characterised as the three
"C" factors:
Countries.
Currencies.
Competitors.
A. POLITICAL FACTORS
In an ideal world, organisations would like to have a political climate that does not change
and is supportive to business interests. They would like to see policies that lead to:
Low inflation rates. This is particularly important in developing markets where increase
in the level of prices has huge impacts upon the poorer people in society. The Indian
Government is very aware of this in setting its economic policy to ensure that economic
growth is managed without significant increases in the level of prices caused by
increases in consumer demand outstripping market supply.
Steady market growth. Erratic market trends can have significant impacts upon
investments decisions
Low taxes on company profits. The level of taxes upon businesses particularly under
foreign ownership can influence investment decisions, as was the case in the Irish
Republic where relatively low rates of corporation taxes resulted in a significant
increase in foreign direct investment by many MNCs.
No restrictions on the ability to repatriate profits.
No restrictions on local content.
Support for a market economy with minimal government intervention, for example no
controls on price / profit levels and no punitive import taxes
However, it is unlikely that this situation would persist in any country.
From a business point of view, the major political problem is likely to be instability. Instability
may arise through frequent changes in the ruling political party or elite, and/or through
frequent changes of policy by a stable ruling political party. If the political situation is one in
which the environment surrounding the company is predictable, companies can develop and
implement international business plans with some confidence. If the government changes
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direction frequently, medium- and long-term planning becomes very difficult and companies
will feel forced to adopt short-term, highly pragmatic approaches.
However even in politically stable countries, democratic elections which could change the
ruling political party take place every five years or so. When a new party takes power, there
is likely to be a measure of uncertainty whilst it settles into the job of running the country and
the effect of new policies is awaited. Even if the same political party is in power for many
years, there will be a variety of political and economic issues that will cause it to make
changes in political and economic directions, and most governments pass laws that affect
market opportunities from time to time.
Stability, though, is not the only issue of interest to business. It is also concerned that
governments take political and economic decisions that do not cause the economy to decline
or become less profitable for companies. For example, many Latin American countries were
not able to prevent runaway inflation in the 1980s, and other governments have acted in
ways which conflict with business interests by such policies as increasing corporate taxation
or using price controls to try and control inflation.
There have been various attempts to identify the level of risk inherent in a country. One such
approach is the Business Environment Risk Index (BERI), which was started in the US in
1972. In the BERI ratings, countries are evaluated on 15 economic, political and financial
factors on a scale from zero to four. The factors that relate most strongly to political areas
are political stability, attitudes to foreign investors, nationalisation, bureaucratic delays, and
currency convertibility. Scores on the BERI scale are calculated out of 100 and a score of 80
or more indicates an acceptable level of risk. However, scores of 40 or less suggest that the
level of risk is probably unacceptable and companies should think carefully before
commencing business in countries with this sort of score.
B. ECONOMIC FACTORS
The economy of any country is the end result of the production and the distribution of wealth.
Before we look at some of the indicators of the economic environment of a country, we
should briefly note some of the underlying resources that influence it.
Economic Resources
The three factors of production labour, land and capital are the key resources which
determine economic activity. We can interpret these factors here in a broader sense as they
represent important considerations for business.
Population
Since the 18th century the world has undergone a population explosion that has
impacted on all aspects of life. In economic terms, population is an important factor.
The availability of labour is an essential resource in the manufacture of goods and
services, whilst at the same time the population as a whole provides a market for the
goods and services produced.
However, it is not just the size of the population which is important but also its age, sex
and geographic distribution. If, for example, as is the case in most advanced countries,
there is an increasing proportion of dependent population i.e. the old, the young and
the unemployed then resources will be channelled into supporting them and
consequently economic growth will be slow. Conversely in many countries the reverse
of dependency is the proportion of the population that is economically active, albeit at a
low level of earning. Thus, India, for example, has a growing and potentially dynamic
population under 35 lessening the dependence of an aged population.
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Natural resources
A countrys ability to generate wealth will be linked not only to its population, but also to
its geography. This conditions not only the availability of natural resources land,
water, minerals, etc. but also its ability to exploit them productively. Thus, the climate
and terrain can be important in respect of the ability of a country to develop, for
example, forestry as a productive industry and to develop effective transport systems
(including port facilities).
Infrastructure
The ability of a country to utilise its labour and natural resources will be influenced by
its infrastructure. By this we mean the stage of development of its systems for housing,
transport, communication, and energy. Many developing countries are now engaged in
major infrastructure projects such as road building in order to provide the infrastructure
to support economic development. This is of great benefit to western companies such
as Bombardier Transportation (Case study June 2010) who have the expertise gained
internationally to successfully undertake major projects.
Economic Indicators
These are factors that provide information about the economic situation of a country.
Income
When we consider the economic factors, the distribution of wealth is perhaps the key
consideration in the selection of target markets.
Countries can be considered in terms of their total income, or gross national product.
Using such a league table, the US, Japan and Germany tend to occupy the top
positions. Indeed, the concept of the importance of the Triad is based upon the large
size of the GNPs of the US, Japan and Europe.
From an individual company point of view, the total income figure for a country can be
used as a rough guide to a specific market size. Thus, a country might already be in
the maturity phase with its markets reliant upon low levels of replacement sales. In
other less developed countries, with lower levels of GNP, the market might be growing
rapidly with initial purchasing. For example, the electricity supply industry in the top
GNP countries is well established, but in countries with lower levels of GNP but with
high growth rates, the demand for electricity might be increasing rapidly, and this would
create a strong growth in the market for electricity supply equipment and transmission
in those countries.
In most instances, though, companies are more concerned with market segment(s)
rather than the total market in any one country. Because of this, companies will be
more interested in the GNP per person or per capita than the grand total. Breaking
down GNP per capita further, companies will be interested in the level of disposable
income after various commitments of taxes, health and social security payments and
other major payments have been made. This is usually a better indicator of available
expenditure, in the majority of consumer markets, than GNP per capita. If this
approach is used, significant market segments can be identified in countries that are
often thought to be quite poor. For example, in India there is an affluent middle class
with a considerable disposable income. The total size of this segment is larger than
the populations of most other countries in the world and represents a huge consumer
market opportunity. Over the next two decades, the countrys middle class will grow
from about 8 percent of the population to more than 40 percent and create the worlds
fifth-largest consumer market.
Certain general relationships exist between income levels and expenditure patterns.
For example, the amount of income spent on food, expressed as a percentage of
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income, is higher in poor families and in poor countries than it is in richer countries.
There are variations in the general rule. Thus, at the beginning of the 21st century in
Japan, almost 20% of consumer spending is allocated to food, compared with 15% in
the US, 13% in Germany and 11% in Britain. The explanation for the high spending on
food in Japan is partially based upon the high prices of food there, caused by
protectionist economic policies to support local agricultural products. In part, though,
expenditure on food is influenced by culture food in Britain is given a comparatively
low priority, whereas in Japan and France food is seen to be more important. This
results in higher consumer expenditure on food.
Inflation
This is a major influence in most countries. In some countries, for example the UK,
one of the main reasons explained by government for economic decisions is a desire to
control inflation to a particular target level. In other countries, inflation rates are so high
that pricing and other decisions have to take account of the constantly increasing price
of goods and services.
The Asian countries of China, India, South Korea and Taiwan have all achieved rapid
growth during the past 5 years or so, with inflation rates usually below 10%. If an
economy is expanding across all income groups this level of inflation is bearable, but
where there are significant differences between the classes then this level of inflation
particularly if it impacts strongly on basic commodities can cause extreme hardship
for the poorest in society. This is certainly a key concern of the Indian government.
Latin and South America is different. Some countries, for example Brazil that has
sometimes experienced inflation rates in the order of 2,000%, have a long history of
uncontrolled inflation. Argentina had very high inflation rates in the 1980s, but had
brought the rate down to 11% by the year 2000. Mexico, whilst never as out of control
as Argentina, has succeeded in bringing its inflation rate down from over 100% to
under 10%. Inflation on this scale is particularly of concern to poorer classes as often it
is the prices of staple goods such as food experience high inflation and governments
must be mindful of this in setting overall economic policy.
Capital investment
This is directly associated with economic growth. It is defined as total business
spending on fixed assets, such as factories, machinery, equipment, dwellings, and
inventories of raw materials, which provide the basis for future production. It is
measured gross of the depreciation of the assets i.e., it includes investment that
merely replaces worn-out or scrapped capital.
In 2008, according to the CIA Factbook, Singapore had the highest rate with 45%. The
figures for China and India were 40.2% and 39% respectively. Developed countries
typically have rates of less than 20%.
Government policies
Other economic influences that can be important are the level of government budget
deficit or surplus. More recently, many western governments that had expanded their
economies by government spending based upon large borrowings, experienced
problems when the crises in the banking sector caused widespread recessions.
Greece and the Irish Republic are among several countries that are now experiencing
difficulties caused mainly by over expansion in government spending. The problems
for both nations have been have been made worse by being members the Euro zone.
The level of official reserves of foreign currencies and gold and special drawing rights
in the International Monetary Fund shows a countrys ability to meet its external
obligations. If reserves are going down rapidly, this will have an almost certain
downward effect on the value of that countrys currency. Declining official reserves
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shows a decline in confidence in the countrys economy. It could be linked to

deteriorations in the countrys balance of trade and the balance of payments.
Government decisions taken to influence economic performance by, for example,
reducing inflation or to stabilise the foreign exchange rate, will affect the level of
personal and corporate taxation. If taxation increases, other factors remaining
constant, market sizes will decrease in the consumer and most business markets. On
the other hand, government markets will increase to reflect the higher influence of the
government in the total market place of that country.
C. SOCIAL/CULTURAL FACTORS
The social/cultural element is particularly important in that it plays a considerable part in
determining how the legal, economic, political technological and ethical/ environmental
elements work.
It is important at the outset, though, to raise a word of caution in looking at these factors.
There is sometimes a tendency to treat social and cultural differences in a rather superficial
way by thinking about stereotypes for example, the British as being reserved, Americans as
being loud, and Afro-Caribbeans as being colourful and gregarious. Stereotyping is a
dangerous oversimplification and needs always to be avoided.
We have linked social and cultural factors together because they are so inextricably
connected.
Social factors are reasonably straightforward to identify in terms of the concepts of reference
groups, social roles and status:
Reference groups are all those groups that have a direct or an indirect influence on a
persons attitude or behaviour. These include family groups, friendship groups,
workplace groups, religious groups and professional groups. The family probably
represents the most important primary reference group that will influence a persons
life. The role of the family varies from society to society.
In each group to which a person belongs (and it is important that we remember that
individuals will belong to a number of groups), his or her actions and influence in that
group will be determined by the role and status of the position held. For example, a
woman within a family may have a number of roles wife, mother, carer and daughter.
If she also has paid employment, her role and position within the organisation in which
she works is likely to be very different from that or those within the family.
But what influences these reference groups? Why do they behave the way they do?
Thinking of the family, it is easy to see that this varies a great deal from country to country.
The answer is culture.
Defining Culture
Terpstran (1987) has defined culture as follows: "The integrated sum total of learned
behavioural traits that are manifest and shared by members of society".
Culture is the shared values and beliefs of a society, its design for living. However, with
such an all-embracing issue as this, precise definitions rarely give usable meanings. Thus,
within the culture of most societies, there are almost always a variety of different subcultures
for example youth culture, student culture and so on.
Culture is learnt and the main force for transmission of whatever type of culture is the
reference group to which individuals belong. In this way, therefore, culture may also be
thought of as the way in which people interact with each other in a group that shares some
common sense of belonging.
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One of the reasons that culture is so difficult to define is because it has so many elements
that interrelate and change over time. One way of analysing it is to seek categories of
significant elements as in the following diagram:
Language: Religion: Values/Attitudes to:

Spoken Sacred objects Time
Written Philosophical systems Achievement
Official Beliefs and norms Work
Hierarchy Prayer Wealth
International Taboos Change
Mass media Holidays The scientific
Colloquialisms Rituals Risk-taking
Possessions
Formal
Beauty Vocational
Good taste
Aesthetics
Education
Primary
Design Secondary
Colour CULTURE
Music Higher
Architecture Literacy level
Brand names Human resources
Planning
Home country law Transportation

Foreign law Energy systems Family structures
International law Tools and objects Social institutions
Regulation Communications Interest groups
Political risk Urbanisation Social mobility
Ideologies Science Social stratification
National interests Invention Class systems
Law and Politics: Technology/Material: Social Organisation:
You can probably add a number of other elements to each of these categories, or even as
sub-divisions of individual elements themselves. To illustrate the complexities involved,
consider language. This is often a first consideration in looking at an international market.
However, not all countries are linguistically homogeneous India or Nigeria, for example,
comprise many subcultures, each with its own language or dialect and who communicate
only in a national context with a common language. In India, there are many dialects and
English is seen as a common language as evidenced by the bank notes that have the15
most common languages listed with English being the main one that denominates the
amount. In a business context, this situation creates further complexities as communication
needs to be translated and, hence the communication becomes vulnerable to distortion.
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Culture and Business

Comparisons of culture by identification of the differences and similarities in these elements
are the most effective way of utilising such a broad range of variables. For businesses
considering international markets it is essential to be aware of these cultural differences. The
relevant issues to consider include the following.
Self-reference criterion (SRC)
It is very easy to use ones own cultural experience and values when viewing other
people and cultures. In fact, it is almost impossible not to. In international business,
though, the ability to think about other cultures from a culturally neutral standpoint can
be very useful. It is the key to being able to identify differences in behaviour, markets
and systems resulting from differences in culture and thus understanding the
requirements of trading with and within another culture.
In 1966, Lee ("Cultural Analysis in Overseas Operations) used the term self-reference
criterion (SRC) as describing the approach of judging other cultural values and
practices based upon one's own cultural standpoint. He went on to suggest a four-step
approach to avoid it. The steps are:
(i) Define the situation, problem or goal in terms of the home country cultural traits,
habits and norms.
(ii) Define the situation, problem or goal in terms of the foreign culture traits, habits
and norms.
(iii) Isolate the SRC influences in the definitions and examine them carefully to see
how they complicate consideration of the issue.
(iv) Redefine the situation, problem or goal without the SRC influence and derive a
specification or solution that is appropriate for the foreign market.
Lees approach is a logical way to reduce cultural difficulties. However, in practice it is
quite difficult to be sure that step (ii) is carried out accurately. Accurate definition of
problems in terms of a foreign culture needs a good knowledge of that culture. Without
this, it will be far too SRC biased and may result in inappropriate actions for example,
offensive or misleading brand names being used and irrelevant product features being
promoted.
High and low context cultures
In communication, some information is transmitted by spoken and written language and
some by the context or setting within which the language is used. The relative
importance of these two means of transmission within a culture can have important
consequences for business communications.
Using this criterion, it is possible to classify cultures into:
(i) Low context cultures those where most information results from the language
itself; and
(ii) High context cultures those where much information is communicated by the
context within which the communication takes places.
We can place societies into these two broad categories as a guide to the use of
communication, for example:
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Table 4.2. High/Low Context Cultures.
High Context Cultures Low Context Cultures
Japanese German
Mediterranean English
Asian Scandinavian
Arab American
The importance of this distinction can be seen if we consider some of the facets of
business communications and processes outside of the purely written or spoken word:
(i) Body language This is a key element of oral communication and may serve to
confirm or refute the message conveyed as well as giving information about the
understanding and attitudes of the participants. Its importance can be magnified
when communicating in a different culture from ones own, when the role and
significance of the messages conveyed by body language may be also be
different. In high context cultures, adherence to particular norms of behaviour
and appearance considered appropriate to the setting within which personal
interactions take place can be much more important than in low context cultures.
(ii) Time Consider the following questions:
What is the importance of punctuality for meetings?
Is late arrival deemed to be discourteous?
Are meetings well planned and do they run to schedule?
In a high context culture, establishing mutual understanding and developing
friendship are seen as highly important. Time constraints will not necessarily take
precedence over this and, therefore, it may be quite normal for meetings to
overrun or to start late, or for individual punctuality not to be considered
particularly important. In contrast, these norms of behaviour are likely to be a
sign of inefficiency by participants from a low context culture.
(iii) Space Space should be looked at in two ways: physical space and personal
space. For example, does physical space confer status (in, say, office size) and
how close is it acceptable to get to people? Again, these elements are culturally
conditioned. In high context cultures, it is more normal for people to feel
comfortable close together and distance between participants may be a sign of
coldness.
(iv) Friendship In high context cultures, deals often relate more to the people that
you know and, therefore, social interaction and developing friendships is a key
aspect to business. In low context cultures, the UK and US are good examples,
friendship may be useful, but it is the contractual quality of the deal that is all-
important.
(v) Contracts The way in which contracts are negotiated differs. Lengthy haggling
is normal in high context cultures and various inducements to purchase, which
could be thought of as bribes in the US and UK, may not only be acceptable but
also expected.
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The way in which contracts are interpreted and delivery monitored also varies. In
high context cultures, it is expected that friends will help each other out. In low
context cultures it is more likely that lawyers will be brought in to argue
interpretation and resolve difficulties.
These issues highlight the need for the international business manager to be aware of
the dissimilarities in an international market. We must remember, however, that it is as
important to identify the similarities and to ensure that best advantage can be gained
from them.
The cultural sensitivity of products and services
The products and services offered for sale in a particular society, and the way in which
they are offered for sale, have to be acceptable to that society. In the main, consumer
products are more culturally sensitive than business-to-business products, and those
that are closest to the core beliefs of culture are the most sensitive of all. Often these
relate to family and religion gatherings.
Food is particularly culturally sensitive because it has strong symbolic values that have
been reinforced from our youngest days within a family. For example, in the UK,
although the traditional Sunday lunch is much less usual nowadays, it still conjures up
for British people a set of images that will cover the food served, the time it is served,
the formality of the proceedings. Likewise the food tradition associated with
Thanksgiving Day in the United States is very significant culturally. In contrast, a
comparable meal in say France, a country quite close geographically to the UK, will
have significant differences in terms of the time, the food, the drink, the length of time it
takes to finish the meal and the acceptable behaviour of children. Beef is an example
of a food product that carries strong significance for Hindus for whom the cow is sacred
and has meant that, for example, McDonalds have had to change their offering to
concentrate on poultry and vegetarian dishes. Other religions also specify acceptable
and non-acceptable foods.
Thus, when we look at products for an international market we must try to estimate how
different cultures will view them. Note, though, that newer products to the market, such
as consumer durables, are invariably less culturally sensitive.
D. TECHNOLOGICAL FACTORS
There has been a rapid growth in the speed of technological advancement over the recent
decades. One of the remarkable features of this has been the way in which access to
advanced technology has spread from the developed countries to other lesser-developed
countries around the world. It is now not unusual to see people, without what many cultures
would perhaps consider the essentials for existence, using computers in offices and shops,
communicating by mobile telephone and watching television programmes via satellite. Wide
variations in technology between countries are less a feature of the international environment
than is the case with legal, economic and political factors.
This has partly been the result of the development of multinational and transnational
companies and partly the result of government intervention.
The practice of multinational companies basing their operations in those countries
around the world that provide the best returns has increasingly meant that countries
with low costs for labour and for factory and office sites are being used to produce
components and sometimes the final assembled product. As part of this process, a
great deal of technology transfer takes place. Many Newly Industrialising Countries
(NICs) and Lesser Developed Countries (LDCs) have benefited greatly from the
acquisition of technological and production-process know-how.
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In addition, governments in many countries have encouraged the development of high-

tech industries and investment in education and training to ensure a competent, skilled
workforce as a means of accelerating economic growth and to reduce levels of
unemployment.
The availability of technology is, therefore, less based on a few countries; although it would
be true to say that some countries have a much wider range of advanced technology than
others.
There are a number of issues in respect of this spread that have important consequences for
international business.
Availability of Information
The developments in communications, and by that we mean personal communications,
transport and the media, mean that we live in a shrinking world. Information about events
almost anywhere in the world can be obtained almost immediately by anyone anywhere. The
advances in mobile communications have meant that poorer nations do not have to invest in
costly traditional phone networks to enjoy modern communications.
Satellite television with its many 24 hour news channels such as CNN and the BBC World
Service, means that events such as the oil spill in the Mexican Gulf or the trapped Chilean
miners, both in 2010, were communicated in real time across the globe.
Consumers can access information now at the touch of a button making it much easier to,
say, compare prices. This puts a premium on information, and particularly on its access,
control and analysis.
A number of developments arise from this:
Satellite, cable television and the Internet has opened up the number of ways in which
people across the world can receive information, and particularly advertising, with
minimal control over content by individual states.
Companies need to pay particular attention to the need to get their own interpretations
across to the public in the face of competing analyses, and this has given rise to the
phenomenon of spin doctors attempting to manage the way in which events are
reported and perceived.
Businesses need to exploit a wide range of technologies in communicating and
conducting operations.
Technology Life Cycles and Development Costs

New technologies and products can be extremely expensive to develop for example, a new
pharmaceutical product will cost millions of dollars to bring to the market, and a new model of
car for mass production will entail a huge amount of investment. On the other hand, the
speed of technological and market change means that technologies and the products they
underpin have ever shorter product lifecycles before the next generation of technology and
products is developed.
The high cost of research and development to produce the next generation of products
coupled with shorter technology life cycles has given an impetus to two developments:
The need to market products to more and more country markets in an attempt to justify
and recoup the high costs of research, development and product launch. In many
products, the market in any one country is less and less likely to be sufficiently large to
achieve a break-even position. This has resulted in regio-centric and geocentric
planning becoming more relevant.
The use of alliances, of various types, in an attempt to share some of the costs of
product development. Often, businesses are not able to recoup the high costs of
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investment in new products and technologies before they are made obsolete. As a
result, we are increasingly seeing the joint development of technologies and new
products between different companies throughout the world so that investment costs
and risks can be shared. So, for example, Sony and Ericsson combined to develop a
range of mobile phones.
Note, though, that the actual prices of computers have fallen in line with the prediction of
Gordon Moore, the co-founder of Intel. He predicted that as the market expands the price of
processing chips will fall and at the same time the processing power of computers will
significantly increase.
The Internet
The Internet is destined to change virtually every facet of our lives, including the whole
nature and operation of business. Its major impact in respect of international business is that
it enables the process of buying and selling across international boundaries without any
reference to the traditional methods of conducting such transactions, such as face-to-face
contact, use of agents and intermediaries, offices and facilities abroad. The characteristics of
the Internet are such that:
It facilitates global marketing for the smaller companies that in the past perhaps have
faced major disadvantages compared to their larger counterparts.
It enables customers to compare and contrast competitor offerings much easier and on
a much wider basis than before.
It is a cost-effective and convenient way of purchasing products and services for both
consumers and business-to-business customers.
Of course, none of this will happen if customers do not have access to the Internet, but
increasingly they will. The costs of computers and access to the Net are dropping
significantly. Further, technological developments mean that access is now available through
other means, such as conventional digital TVs, smart mobile phones and ultra mobile
personal computers (UMPCs) such as tablet devices. In addition, initiatives such as
computers for all and the adoption by many organisations to incorporate free WIFI access for
their customers in their outlets, have further increased the access of more and more
customers to the Internet.
The use of the Internet by businesses is growing rapidly, both for advertising their products
and services and for actually selling them. Virtually all the large multinational companies
have now developed web sites, but interestingly enough, it is the smaller, newer companies
who have been the quickest to realise the potential of the Internet for commercial purposes.
Companies like Amazon, an Internet book sales company, has grown in less than a decade
from nothing to being one of the largest in the market, all through Web-based sales.
There is no doubt then that the Internet will give rise to some of the major opportunities and
threats for international business in the future. It is also likely to impact on the whole nature
of marketing operations ranging from access to, and the use of, data through to the concepts
of market segmentation and targeting, and the way in which elements of the marketing mix
are applied.
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E. LEGAL FACTORS
The legal environment within which international business operates comprises three
elements:
Home country law this defines what is considered by the home culture to be
acceptable behaviour both at home and in dealings with a foreign country.
Host country law this defines acceptable behaviour within the country in which you
wish to trade.
International law there is no international legislative body, but there are a series of
conventions, agreements and treaties, the enforcement of which relies on national
sovereignties.
In light of this the international business must be aware of which jurisdiction will apply.
Inevitable conflicts will emerge which may give rise to not only practical problems, but also
moral issues as the legal environment in a foreign market conflicts with the cultural values of
the home country.
There are also three main types of legal system operating in the world:
Common law This system of law, used in the UK, the United States and Canada, is
based upon tradition and on legal precedents. Laws are passed by government, but
are then interpreted by the courts. The interpretation of the law then becomes the legal
precedent for similar cases in the future.
Civil or code law Civil or code law is based upon laws that are written down. It is
usual for there to be three different written types of law commercial, civil and criminal.
The aim in code law is to develop an inclusive set of written codes that will cover all
possible situations.
Sharia law This type of law, based upon the Koran, incorporates social and religious
obligations in addition to legal duties. An important element in Islamic law is the
achievement of social justice. A feature of Sharia law is that it is unlawful to charge
interest on loans, and this obviously has an impact upon the operations of international
banking groups.
The Law and Business

Legal factors provide the regulatory framework within which international business must
operate and the legal system applying to business in a particular country has an important
influence on many aspects of international trade, for example:
Regulation of contracts This involves:
(i) The establishment of the legal rights of the buyer and of the seller.
(ii) The establishment of the terms and conditions between agent and principals.
(iii) The mechanisms for the resolution of disputes regarding both the
appropriateness of the quality of the merchandise (and so on) in respect of
exported goods and the responsibilities of agents.
Regulation of the business environment Legislation can condition what companies
can and cannot do,
(i) Export/import controls, tariff/non-tariff barriers and competition controls.
(ii) Pricing controls, for example, resale price maintenance and price increases.
(iii) The registration and enforcement of trademarks, brand names and patents.
(iv) Product liability and product safety.
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(v) Advertising and sales promotions what can be promoted and how it can be
promoted.
(vi) Labelling.
(vii) Environmental issues for example, Germany has strong laws regarding excess
packaging that makes manufacturers responsible for the responsible disposal of
extra packaging materials.
It goes without saying that businesses must be careful to operate within the laws and
regulations of the countries in which they are trading. This is particularly important when the
business is trying to establish a global approach and, therefore, wishes to standardise
operations and marketing as much as possible. So, for example, in some countries certain
types of advertising may be illegal and the business cannot apply an approach used
elsewhere in the world. Countries often differ considerably with regard to, for example,
competition policy and price legislation. In the same way, there is considerable difference
throughout the world with respect to what is legally an acceptable incentive.
F. ETHICAL AND GREEN/ENVIRONMENTAL ISSUES

In recent years there has been a marked growth in importance of ethical/social and green
(environmental) issues. Related to these, and indeed partly responsible for their growth in
importance, has been the emergence of often very highly organised and vociferous pressure
groups who have embraced the new communications technologies and channels to publicise
issues globally.
Concern with social and ethical aspects of international business has grown as customers
have become more aware of their possible harmful social implications and the, admittedly
and thankfully relatively small, amount of unethical practices by some businesses.
Of particular concern is the exploitation of developing countries by multinational companies
through the depletion of their natural resources for little return, the degradation of their
environment and the payment of low wages for the production of products that sell in
developed countries for very high prices. The global tobacco companies have been criticised
for switching their marketing efforts from the developed countries, where cigarette sales have
been falling, to the newly emerging industrialised countries that have been persuaded to
increase their purchases of cigarettes.
The size and power of the multinationals has, in the past, enabled unscrupulous companies
to get away with socially unacceptable and unethical practices. However, this is changing
partly as a result of legislation by both home and host countries, partly as a recognition of the
public relations problem that such practices can pose to companies, but most importantly
because of changing social values, with customers throughout the world now demanding that
companies operate socially and ethically acceptable business policies and programs.
Hill (2007) notes that in the international business setting, corruption is among the most
common ethical issue, but others of significance involve employment practices, human
rights, environmental regulations, and the moral obligation of multinational corporations.
Nature of Ethical Issues

In recent years, the subject of corporate social responsibility has widened into what is
generally referred to as business ethics. First of all, let us define what we mean by "ethics".
A dictionary definition describes ethics as "a moral philosophy which teaches people their
duty, and the reasons for it".
Therefore, we might say that ethics are principles concerned with interpersonal behaviour. If
they are such principles, then:
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They should be universally applicable.

They should provide the standards by means of which the conduct of people can be
compared.
They can be taught, and thus help to establish generally acceptable standards of
conduct.
Many business and professional groups, for example in the legal and medical fields, have
adopted codes of conduct for their membership which help to establish a standard of
acceptable behaviour, and these in turn help to further ethical practices.
The way in which organisations perform their activities within society has an effect both on
society in general and on individuals and their values. This raises questions about the role of
managers in the area of strategic management in terms of ethical practices, and the way
they treat people.
The range of ethical issues that potentially face the manager is enormous. Below are some
of the more important.
(a) Keeping to laws and regulations
Often managers must decide whether or not to break laws or ignore regulations
pertaining to their and their companies' activities.
(b) Telling the truth
Managers must also often decide when to tell the truth or at least how much
information to provide.
(c) Showing respect for people
The business manager can face dilemmas with regard to standards of ethical
behaviour relating to how people, and specifically staff and employees, are treated.
(d) Doing no harm
For many, this first rule of medical ethics is considered to be the most important ethical
consideration for any business manager. There is no doubt that managers do face
dilemmas with regard to this principle. In this case, harm could mean harm to
particular people or perhaps the wider environment and society.
These then are some of the key types of ethical issue managers face. Within these broad
categories, managers are faced with specific issues such as, for example, product safety,
misleading advertising, unethical employment practices, etc.
Johnson and Scholes suggest that these ethical issues, which concern both businesses and
public-sector organisations, operate at three different levels:
The macro level, which concerns their role at the national and international level of the
organisation of society.
The corporate level, which focuses on the ethical issues concerning individual
corporate entities, both in the private and the public sectors, when selecting and
implementing strategies.
The individual level, which concerns the behaviour of individuals within organisations
Approaches to Ethical Issues

In considering the position taken up by organisations in terms of ethical conduct we can
identify four broad categories which between them form a spectrum, from minimal concern
with ethics to making ethics central to the organisation's purpose.
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In the first category, the role of the organisation is seen to be focused solely on its
business performance in terms of making a profit. As Milton Friedman put it, "the
business of business is business", and "the only social responsibility of business is to
increase its profit". This type of business regards social issues (for which we can read
ethical issues) as none of their concern, and that these are best left to society to decide
for itself by legislation what is acceptable and what is not.
In the second category come those organisations which look beyond making a profit for
shareholders to consideration of the wider group of stakeholders. Here a limited
amount of sponsorship or involvement in "worthy causes" is seen as being of economic
value in improving the public image of the organisation.
The third category embraces the interests of stakeholders to a greater extent and sees
its role as going beyond just the obvious business targets of employing people and
providing profits, to "looking after their people". Paternalist companies, such as the
chocolate manufacturer Cadburys, saw their role as providing decent working
conditions and improving the environment as well as creating profit.
The final category, which includes many charitable bodies, comprises organisations
whose raison d'tre is to meet society's needs. For these organisations, finance is less
important than the provision of an acceptable level of service. Unfortunately, without
some source of income, whether by sponsorship or taxation, they cannot exist and so
they face the problem of trying to reconcile these two.
There are a number of high profile examples where the ethical face of business has become
a public issue. Shell in Nigeria was accused of human rights abuses in the 1990s which
concluded in 2009 with the corporation settling a lawsuit which acknowledges their unethical
behaviour in the exploiting of oil reserves in southern Nigeria. The court case was heard in
New York. The behaviour of Union Carbide in delaying settlements following the disaster at
Bhopal in India is also well documented.
There are increasing numbers of "ethical investors", who put money only into companies
whose objectives and methods they approve. Of particular significance, there has also been
a rapid expansion in the demand for "fair trade" products companies selling these
guarantee a "fair" price to producers in Third World countries, and/or return a proportion of
their profits to social investment in those countries. From being a small scale operation
involving just smaller companies it has now grown to include large global organisations such
as Cadbury and Nestle.
Perhaps the best known example of an ethical company is that of the Body Shop, set up by
the late Anita Roddick with her husband Gordon and based on what she referred to as its
DNA: its very strong social, ethical and environmental stance. She said she would like "to be
judged by our actions in the larger world, by the positive difference we make".
From the above we may summarise the following four alternative ethical positions which a
company may adopt:
(a) Short-term shareholder interests
This is the "business is business" stance as described by Milton Friedman, in which the
primary objective is to satisfy the short-term interests of shareholders through the
strategies and policies which the company pursues. This type of company
concentrates on short-term profit which will increase shareholder value and returns.
Other, wider, ethical issues with respect to other stakeholder groups, or to the
community in general, are regarded as not its responsibility.
(b) Longer-term shareholder interests
This position is also largely concerned with shareholder interests, but takes account of
the premise that the longer-term interests of shareholders may well benefit from
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developing good relationships with other stakeholders. Thus, being concerned with the
wider issues will, in the long term, result in higher profits and returns for the company's
shareholders.
(c) Multiple stakeholder obligations
Here the interests of the wider group of stakeholders are taken into account. These
include employees, customers, suppliers, distributors and the community at large.
Unlike those companies, which meet only the minimum statutory obligations, these
companies go beyond minimum requirements in order to achieve a balance between
the interests and expectations of their shareholders and those of other groups of
stakeholders.
Problems can arise for companies in this category in terms of conflict between social
responsibility and company survival, or between social responsibility and shareholder
expectations.
Many public-sector organisations fit into this category.
(d) Shaper of society
This category contains those organisations whose raison d'tre is primarily to effect
changes in society in accordance with the needs of the community. Financial and
shareholder interests are regarded as being of only secondary importance.
The dilemma faced by such organisations is how commercial they are prepared to be
in order to carry out their social role. The answer will depend to some extent on
circumstances, and also on the structure of the organisation. For example, a company
without shareholders, such as a private family company, or a public service
organisation, would find it easier to adopt this stance.
The larger charities, such as Oxfam, are in a similar position, where they are accused
by some of being too commercial and of spending too high a proportion of their income
in internal administration.
In considering these alternative ethical positions it is important to remember that they will
have a major impact on the organisation's operations, including its strategies.
Encouraging Ethical Behaviour

There are a number of steps that a company can take to encourage ethical behaviour on the
part of its staff. Some of the main ones are as follows:
Ensure top management commitment to ethical issues in the organisation.
Establish clear corporate guidelines and policies with regard to ethical issues and
practices. This is embodied in the creation of a policy of Corporate Social responsibility
(CSR) at the highest level in the organisation.
Communicate ethical guidelines and policies to all staff, preferably through a written
code of ethics.
Encourage staff to be open about ethical problems and dilemmas they face. Establish
"ethics hotlines" which allow employees to bypass normal chains of command.
Conduct ethics audits on a regular basis to identify any serious breaches of ethical
policies.
Conduct ethics training on a regular basis.
Devise systems of motivation and remuneration/reward which encourage conformance
to ethical practices and standards.
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In conclusion, ethical issues are now a major factor for the corporate planner. The corporate
planner must understand the range of ethical issues for the modern business and how to
resolve the potential dilemmas to which these give rise. The planner can take several steps
to encourage more ethical behaviour and practices in the organisation.
Environmental Issues
Some of the areas causing concern today include deforestation, global warning, decline in
fossil fuel supplies and "fishing out" of the oceans.
How do these affect strategic planning?
(a) Deforestation
With many people showing concern for the disappearance of forests, these companies
which use wood and wood products in their business have had to look either to
alternative materials or to sustainable sources in order to maintain their client/customer
base.
One of the ways this can be achieved is by recycling wood and paper products. Thus
the pen I am using to write these original draft notes has its carcass made from
recycled paper, and was supplied by Friends of the Earth.
(b) Global warming
Though there is still some debate, it is now generally accepted that we need to reduce
carbon dioxide emissions worldwide, with particular implications for certain businesses
such as car manufacture and those factory sites which give off carbon dioxide. This
has resulted in a number of strategic decisions having to be made, such as the use of
catalytic converters, and gas filtration systems.
(c) Decline in world stocks of fossil fuels
This has led to such changes as legislation in the UK on engine size for cars, with
reductions in road fund licences for smaller sizes, and to investment in sustainable
energy sources, such as wind farms.
(d) Disappearance of fish stocks
This has resulted in fishing quotas being cut for European fishermen, resulting in a
large decrease in the English fishing fleets operating out of Devon and Cornwall. At the
same time it has encouraged the setting up of fish farms, particularly for salmon in
Scotland. Globally the wasteful fishing practices for species such as tuna has come
under scrutiny for its impact on other endangered species literally caught up in some
fishing nets.
Pressure Groups
There is no doubt that pressure groups of one sort or another have been important and
influential in encouraging companies to be more socially/ethically and environmentally
responsible. For example, Shell recently proposed to sink a disused oil drilling platform in
the North Sea leading, it was suggested, to potential significant levels of pollution. Only after
concerted efforts by pressure groups, and in particular Greenpeace, were these proposals by
Shell withdrawn.
Furthermore, these pressure groups are increasingly organising on an international/global
basis so as to match the power of the global companies. We saw in an earlier study unit, for
example, that the recent world trade discussions were effectively destroyed by the activities
of a number of pressure groups who organised demonstrations to disrupt the talks.
Moreover, these pressure groups organise themselves internationally through the use of the
Internet. It is likely that pressure groups will continue to grow in importance with regard to
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the operation of international business, and that access to and use of communications
technology will enable these groups to act quickly and powerfully to make their feelings
Green issues, too, have become an important concern for customers throughout the world.
We have already referred to the depletion of the worlds resources through the worst
excesses of some of the multinationals, particularly in industries such as mining, forestry and
oil extraction, but governments are increasingly requiring that companies operate and
implement policies that do not harm the environment. Similarly, customers are increasingly
demanding green products, produced with green credentials.
For the company unable, or unwilling, to respond to this increased awareness of social,
ethical and green issues, consumer demands for socially responsibility represents a distinct
threat. However, the more astute companies have recognised that, in fact, this represents a
marketing opportunity. Such companies have responded to this growth in awareness and the
emergence of pressure groups by introducing business policies and strategies which are
more socially and ethically sensitive and products and services which are distinctly green in
their credentials. So, for example, increasingly timber companies operate environmentally
friendly policies of only producing and marketing timber from managed forests.
G. THE THREE Cs FRAMEWORK

In addition to the PESTLE analysis, when dealing with the international environment it is very
useful to consider certain additional factors which we can characterise as the three Cs.
Country
The concept of the country is significant in international business. This might seem rather
self evident, but it is important to understand how the concept is used and what its limitations
are.
Companies often use countries both as a unit of analysis and as a basis for their
organisational structure. In terms of analysis, in many ways the boundary between one
country and the next country changes markets. We often find that the laws change, the
types of retail outlet are different, the types of tax paid on income and on expenditure are
different, and newspapers, radio and television are different. In addition, the spoken
language may well be different, although in the border areas it is not uncommon for people to
speak both the languages of the neighbouring countries. Thus, it is very often the case that
there are many differences in the business environment caused by the different rules,
regulations and customs that relate to one country and not to the next.
It is important, however, not to fall into the trap of assuming that a country constitutes a
homogeneous market. We have already used the example of India, where there are many
different languages, considerable divisions in the society caused by the caste system and a
large proportion of wealth is owned by approximately 5% of the population. Consider also
the United States of America. They may be united, but many states have their own laws and
very different cultural values, consider the difference between those living in multicultural
New York State and those living in the Deep South.
Additionally, in some parts of the world, the development of trading blocs has started to mean
that companies need to consider trading blocs or world regions as another basis for their
analysis. For example, Japanese and US companies might need to develop analyses based
upon the European Union as well as the individual countries within the EU. In addition,
companies might change their organisational structures to allow a pan-European
organisation and culture to develop. A European head office might be started in Paris,
Brussels or perhaps London. Bombardier chose to relocate its head office from Montreal,
Canada to Berlin, Germany to be closer to the key European rail market and to benefit from
local engineering talent.
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Finally, in some ways, countries and country boundaries may increasingly not be the best
way of thinking about market boundaries and target markets for the international business.
As we shall see in later study units, it may be more useful to look for similarities and
differences with respect to, for example, customer needs and wants, in order to group
customers and markets rather than grouping them by country.
Currency
One of the major differences between countries, and one that keeps the concept of the
country strong in business terms, is that each country usually has its own currency. Thus,
neighbouring countries, which may be similar in many other respects, will have different
currencies.
This is a significant issue for international business. At its lowest level, the problem is simply
the need to change one currency into another in order to effect payment for international
transactions thus, if you export products to a company in Argentina, your customer will
normally only have pesos to pay your invoice and either you or your customer will have to
exchange currency so that both parties end up with currencies that are acceptable to
themselves. The other, more significant, problem is that currencies change values. For
example, over the past ten years or so, the pound has exchanged at rates varying from
approximately 1 to $1 to 1 to $2, which is an effective change in value of 50% from the
strong sterling position of gaining two dollars for every one pound sterling. Variations in
exchange rates cause considerable problems for business.
In terms of the financial implications, companies need to take steps to manage the risk that
variations in the exchange rate will cause the value of payments due in a different currency to
fall in terms of their own domestic currency. There are number of measures that can be
taken for example, buying foreign currency forward at a fixed rate, in order to remove the
risk and obtain certainty about future income and profit levels. We shall return to this when
we consider international finance later in the course.
Large international companies often try to develop their international operations to avoid the
need to exchange currencies. If they can exchange products and services between different
subsidiaries in different countries, they can minimise the amount of currency that needs to be
exchanged. Most of the exchange can be handled internally within the company accounting
system.
Changes in foreign currency exchange rates can also influence pricing decisions. Over
minor exchange rate fluctuations, the company can invariably adjust its profit margins in
order to maintain a constant price to the customer. However, if the fluctuations are
considerable, the company might need to change its business strategy radically. The
problems arise when its own currency is appreciating, therefore making its products more
expensive in other currencies and, hence, less competitive with other producers, principally
local ones that are not affected by exchange rates. One solution would be to drive down
costs in order to avoid increasing prices for example, embarking on substantial cost
reduction programmes in its home production or finding different distribution channel
arrangements with lower distributor margins. Alternatively, it might attempt to develop a more
expensive image and positioning to help to justify the higher price.
As we saw in Chapter 3, regional trading blocs may attempt to minimise some of the
problems caused by different currencies by adopting common rules for, say, fixing exchange
values between member countries. In the case of the European Union, we have seen the
introduction of a common currency, the Euro, in certain member countries in order to reduce
some of the problems caused by volatile currencies and exchange rates.
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Competitors
In international markets, competition is often more difficult to manage than in the home
domestic market. The reasons for this include:
In international markets, the company often has a lower market share, sometimes very
much lower, than in the domestic market. This results in a less powerful position. It
also results in costs that are relatively higher, because of the lower scale of operations;
activities such as marketing research or advertising are more expensive per unit of
product sold.
The development of more international companies means that, in any one market, the
number of companies looking for a share of that market is increasing. As business
looks beyond its domestic markets, companies from all around the world are becoming
more world regional and global in their business strategies and in the co-ordination of
their strategies towards competition.
Companies in the NICs are becoming more and more successful in their own markets,
developing products and services that can compete with foreign multinationals on most
terms and often undercutting them on price. The more successful such companies
become, the more difficult it is for international companies to retain their share of the
market. Further, many of these companies are themselves looking to international
markets for growth, for example, the Hyundai car from South Korea.
When added to the difficulties of obtaining high quality information and the barriers resulting
from cultural differences, these factors make it increasingly difficult to compete successfully
with competitors in non-domestic markets. Furthermore, some competitors will have
advantages resulting from lower operating costs and/or from currencies that are depreciating.
H. USING INTERNATIONAL ENVIRONMENT ANALYSIS

TECHNIQUES
When assessing your case study, it is important that you work through all the elements of the
analytical techniques we have examined here and apply them to the scenario given in
respect of the general industry/sector and the specifics of the organisation concerned. Here,
we outline the way in which this may be done in respect of Bombardier Aviation (from the
June 2010 examination) and Acer (from December 2010).
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Example of PESTLE Analysis for Bombardier Aviation
Element Trend Importance Comments

(110)
Political Recession 8 Less government support for

airline industry
New states 6 Establishment of new state
backed airlines increased
demand for aircraft
Open skies treaties 6 Increased globalisation of
(deregulation) airline industry
Immigration policies 5 Impacts on foreign working
and may limit availability of
skilled aviation workers in
certain countries.
Terrorism 6-8 Can inhibit air travel and
ultimately increase cost of air
tickets and impact on
demand for aircraft,
Economic More employment 8 More disposable income

more leisure travel. More
aircraft demanded
Oil Prices 10 Major cost factor in air travel
demand for energy saving
aircraft
Recession 6 Less business travel fall in
sales of executive jets
Banking Crisis 10 Less lending to BA and
customers
Social Leisure industry 10 More leisure time

Growth in holiday industry
Shopping 10 Changes in shopping
later/longer/globally trends/habits Weekend
flights to shop in New York
Quality products 8 Last longer, but improve
image
Technological Internet VOIP 9 Threat of less air travel

particularly in business travel
Aircraft design 10 Better economy of operation
ECO4 & MIRAG
technologies
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Element Trend Importance Comments

(110)
Legal/ Product air safety 10 All products must confirm to

Regulatory regulations safety standards can inhibit
NPD
Anti-competition 6 May impact on the growing
laws low cost air travel market
sector
Environmental Global warming 8 Air travel seen as high impact

on environment.
Example of 3 Cs Analysis Applied to the Acer Corporation
Country The demand for Acers products is affected by country factors

based upon the levels of economic development. In some
countries, the price of a computer is the average weekly wage,
whereas in others it depends upon the distribution of wealth. The
levels of literacy will also affect sales. There may also be a need to
adapt the product due to language difficulties.
There have also been reports of resistance to the adoption of
modern technologies. For example, in Uruguay where there is a
government programme aimed at using information technologies to
bring about rapid economic expansion, opponents of the
programme feel that this will lead to fundamental changes in
society to the detriment of existing culture.
Acer being a Taiwanese company has built up a strong market
presence in the ASEAN economic area, particular in Australia.
There is also a significant presence in the United States which was
recently further increased by the acquisition of Gateway.
Currency Acer and most other ICT manufacturers/suppliers are affected by

currency issues. Acer, with its base in Taiwan, is particularly
affected by the value of the Taiwanese currency against other
currencies especially the US Dollar and the Euro. Acer uses
subcontractors to manufacture its products, so it can, within certain
constraints, adapt its supply chain to reduce the impact of currency
fluctuations. However, with the economic weakness of some
Eurozone countries causing a general fall in the value of the Euro,
there have been subsequent increases in retail prices across the
whole Eurozone.
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Competition The nature of the competition in this market is mostly based upon
major global players such as Sony, Samsung and Dell. There is
also some major involvement from governments. The Indian
government has active plans to develop low priced computers and
the Chinese Government have a significant share in the Lenova
Corporation which was previously owned by IBM. At the moment,
the market is showing exceptional growth and whilst there is some
competition within the market, there is a significant investment in
developing and innovating new technologies to gain market
leadership.
1. The Delta Airlines case study in chapter 1 is based on the global airline industry and its
environment in 2009. Carry out a PESTLE analysis on the airline, and try to update it
by reference to changes that have taken place since that date.
2. Conduct an analysis based upon the 3Cs framework for the global car industry with
information from the Toyota case study (June 2009).
3. Compare and contrast the social/cultural environment that exists in two countries at
different stages of economic development.
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89
Chapter Five
The Micro and Internal Environment
Contents Page
Introduction 90
A. Internal (Situational) Analysis 90

Strengths, Weaknesses Opportunities and Weaknesses (SWOT) 90
The TOWS Matrix 91
Product Life Cycle (PLC) Analysis 91
Rogers Adoption Theory 92
The Value Chain 93
Financial Analysis 95
B. Analysis of Competitive Market Structure 96

Porter's Five Forces Model 96
Directional Policy Matrices 98
Competitor Intelligence 104
Positioning/Perceptual Maps 105
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90 The Micro and Internal Environment
INTRODUCTION
The last part of the environmental analysis is to consider the organisation itself. Here, we
shall examine this in terms of its capabilities and competences for responding to key aspects
of the external environment and the markets in which it operates. The frameworks for
analysis examined should all be very useful when you come to evaluate the situation of the
organisation featured in your examination case study.
A. INTERNAL (SITUATIONAL) ANALYSIS

Strengths, Weaknesses Opportunities and Weaknesses (SWOT)
A SWOT analysis is a good and well-tested technique for defining the microenvironment of
an organisation. It bridges the external and internal environments in assessing the position
of a business considering the external environment in terms of the opportunities and
threats it presents, and the internal environment in terms of the organisation's strengths and
weaknesses in responding.
A strength is defined as an internal characteristic with the potential to improve the
organisation's competitive position, such as a high level of competency among staff.
A weakness is an internal characteristic that may disadvantage an organisation in
relation to competitors, such as ageing equipment or manufacturing facilities.
An opportunity is an external factor that offers the possibility of securing competitive
advantage, such as changing consumer tastes.
A threat is an external factor that may undermine competitive advantage, such as the
entry of new firms to the industry.
Figure 5.1: Outline SWOT Analysis
Strengths Weaknesses
High level of staff competence High wage levels
Experienced management Old buildings and equipment
Positive public image Poor record in implementing
change
Good customer service
Strong trade unions
Strong research function
Slow decision-making
Well-developed financial control
systems
Opportunities Threats
Rising consumer prosperity Low-cost competitors

Expanding markets worldwide Demographic changes
Diversify into other products Changing consumer tastes
New legislative requirements
Note, though, that whilst we have simply listed a number of items here, when carrying out a
SWOT analysis, it is important to detail them with a description, explanation or evaluation of
their importance.
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The Micro and Internal Environment 91
The TOWS Matrix

A SWOT analysis is key to defining the current situation. However, it does not offer any plan
for addressing the issues identified. The next stage, then, is to determine the strategic
choices that an organisation faces as a result of the initial analysis. This may be provided by
the TOWS matrix.
TOWS which stands for the same terms as SWOT, but reversed looks at matching the
external opportunities and threats with the internal strengths and weaknesses. It then leads
to the consideration of the options that are available.
Figure 5.2: TOWS Strategic Alternatives Matrix
External Opportunities External Threats
SO: ST:
Internal Strengths Maxi-Maxi Option Maxi-Mini Option
Strengths will maximise Strengths will minimise
opportunities threats
WO: WT:
Mini-Maxi Option Mini-Mini Option
Internal Weaknesses
Weaknesses are Minimise threats by taking
minimised by taking avoidance action
advantage of opportunities
After the external environment has been audited, the results of existing strategies can be
forecast in the light of the organisation's internal strengths and weaknesses. Then strategic
decisions can be taken about continuance and change, depending on the convergence of
forecast and required outcomes.
As with all management decision-making, the key stages are identification of alternatives,
evaluation and selection. In evaluating an opportunity, careful consideration needs to be
given to its relationship with the organisation's strengths and weaknesses. Opportunities
should be sought which are most congruent with the organisation's identified strengths and
where any weaknesses in strategic factors can be subject to corrective action. Decisions
also need to be made on the aspects of the business which appear most vulnerable to
external threats, indicating it may be necessary to withdraw from a particular product or
market, or divestment of a particular business unit.
Product Life Cycle (PLC) Analysis

It is possible to plot the progress of a product in terms of sales volume against time. This
gives rise to the theory of a product life cycle. If we plot sales against time, we typically
obtain a S-shape curve, as shown in Figure 5.3. Given that this shape curve is expected, a
manager can say, "When I look back, at which point on the curve will I discover we have
been at this time?".
During this life cycle a continuous process of external change takes place, from the entry of
competitors to consumer attitudes. Understanding this enables the business to anticipate
these changes and to plan accordingly. However, you must remember that any change in
the environment, both external and internal, can affect the curve, not just a change in the
product. Thus, the PLC is a variable, not a determinant.
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Figure 5.3: Product Life Cycle
Sales/
Profits in
Introduction Growth Maturity Decline
Sales
Profits
+
Time (months or years,
depending on the product)
Development
Rogers Adoption Theory

The success of a product or service will depend upon how customers and consumers accept
and adopt the product. Rogers' adopter categories are the definitive model of the adoption
process, as shown in Figure 5.4 and, in essence, reflect the product life cycle.
Figure 5.4: Adopter Categories Based on Relative Time of Adoption of Innovation
Early Late
majority majority
Early
adopters
Innovators Laggards
34% 34%
2.5% 13.5% 16%
Time
Rogers' categories are as follows:

Innovators (2.5%) those who get satisfaction from being ahead of fashion.
Early adopters (13.5%) opinion leaders; those keen to try new things.
Early majority (34%) those willing to try new things, but who are not "pioneers".
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Later majority (34%) the followers of fashion, who perhaps wait for the product to
become a perceived necessity. They are not being prepared to take risks with a new
idea.
Laggards: (16%) the latecomers.
Rogers' theory neatly forms a normal distribution curve.
In practical terms, it is for each organisation to forecast the pattern of adoption for individual
products. This will have the strongest implications for forecasting the duration of the
introductory and growth stages of the product and can vary according by country/culture.
A product opening up a market will be distinctive, i.e. innovative. But with success comes
competition in the form of copying, perhaps from products with distinct advantages of their
own. As time passes the "innovative" product loses this distinction and then has to be
updated in order to sell it on differential terms, i.e. it is different, not distinct. A good example
of this is laptop market where in a relatively new market there are many companies
competing for market leadership.
In international terms, the rate of adoption may vary according to many factors particularly
economic conditions and those involving the many cultural dimensions of the market.
The Value Chain

A technique that is useful in analysing the key activities and processes within a business is to
look at the various steps by which value is added.
The identification of the value chain for an organisation helps in the understanding of those
activities that are of importance from a strategic viewpoint. Value chain analysis shows that
an organisation is not made up just of a collection of different resources, such as machines,
money and personnel, but that it is the way in which these resources are deployed through
the organisation's systems of operation which make the products or services valued by the
customer or client. It is through these value activities and the linkages between them that
competitive advantage is gained by an organisation.
Porter categorises the value activities as:
Primary those activities which create the product or service, deliver it and market it,
and provide after-sales support, and
Support those activities which provide the input and resources that allow the primary
activities to take place, i.e. company infrastructure, human resource management,
technology development and procurement.
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Figure 5.4: The value chain
Company infrastructure
Support activities
Human resource management
Technology development
Procurement
Margin
Primary activities
Inbound Outbound Marketing

Operations Service
logistics logistics & Sales
Competitive advantage comes from the way in which businesses organise and carry out the
separate activities within the value chain. It may be the case that, as it evolves, a business
may rationalise its direct primary activities to concentrate on those in which it has a distinctive
expertise and its competence can deliver higher added value. This is particularly true in an
international setting where companies such as IBM and Acer have changed the focuses of
their business. In the case of IBM, they no longer manufacture hardware but are extremely
successful in providing IT support. Similarly, the focus of Acer is in marketing, including
product development of personal computers, rather than the actual manufacture of the
products that they sell.
The advantage of this approach is that it considers support activities and the way in which
these interact with primary activities in achieving business objectives. It can be used to
identify where problems exist and where new processes are required for example, by
looking at existing activities in order to identify bottlenecks and waste. This is based on a
technique known as "value engineering", which is used in the engineering industry and which
looks at every component of a machine to see how it could be produced at a lower cost.
In each of the categories it is the way that resources are deployed which leads to the
creation of value, and thus to competitive advantage. Johnson and Scholes suggest that
resource utilisation can be achieved in three stages:
by identifying value activities assigning costs and added value, and identifying which
are the critical activities
by identifying cost or value drivers those factors which determine cost or value of
each activity
by identifying linkages which either reduce cost or add value, and which discourage
imitation.
Management's role is to examine the costs and performance in each value-creating activity
and to look for ways to improve, preferably through ones which will add positive synergy to
the whole.
Competitors' costs and activities should also be looked at and their performance used as a
benchmark for performance appraisal.
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It is essential to look for competitive advantage beyond the organisation's own value chain,
by considering those of its suppliers and the members of its distribution channel, since these
also have a part to play in the consumers' perception of quality.
Resources of finance, personnel, production capacity, etc. all have to be allocated to achieve
competitive advantage. One of the difficulties of resource allocation at the corporate level,
especially, in large organisations, is the extent to which overlap, sharing or duplication of
resources occurs between various parts of the organisation. This can apply across the
board, from relatively minor considerations such as the sharing of photocopying services
between departments, to major considerations such as two divisions sharing their transport
and distribution services. It is issues such as these which affect the centralisation or
decentralisation of control over resource allocation.
Central control over resource allocation is required where the strategies involved are
dependent upon high levels of co-ordination or co-operation between different departments
and/or divisions. Where divisions or SBUs are to a large extent independent, then control by
the centre is less important.
Financial Analysis
It is important to analyse the financial performance of an organisation especially within a
dynamic international environment where strong financial results are essential to ensure that
all other activities of an organisation can be successful.
There are many indicators of an organisations financial performance and the important ones
are as follows
Profit
Shareholders expect a return on their investment and it is estimated that up to 70% of
new capital investment comes from retained profits. Thus, it is an absolute requirement
that organisations need to be profitable.
The profit margin should be in line with what is expected within the particular
business/industry sector. The trend in the level of profit should show that an
organisation could operate successfully given any changes in its markets. The
difference between profit at the gross level and at the net (after expenses) can also
show how efficient an organisation is.
Investment
An important comparative measure is the amount of return that profit represents as a
percentage of the capital that is invested (tied-up) in the business. New investment will
be easier to attract if an organisation can show a good record of returns, which clearly
shows it to be a well run and profitable business. Failure to generate sufficient sales
against large investments can put pressure upon the whole organisation.
Liquidity
This assesses the ability of an organisation to meet its financial commitments as they
become due. Organisations need to have sufficient cash and near-cash resources,
and this means managing their cash flow to ensure that they can continue to operate
successfully. International business can be particularly risky in this regard.
The traditional method of gauging liquidity that of comparing current liabilities with
current assets needs to take into account the nature of the business. For example,
many retailers such as Tesco would be considered to have poor liquidity, but this is
mainly because they are ultra efficient in ensuring both that their levels of stock are
kept low and they are effective in obtaining good settlement terms with their suppliers
(Trade Creditors).
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There are many other financially based measures of performance and you need to consider
the range of possible factors appropriate to the particular situation. For example, in retail
operations, there are measures such as the rate of stock turnover, the value of sales per
square metre of store space, and the average spend per customer. For an manufacturer
involved in large engineering projects such as Bombardier (case study examination, June
2010), the value of future orders (the order book) is an important measure.
B. ANALYSIS OF COMPETITIVE MARKET STRUCTURE

Porter's Five Forces Model
Porter states that there are five forces that determine competition in an industry, as follows.
The threat of new entrants
New entrants to an industry bring additional capacity and the desire to gain market
share. The seriousness of the threat of entry depends on the extent to which there are
barriers present within the market that deter potential new competitors, and on the
reaction from existing competitors which the new entrant can expect.
The bargaining power of suppliers
Powerful suppliers can exert bargaining power over participants in an industry by
raising prices or reducing the quality of purchases. A supplier is powerful if:
(i) the industry is dominated by a few companies
(ii) either its product is differentiated or there would be significant costs involved in
changing to another supplier
(iii) it does not compete with other products
(iv) it poses the threat of integrating forward into the organisation's own business
sphere
(v) the organisation is not an important customer of the supplier.
The bargaining power of buyers
A buyer is powerful if:
(i) it purchases in large volumes
(ii) the products it buys from the organisation are standard or undifferentiated
(iii) the products it buys form a component of its own product and represent a
significant fraction of the cost, so it are more likely to shop for a favourable price
(iv) it earns low profits, creating an incentive to reduce purchasing costs
(v) the organisation's product is unimportant to the quality of the buyer's own product
(where it is, the buyer is much less likely to be price-sensitive)
(vi) the organisation's product does not save the buyer money (if it does, then the
buyer is rarely price-sensitive)
(vii) the buyer poses a threat of integrating backwards into the organisation's own
business sphere.
Substitute products or services
The availability of suitable, viable substitute products or services limits the potential for
earnings and growth from existing products or services, since these have to be priced
so as to be more attractive than the substitutes.
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Rivalry among existing competitors

Rivalry among existing competitors takes the form of seeking to increase market share
by cutting prices, introducing new products and promotional advertising. Intense rivalry
is related to the presence of:
(i) numerous competitors, roughly equal in size
(ii) slow industry growth
(iii) lack of product differentiation, or of significant costs of changing
(iv) high fixed costs or the product being perishable, resulting in significant price-
cutting to stimulate sales
(v) capacity which is normally increased in large increments, leading to periods of
over-capacity and price-cutting
(vi) high exit barriers, such as the difficulty of disposing of very specialised assets.
Once top management have assessed the forces affecting competition in the industry and
their underlying causes, the organisation's strengths and weaknesses can be identified. The
crucial strengths and weaknesses are those which relate to the underlying causes of each
force. Within a market there will often be strategic groups which comprise of organisations
with similar market aims and capabilities for example, in the airline industry there are the
international carriers, regional/ domestic airlines and low cost airlines.
A simple example of the five forces in action can be seen from looking at the Bombardier
case study: This shown diagrammatically in the following figure.
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Figure 5.5: Five forces analysis Bombardier
Threat of New
Entrants
HIGH
Low barriers in China
and Russia
Rivalry
Power of Suppliers Power of Customers
INTENSE
LOW VARIABLE
Direct: Embraer and
Engine manufacturers BAE Low in short term
some choice driven High in medium term
by technology Indirect: Airbus and
Boeing new low cost airlines
Threat of Substitutes
VARIABLE
NICs lack road and rail
infrastructure
Developed countries
have high speed rail
links
Directional Policy Matrices

There are a number of models that look at a business's position in relation to the nature of
the market or markets in which they operate, and use this as the basis of determining
strategic direction. We shall consider three such models here, all of which use matrices to
position the company against the competition in the market.
(a) The GE Matrix
This model was developed at a time when the General Electric company was going
through a very expansive time in its history. The model takes account the nature of the
market and the capability of the companies within it, and assesses a business's
products and/or its organisation in terms of the "attractiveness of the industry" to the
business and the "business strength" of the company itself.
Planners take account of factors such as the following in order to assess a company as
"high", "medium" or "low" with a view to placing them on a grid. Often these factors are
"weighted" by the planner.
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Industry attractiveness Business strength

Market size (numbers/value) Differential advantages
Market diversity Share (number/value)
Growth rate (total/segment) Sales (volume/growth)
Profitability (total/unit) Breadth of product line
Competitors Mix effectiveness
Social/legal environment Innovativeness
Figure 5.5 shows the characteristics of products in a company's portfolio. On the grid,
the circles represent overall market sales, and the share held by the particular
company is then shown as a proportion of the circle.
Figure 5.6 General Electric Business Matrix
Industry Attractiveness
High Medium Low
(1)
High
(2)
Business Strength
Medium
Low
(3)
We can see from this that the company has major shares in three markets:
(1) A highly attractive market with large overall potential revenue, where the
company has high business strengths.
(2) A mid-value market, but again one in which the company has high business
strengths. The overall market income is not high, but there is future potential.
(3) A market which is not highly attractive and where the company strength is low.
The high share of the market may be because competitors have withdrawn. This
market may be potentially lucrative in earnings, but small in size. Planners may
decide therefore to stay and keep out competitors.
(b) Boston Consulting Group (BCG) Matrix
In this model, an organisations products and/or its strategic business units (SBUs) are
related to the market growth of the market in which they operate and also to the relative
market share they have. Planners can then classify products/SBUs into four categories
according to their position on the matrix, allowing them to understand the nature of
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those products/SBUs in the market i.e. whether they are "cash providers" or "cash
users". This analysis then serves as the basis of strategy determination for taking the
product/business unit forward.
Figure 5.7 shows a range of products produced by a company in relation to the two
characteristics of the markets in which they compete. The direction arrows indicate the
normal way in which products can be assumed to move between the positions on the
grid.
Figure 5.7: Product Classification in the BCG Matrix
High 20
Stars Question marks
Market Growth
10
Cash Cows Dogs
Low 0
10x 1x 0.1x
Relative Market Share
The four classifications are defined as follows.

Question Mark (sometimes referred to as Problem Children or Wildcats)
Question Marks are products/SBUs, which have low relative market, share and
are in high growth markets. The product/SBU has not yet reached a dominant
position in the market. Although it may be generating funds, it still requires a lot
of investment for development and the company must decide if they want to keep
investing.
In Figure 5.7 the company has two Question Marks. Planners may decide that it
would be better to concentrate all their efforts on one of these, in order to make it
successful, and keep all the others just ticking along until they have secured the
most favourable position for this one. The product, which is producing a greater
proportion of revenue for the company (the one with the largest circle) may be
chosen for additional effort as it obviously has good earning potential. A greater
market share should be gained as soon as possible. Decisions of this type would
be based on a variety of factors relating to the product(s) and the competitive
environment.
Star
If Question Marks succeed they become Stars leaders in high growth markets.
Stars are the "providers of tomorrow" and a company with no Stars should worry.
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The company depicted in Figure 5.7 has two Star products one which has the
leading share in its market and one which has only slightly more share than its
leading competitor. Efforts should be made to increase the share of the second
product in order to secure its future profitability, particularly as the market has a
very high growth rate this could be where future earnings lie.
This, of course, means investment, which can be a cash drain on the
organisation. Even Stars with high market share may involve investment in
promotion or distribution, etc. if the competition is attacking. Stars can therefore
both produce revenue and use resources which can mean just "breaking even".
Investment decisions must be based on the future potential of the product and its
market. Companies want to retain the share that Stars hold, but they also want
the market to stabilise as stable markets are much easier to cope with than high
growth markets which can mean difficulties in production and distribution.
The Star with the leading share is moving down the spectrum which indicates that
growth in that market is slowing or stabilising and, providing no share is lost, the
Star should become a Cash Cow.
Cash Cow
When market growth reaches a stable level (10% is used in our diagrams as an
example but this will vary according to the particular market) Stars become Cash
Cows providing they hold a leading share of the market. If they lose any market
share to the competition they will "slip" into either being a marginal Question
Mark or, at very worst, a Dog. Cash Cows produce good revenue, do not require
high investment and often mean that economies of scale can be gained.
The money earned from Cash Cows should be used to invest in other
products/SBUs which are placed in the other classifications on the BCG matrix.
Figure 5.7 shows that the company has only one Cash Cow, so is vulnerable. A
loss in market share could mean trouble, even more so if there is no Star to come
in and take the place of the Cash Cow. In this situation, a company would have
to pump in finance to support its Cash Cow, thereby deflecting support from the
other categories. If the company continued to support other categories and
neglected its Cash Cow, the Cash Cow could eventually become a dog.
In our example, it would be very dangerous if the Cash Cow slipped to being a
Dog, as the Star which could come into the Cash Cow category is not making as
much money for the company as the current Cash Cow. Given these
circumstances it is likely that the company would invest in its current Cash Cow
to retain market share.
Sometimes Cash Cows that are losing their share can be turned into Question
Marks, which is preferable to becoming Dogs, but this situation will only really
occur if something happens to revitalise the market perhaps a new use for a
particular product may be found and the market will begin to grow again.
Dog
Dogs have weak market share in low growth or stable markets. These products
can often take up more time than they are worth. They usually produce low
profits and very often incur losses. They will always consume cash, even if it is
just in the time taken to manage them.
Given the fact that Dogs consume cash, many are often dropped by companies,
but it is not always wise to do that immediately as they may still be making
money.
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In Figure 5.7 you can see that the proportion of the company's revenue for one of
its Dog products is actually higher than the proportion of revenue gained by one
of its Star products. If the company were to drop the Dog, they would have less
cash coming in, which could have serious repercussions.
The competition must also be considered, as well as the effects on customers.
Dropping a product from a range can upset buyers who will then look for
alternative sources for that product. The alternative sources may also be able to
offer other products which the buyers want and they may place their future orders
with the new suppliers resulting in the loss of even more sales overall.
Decisions on product deletion must therefore not be taken lightly or without full
investigation.
Dogs that are retained tend to be kept because they are recognised as being a
product with "other" benefits. For example, the customer will have to come back
to the company to buy consumable supplies which are actually highly profitable
for the company, or perhaps the product has such a high image and reputation in
the market that the company prefers to maintain it.
There is also danger in keeping on a Dog if it is proving to be useless as this just
wastes resources that could be better employed elsewhere. Decisions to retain
Dogs past their useful life are usually based on someone's great belief in, or
favour for, that product they become "Pets". For example, the owner of a
company may wish to maintain a product, which was the foundation of the
company's current product range despite the fact that the market has changed
and technology has bypassed the original product. Sentimentality, and the power
of the owner, will ensure that the product is retained and money will be wasted.
We should also not overlook the case of products which have just been launched
and the market has not really taken off. Such products could be classified as
Dogs but, given more investment, the market might be stimulated into a faster
growth rate and the Dog could actually gain more share. Sometimes the faith of
one manager in a product can turn a company's portfolio around completely.
As we noted earlier product deletion decisions can be risky. They should
always be calculated for effects.
BCG Matrix: Cash Position for Products
We have seen, the various types of products or SBUs each have different
characteristics as far as revenue generated and money for investment are concerned.
Figure 5.8 indicates the likely cash position for products, etc. placed on a BCG matrix,
and this can prove helpful for assessing the contribution that each may make to the
business as a whole, and the extent to which they each use resources which may well
be applied elsewhere.
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Figure 5.8: Cash position on the BCG Matrix
High 20
Stars Question marks
Revenue +++ Revenue ++

Investment Investment
0
Market Growth
10
Cash Cows Dogs
Revenue +++ Revenue +

Investment Investment
++ 0
Low 0
10x 1x 0.1x
Market Share
Weaknesses of the BCG matrix
After being used extensively for many years, today the BCH matrix has become
somewhat discredited as managers have become more aware of its assumptions and
limitations. The major weaknesses are:
Market growth and market share are considered by many as inadequate
indicators of overall attractiveness and competitive strength.
It is difficult to plot information accurately. The sizes of circles, unless done by
computer modelling, can only ever be estimated.
It is not fair to expect all SBUs to have the same rate of return or market share,
etc. The whole point of this method is to assess the position of each product, or
SBU, and different markets will have different growth rates. It is therefore really
better to plot only one product or SBU onto a BCG matrix.
If the model is used as a predictor of cash usage, valuable products may be left
to stagnate and die owing to lack of investment.
It is not particularly helpful for many Small Medium Enterprises (SMEs) who may
have a small market share but are highly profitable.
The model ignores environmental factors which may have an impact on
performance.
Positioning can encourage planners to develop bad habits for example, not
allowing enough funds to maintain the Cash Cows so that they grow weak.
Planners can also sometimes allocate them too many funds and fail to invest in
other categories.
(c) Arthur D Little Strategic Condition Matrix
This is a more detailed model, having twenty cells to identify various business units.
The variables used with this model are "competitive position", which denotes the nature
of the position held by the company in the market (and whether or not it can maintain
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it), and the "stage of industry maturity", which is similar to describing the life cycle of
the industry. It is illustrated in Figure 5.9 below.
Figure 5.9: Arthur D Little Strategic Condition Matrix
STAGE OF INDUSTRY MATURITY

Embryonic Growth Mature Ageing
Grow fast Grow fast Defend position Defend position

Dominant
Build barriers Aim for cost Increase the Focus

leadership importance of
Act offensively Consider
cost
Defend position withdrawal
Act offensively
Act offensively
Grow fast Lower cost Lower costs Harvest

Strong
Differentiate Differentiate Differentiate

COMPETITIVE POSITION
Attack small Focus

firms
Favourable
Grow fast Focus Focus Harvest

Differentiate Differentiate Differentiate
Defend Hit smaller firms
Grow with the Hold-on or Hold-on or Withdraw

Tenable
industry withdraw withdraw

Focus Niche Niche
Aim for growth
Search for a Niche or Withdraw Withdraw

Weak
niche withdraw
Attempt to catch
others
What is not shown in this model is the "non-variable" position, when the company's
capabilities are really limited and the market offers no indication of improvement. In
such a situation, it may have to be accepted that the business should withdraw from
the market in a way that minimises the cost and does minimal disruption to the
company's overall portfolio.
Competitor Intelligence
Competitor Intelligence (CI) is a system that assists managers to assess their competitors in
order to be able to make better decisions and plans. It is a key part of the market intelligence
system along with environmental scanning. CI means that organisations have less surprises
and can be a source of competitive advantage. Among other aspects CI allows management
to be able to predict changes in business relationships, identify marketplace opportunities,
guard against threats, forecast competitors strategies, discover new or potential competition,
learn from the success or failure of others, keep abreast of new technologies and learn about
the impact of regulations.
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The Internet has made the process of CI much easier, especially with regard to technical
information and there are many forums for consumer feedback on products and services.
Traditional methods such as the trade press and trade shows/exhibitions are still good
sources, and having good relationships with distributors and feedback gathered by the sales
force can also be extremely useful. The key to successful CI is to have a methodical system
that forms part of the strategic decision making system in order to maximise the benefit from
the intelligence gathering.
Positioning/Perceptual Maps
Perceptual mapping is a useful technique for charting the relative positions of many different
issues in international business. For example, it can be used to evaluate the customers
perception of different countries as figure 5.10 shows.
Figure 5.10: Perceptual/positioning map
Positive Country of Origin Effect
Germany
USA Japan
Low High
Product Product
Quality India Quality
Korea
Taiwan
Negative Country of Origin Effect
It is interesting to note that the Bombardier Organisation chose to relocate its head office to
Germany from Canada and not to its closest neighbour the USA the above perceptual map
would suggest it was a good decision,
The use of positioning maps is also a way of analysing how an organisation performs against
its competitors on a range of measures. For example, an airline can analyse its comparative
market performance by seeing how customers rate it on a number of qualities such as
punctuality, friendliness of staff, value for money, and ease of booking. By comparing its
actual performance with its intended position and with the rest of the competitors (particularly
the leaders) it can monitor the success of its strategy and decide upon revisions as
necessary.
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1. Perform a TOWS analysis based upon the data in the Delta Airlines case study in
chapter 1.
2. Construct a Porters Five Force Analysis for the Acer Corporation (November 2010).
3. Use the Boston Consulting Group Matrix to assess the relative positions of the SBUs of
Bombardier Aviation (June 2010).
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107
Chapter Six
Defining Overarching Intent: Mission, Goals and Policies
Contents Page
Introduction 108
A. The Concept of Mission 108

Mission Statements 108
Producing the Corporate Mission 111
B. Goals and Policies 111

Goals 111
Policies 112
C. Mission and Strategy Development 113

The Planning Gap 113
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108 Defining Overarching Intent: Mission, Goals and Policies
INTRODUCTION
All the stakeholders in an organisation need an understanding of what that organisation
intends to achieve. For the most part, many stakeholders do not need or want to know the
detail of objectives and plans the specification of how it intends to achieve its goals but
rather want an overall vision of what they are a part of.
This short chapter considers the important concept of an organisation's mission. This is very
important for all businesses, as it underlies the whole strategic planning process.
A. THE CONCEPT OF MISSION

An organisations mission has been said to answer the question: 'What business are we in?'.
The mission of an organisation incorporates not just an identification of the products and
services the organisation offers, but also sets the philosophy and culture behind the basic
organisational functions. It is concerned with its overall purpose, its scope and its
boundaries, and attempts to describe the nature of the organisation and the reason why it
exists. It is also long-term, in that it is not concerned with a set of relatively short-term
achievable targets, but rather a definition of the parameters of the organisation's activities.
Summarising these various points, we can say that a clear mission will
define the philosophy and purpose of the organisation, and
signpost the direction which the selection of strategic plans and control systems will
take in the future.
It has, therefore, an important role to play in the planning process. Within the terms of the
mission, managers can identify, evaluate and select appropriate corporate objectives and
strategies which will enable the organisation to achieve its intentions. As such, then, it is the
essential starting point for corporate planning, and thus for all planning within an organisation
and, ultimately, for all the activities that the organisation carries out.
The mission can also make a very real difference to the way in which an organisation
operates and develops. For example, it can have a direct influence on culture by stressing
the importance of customers or product quality as the driving force behind the business.
Mission Statements
As we noted above, stakeholders need to be aware of the organisation's mission in order that
they can assess the commitment they may make and their level of involvement. Clearly this
is easier in a small organisation, but in a large one, the vision and organisational goals need
also to be formalised and communicated to all stakeholders. This is through the
organisation's mission statement.
Many businesses take mission very seriously and studies have shown that over 80% of
companies have a formal mission statement and believe that it contributes to the
organisation's effectiveness. Once established, many organisations publish their mission
statement in order to communicate widely the essence of the organisation that it displays.
The mission statement encapsulates the vision of what the organisation is, or intends to
become. It does not need to be long (famously the car rental firm AVIS encapsulated its
mission in the three words We try harder), nor is there any standard format. The important
point is that it should be:
Easy to understand and remembered, particularly in the global context
It should make the organisation seem different from the rest
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Defining Overarching Intent: Mission, Goals and Policies 109
It should be flexible enough to accommodate change, although mission statements

rarely change frequently.
Content and Meaning
Johnson and Scholes consider that the mission statement should be visionary: that is, it
should be regarded as a general, long-term statement about the organisation, which may be
subject to changes in detailed objectives over time without losing its overall direction. Thus,
Avis states its overall objective as 'To become the fastest-growing company with the highest
profit margins in the business of renting and leasing vehicles without drivers'. The details of
how it plans to do this do not appear in the mission statement.
Johnson and Scholes go on to identify the following three key elements which should be
addressed in a comprehensive mission statement.
It should clarify the main purpose of the organisation, answering the question 'Why
does the organisation exist?' This may be to make profits for shareholders, or perhaps
the furtherance of a philanthropic aim.
It should describe the organisation's main activities and the position it wishes to attain
in its industry. This clarifies the nature of the business the organisation is in and the
way in which it intends to compete.
It should state the key values of the organisation: particularly regarding attitudes
towards and commitment to stakeholder groups customers, employees, suppliers
and the environment.
Following from this, Johnson and Scholes also point out that the organisation should have
the intention and capability to live up to its mission statement. Having established, and
declared publicly, its strategic intent, the organisation must be able to follow it through with
the necessary course of action. Often, general policies and the standards of behaviour it
intends to follow are included in aspects of the statement.
Consider the following three examples of mission statements and assess how far they meet
these three elements:
(a) Acer Computing
The mission statement for Acer Computing is "Fresh Technology Enjoyed by Everyone,
Everywhere." Fresh here does not imply new, but the best namely, proven high-
value, low-risk technology that is affordable to everyone, and has a long lifespan.
Fresh also refers to innovation based on mature technology that is user-friendly,
reasonably priced, and enjoyed by everyone, everywhere.
(b) Tesco
Tesco include in their mission statement: 'Our core purpose is to create value for
customers to earn their lifetime loyalty'. The company goes on to state their corporate
objectives, which include:
Offering customers the best value for money at the most competitive prices.
Providing shareholders with progressive returns on their investment.
Developing the talents of people through sound management and training
practices while rewarding them fairly, with equal opportunities for all.
Working closely with suppliers to build long-term business relationships based on
strict quality and price criteria.
Supporting the well-being of the community and the protection of the
environment.
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(c) Marks and Spencer

Marks and Spencer's mission specifically addresses stakeholders as follows:
To offer our customers a selective range of high-quality, well-designed and
attractive merchandise at reasonable prices.
To encourage our suppliers to use the most modern and efficient techniques of
production and quality control dictated by the latest discoveries in science and
technology.
With the co-operation of our suppliers, to ensure the highest standards of quality
control.
To plan the expansion of our stores for the better display of a widening range of
goods (and) for the convenience of our customers.
To simplify operating procedures so that our business is carried on in the most
efficient manner.
To foster good human relations with customers, suppliers and staff.
You can see that, in all these cases, basic corporate values have been identified and
expressed, and that policy formulation is considerably simplified.
Value
The mission statement provides an overarching guide for planning purposes, because it
states the direction in which the organisation is going. Strategic and operational plans will
then be drawn up to identify how the mission is to be achieved. In addition, both the broad
and specific objectives of those plans will be set within the values, norms and beliefs of the
organisation as defined by the mission statement. This is likely to include, at least implicitly,
the ethical standards within which objectives have to be achieved.
As such, it is important that all levels of management have "bought into" the mission and
accept it as the basis for planning and operations. This may be relatively straightforward at
board level where commitment should be total (at least on the face of things), but may be
less clear at lower management levels involved in the formulation of the business plans.
If a mission statement is imposed without consultation with management or is not effectively
communicated, there is a risk that employees will not be engaged in it. To avoid
misunderstanding or any ambiguity, some organisations have the mission statement printed
on small cards for employees to carry with them. Marks and Spencer is one such
organisation.
Mission statements also have a significant role in corporate publicity to communicate the
principles and ethos of the organisation. For example, the Ford Motor Company uses their
mission statement to convey a truly international message We are a global family with a
proud heritage passionately committed to providing personal mobility for people around the
world". This is clearly aimed at global consumers. Note that an earlier mission statement,
when the main Ford activity was located in the western developed nations, was "Everything
we do is driven by you obviously it was felt that the double meaning of the word driven
would not be fully understood on a global basis.
Conversely, mission statements have been criticised for being too general and containing
statements which are difficult, if not impossible, to quantify or prove. Terms such as 'best',
'favourite' or 'quality' can be difficult to define. Mission statements are sometimes viewed as
a public relations ploy with no real commitment and of minimum value in the planning
process.
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Producing the Corporate Mission

Mission statements take considerable time and effort to prepare, particularly because they
are likely to remain in place for the long term. However, it is important that the mission
statement is reviewed from time to time to see if it is still relevant given changes in the
business environment.
A preferred method for writing a meaningful mission statement is set out below.
Set up a project team.
Carry out an attitude survey throughout the organisation, to check the validity and
usefulness of the current mission statement. Ask for suggestions for improvement
and/or any amendments that the staff feel are more in line with their level of operations,
growth and development. Is the mission statement outdated and no longer reflecting
current thinking about processes and policies?
Elicit information from current customers and their perceptions of the organisation. Ask
for suggestions for improvement/amendments/updating.
A revised mission statement can then be drafted, and sent for consultation to
representatives of the workforce and a selection of customers. Further comments
should be elicited.
This process of involvement must be communicated throughout the company in an
appropriate way. Newsletters, workshops or meetings are commonly used. This is an
important because a sense of ownership of the mission statement throughout the
company is vital in realising its purpose.
Finally it is important to monitor and review the process to ensure that the mission
remains relevant and supported, and takes into account stakeholder views.
Once the mission statement has been established, it is possible to develop action plans and
set objectives. Action plans should aim to build on the consensus and commitment
developed within the senior management team and to spread it throughout the organisation.
In effect, this is where the mission process meets with the strategic planning process, and
objectives are set by asking what has to be done to realise the mission.
B. GOALS AND POLICIES

Whereas a mission statement gives some general guidance to the planning process, this
general guidance has to be translated into something a little more concrete. Here, the
terminology used by various writers can get confusing. The dictionary tells us that goals,
aims and objectives all mean much the same, but management writers often use each word
to describe a different level of target-setting. Unfortunately they are not always consistent in
the way they do this, and you need always to define your meaning when using these terms.
Goals
Goals are frequently used to give substance to the mission statement and may be included
as part of it or alongside it. If we take the example of the Association of Business Executives,
its mission is encompassed in its general aim of 'the promotion and advancement of efficient
administration and management in industry, commerce and the public service by the
continued development of the study and practice of administration and management', and its
primary objective that 'students successfully completing its examinations will be more
effective managers'. This is given more substance by a series of goals which accompany
these statements.
'To be the first choice for business management education worldwide.
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To focus the range and quality of our courses and qualifications.

To provide our members with a positive learning experience for business.
To deliver respected and recognised UK qualifications.
To open up a world of opportunity for now and the future.
To provide effective responsive management for the millennium and beyond.
To meet the needs of tomorrow.'
You can see how these goals start to focus the mission statement into more specific areas of
intent, although they are not yet sufficiently specific to enable us to measure how successful
the ABE is at achieving its mission.
Policies
All organisations have policies: some are formally laid down and others are less formal, but
they represent the way in which "things are done" in the business. They are overarching
specifications which concern how managers should behave in certain circumstances and
which define the ways in which rules and procedures are to be applied. They relate strongly
to the culture of the organisation.
Policies often flow from the mission and goals of the organisation, and as such will constrain
strategic choice for example, to use only organically grown food products, or not to trade
with companies who are known to pollute the environment. Policies may also be determined
as part of the strategic planning process where overarching concerns about the conduct of
business may be identified, often in reaction to pressures from stakeholders or for
competitive advantage.
Policies act as guidelines within which other decisions are taken and procedures are
developed, with the aim of:
Ensuring consistency of decision-making for example, a retail chain may have a
policy of always prosecuting shoplifters, or a company may adopt a travel policy that
states that staff always travel standard class on journeys of less than two hours.
Ensuring compliance with legislation for example, companies have equal
opportunities policies, and specific policies like the wearing of hard hats or specialist
training to ensure that health and safety requirements are met.
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C. MISSION AND STRATEGY DEVELOPMENT

Strategy development is the process by which the organisation's mission and goals are
translated into plans which will enable them to be achieved. Here we are concerned with a
key element of this - the planning gap which strategy needs to address.
The Planning Gap

This is the difference between the desired future and the likely future. Figure 6.1
demonstrates the concept.
Figure 6.1: The Planning Gap
SALES (m)
New strategies
10 gap Objectives
8 Revised THE
forecast PLANNING
6 GAP
Initial
4 forecast
2 Operations gap
1 2 3 4 5 6 7 8 9 10 TIME (Years)
If an organisation continues on its current path the likely outcomes can be forecast, based on
what has happened in the past and what is happening in the present. The objectives can
then be plotted onto the diagram to show what is being aimed for at a certain time
(represented by the vertical line on the diagram).
The planning gap is where the aimed-for outcome differs from the likely outcome.
The planners must find a way of "closing the gap" and this is where strategy choice is
important. Strategies chosen must be aimed at narrowing, if not closing completely, the gap
between what is being aimed for and what is likely to be.
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1. Look at the following mission statements from some important global organisations and
assess them against the guidelines discussed in this chapter, making suggestions for
improvement as you feel appropriate.
DHL
DHL enhances the business of our customers by offering highest quality express
and logistics solutions based on strong local expertise combined with the most
extensive global network presence. Customers trust DHL as the preferred global
express and logistics partner, leading the industry in terms of quality, profitability
and market share.
Toyota
"To sustain profitable growth by providing the best customer experience and
dealer support."
Wallmart
"Our mission is to enhance and integrate our supplier diversity programs into all
of our procurement practices and to be an advocate for minority- and women-
owned businesses."
Apple Computers
"To produce high-quality, low cost, easy to use products that incorporate high
technology for the individual. We are proving that high technology does not have
to be intimidating for non computer experts."
2. The following mission statement is from the Bombardier organisation which was the
subject off the June 2010 case study. Suggest some goals and policies that could
support this statement.
Our mission is to be the world's leading manufacturer of planes and trains. We
are committed to providing superior value and service to our customers and
sustained profitability to our shareholders by investing in our people and
products.
We lead through innovation and outstanding product safety, efficiency and
performance. Our standards are high. We define excellenceand we deliver.
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115
Chapter Seven
Selection and Evaluation of Strategies
Contents Page
Introduction 116
A. Ansoff Growth Matrix 116

Market Penetration Strategies 116
Market Development Strategies 117
Product Development Strategies 118
Diversification Strategies 118
Risk and the Ansoff Model 120
Use of the Ansoff Model 120
B. Porters Generic Strategy Model 121
C. Bowman's Strategy Clock 123
D. Harrel and Keifer's Business Portfolio 125
E. Strategies for Hypercompetitive Markets:

Reducing the Impact of Competition 126
F. Marketing Mix Strategic Options 127

Standardisation 127
Adaptation 130
Globalisation 132
G. Strategic Direction and Implementation 135

Strategic Direction 135
Strategic Implementation 136
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116 Selection and Evaluation of Strategies
INTRODUCTION
In the last chapter, we looked at the planning gap and identified the need for strategic
development to enable the business to bridge the gap between what it wants to be achieve
(in order, essentially, to fulfil its mission) and where it is now or will be if it continues as it is.
In this chapter, we examine a number of strategic options for bridging that gap.
A. ANSOFF GROWTH MATRIX

Igor Ansoff in 1957, developed a matrix based upon markets and products to show the
possible options that organisation have to fill the planning gap.
The Ansoff Matrix identifies four possible combinations:
existing products which they can sell to existing markets
existing products which they can sell to new markets
new products which they can sell to existing markets
new products which they can sell to new markets.
Using these combinations gives a choice of four possible basic strategies:
Figure 7.1: The Ansoff growth matrix
EXISTING NEW
PRODUCTS PRODUCTS
EXISTING Market Product

MARKETS Penetration Development
NEW Market Diversification

MARKETS Development
Market Penetration Strategies

Market penetration means taking advantage of opportunities to increase market share. This
strategy same product/same market will be appropriate when a market is growing and is
not yet saturated. Penetration can then be achieved in one of two ways:
Attracting non-users of a product
Increasing the usage, or purchasing rate, of existing customers.
The strategy will usually be implemented by increasing activity on one or more of the
marketing mix elements for example, using more intensive distribution and aggressive
promotion in order to increase market awareness and availability.
We noted that the strategy is appropriate when the market conditions are that it is growing
and not yet saturated. We can explain this further as follows:
If a market is expanding, it may be relatively easy for an organisation to expand
sometimes because a competitor creates a bigger demand than it can satisfy itself.
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Selection and Evaluation of Strategies 117
In mature markets, penetration is more difficult, because the market leaders have a
distinct cost structure advantage.
In declining markets, there is little opportunity for a company to build its market share
unless others withdraw from the market, and a company perhaps has to hang in there
until others are forced to go never a very comfortable situation.
Market Development Strategies

This strategy same product/new market is often found when a regional business wishes
to expand or if new markets are emerging because of changes in consumer habits. It can
also occur when a new use has been discovered for an existing product.
Implementation of this strategy involves appealing to new market sectors, geographical
regions and new countries not currently catered for and may mean a repositioning of
products as well as considering new distribution methods such as franchising or channels.
(a) New Segments
Not all consumers of a product are the same. They can differ in terms of their
characteristics such as age, sex, income, race, location, lifestyle, etc., and in terms of
their needs, such as preferences in respect of price, brand or quality expectations, etc.
Consequently, markets are best thought of in terms of their different segments, rather
than the total market as a whole.
Different segments of the market, then, cater for different, definable, groups of
consumers. It is possible, therefore, for a company to operate successfully by having a
foothold in a number of different segments in its market, without actually being
dominant in any one segment.
A company can then develop by entering a "new" segment i.e. one it was not
operating in previously. It may even be possible to identify a segment that has not
been identified previously, and so be the first to enter.
(b) New Territories
Another source of market development, very relevant to the International context, is in
entering new territories, such as new geographical territories. This may or may not be
successful. Past failures include Marks and Spencer's attempt to enter the American
market through Brooks Brothers, and Boots' retreat from Holland and Japan. On the
other hand, in the drinks sector, both Budweiser from the US and Foster's from
Australia have successfully entered the UK market for lager, despite European
companies having been there much longer.
(c) New Uses/Reinvention
New uses can often be found for existing products/technologies and so be a means of
market development. The car brands of the Volkswagen Beetle, the Mini and the Fiat
500 have all been reinvented from being mass market brands to being niche brands.
Lucozade was originally a drink which was drank when people were ill, but has now
been repositioned as a health / energy drink mainly for sports people. Running shoes
are now seen as fashion footwear.
(d) Heavier/More Frequent Usage
It may be possible for a company to expand by convincing its customers to use its
product more frequently. This type of market expansion can be seen in the cosmetics
sector for example, where shampoo manufacturers advocate the frequent use of their
products.
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Product Development Strategies

With this strategy new product/existing market an organisation develops new products to
appeal to its existing markets. This may simply be a product "refinement" for example, a
change of packaging or taste or a completely new product which aims to satisfy the same
consumers.
Product development is most prevalent when strong branding exists. Promotional aspects
will emphasise the added qualities of the "new" product and link it specifically to the security
of, and confidence in, the brand. This strategy builds on customer loyalty and the benefits to
be gained by purchase. Other marketing mix elements, such as distribution, may remain
unchanged.
One example of this approach is Kodak, which saw its annual sales of film decline from 15
billion dollars to 200 million dollars in the five years to 2010 and were late into the digital
camera market, but have successfully used their technology in the development of printers.
Diversification Strategies
Diversification new product/new market is the most risky strategy (as we shall consider
below), but also offers considerable gains. It is sometimes introduced so that a company
does not become too dependent on its existing SBUs, in which case it is a form of
"insurance" against potential disasters that could occur in the event of drastic environmental
changes. It can also simply be a means of growth and expansion of power.
There are two basic approaches to diversification:
(a) When a company develops beyond its present product and market whilst remaining in
the same area, this is described as related diversification. For example, a
newspaper expanding by taking over a radio station remains within the media sector. It
has built on its present strengths by using its expertise to develop new interests in the
same sector.
(b) The term unrelated diversification is used to describe a company moving beyond its
present interests into unrelated markets or products. For example, when it considered
diversification targets, Philip Morris believed that the core competence it had developed
in marketing cigarettes could apply to other, similar markets. Based on this belief, the
company purchased Miller Brewing and then used the Philip Morris marketing skills to
move the Miller brand from seventh place to second in its market.
Another example is that of General Electric. Jack Welch, the founder of GE
transformed the organisation from a purely manufacturing company into a more
diversified company with an increasingly important service component. In his 1996
annual report, Welch wrote: "Services is so great an opportunity for the Company that
our vision for the next century is that GE is 'a global service company that also sells
high-quality products' ". When asked if GE was going to become a more product-
oriented or service-oriented company, Welch replied, "It's got to be a big combination...
It's an integrated game." In 1996, GE Capital Services earned US$4 billion. In 2005,
GE services agreements increased to $87 billion, up 15% from 2004. In particular,
financial services revenues increased 12% to $59.3 billion.
Diversification can bring a number of advantages to a company.
(a) Related diversification can:
take advantage of existing supply chains, leading to continuity, improved quality,
etc.
lead to control of markets, by guaranteeing sales and distribution through tied
outlets
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take advantage of existing market expertise and knowledge in the company when
expanding into new activities
provide better risk control, through no longer being reliant on a single product in
the market.
(b) Unrelated diversification can:
exploit under-utilised resources
provide movement away from declining activities
spread risks by avoiding having "all the eggs in one basket"
reduce seasonal peaks and troughs
create greater positive synergy.
Firms can diversify by producing their own new products or by taking over some other
product. In the latter case there are two main types of diversification integration (which
may be vertical or horizontal) or conglomeration.
Vertical integration
This involves the acquisition of some other enterprise in the chain of distribution
between the manufacturer and the customer. It can be either "forward", i.e. towards
the customer, or "backward" towards the source of raw material.
For example, a company dealing in writing stationery may vertically integrate forward
by taking over a retail outlet to sell its products, or backward by taking over a paper
mill. Although there will obviously be control benefits to be gained in either of these
examples, the company will be dealing with a product, or products, and markets which
are new to them.
Horizontal integration
This is the acquisition of another organisation that has a feature that is desired i.e.
the acquired organisation may be using similar materials or components for which they
have a monopoly of supply. This is particularly relevant when materials, etc. are in
short supply. The company that is acquired may use similar production methods and
have greater capacity; or its distribution channels may be highly effective and would
prove advantageous; or it may have some other quality which could be seen as a
benefit for example, Johnson Brothers (china manufacturers) taking over the
Wedgwood china company and capitalising on the Wedgwood brand and reputation.
Conglomeration
This strategy moves the firm away from its existing product-market situation into an
entirely new area in order to satisfy a primary objective. Quite often this is done as a
short-term activity that will allow an organisation to recover from a temporary setback in
market conditions.
Note that diversification does not always improve a company's business. For example, high
street banks who decided they could operate successfully in the property market by buying
up estate agencies found themselves having to dispose of the businesses at a loss when the
market collapsed.
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Risk and the Ansoff Model

There are different levels of risk associated with the different Ansoff product/market
quadrants. In general, these are as follows:
Risk factor
Existing product/existing market 1
Existing product/new market 2
New product/existing market 4
New product/new market 16
A company selling the current product to the current market is in the safest position. All key
factors such as buyers, distribution, competition, are known.. Once the company begins to
change some aspect, risks occur. With "new" products to existing markets there is always a
danger that the customers will not adopt the new product and, possibly, that the new product
will have an adverse effect on the existing range. Likewise, unknown market sectors, or
regions, can be risky and, of course, the unknown variables involved in diversification make it
the most risky strategy of all.
The risk element can vary according to the competences of the organisation. For example, if
it has proven expertise in new product development, particularly with regard to innovation,
then the risk element connected with new products will be lessened the Apple Corporation
is a good example with products such as the IPod. Similarly if an organisation has proven
international market entry capabilities, then the new market risk element will be reduced.
As has been noted earlier, there has been convergences in many markets, so that whilst the
Indian youth market, for example, may at first seem quite different to the French youth
market, it has some key similarities. These will lead to the same, or very similar, buyer
behaviours and hence the new market element of risk will be low.
Use of the Ansoff Model

Ansoff's model is one which is so widely used that you cannot afford not to know it really well.
There is no doubt that it is extremely useful in deciding which strategy to adopt in a given set
of circumstances, and its value can be seen in considering the following examples:
McDonald's moving into growing coffee bar market with the introduction of Mc Coffee.
Nestl developing new sectors of the coffee-drinking market by introducing coffee
capsules and machines for domestic use.
Honda using their proven competence in small petrol engines from their motorcycles in
developing small engines for products such as powered lawn mowers and portable
generators.
Pepsico using their business expertise in soft drinks on marketing bottled drinking
water in countries where the supply of safe public drinking water is currently a problem.
However, you should recognise that the model is not perfect as it does not cover everything.
It takes no account of any environmental factors.
It does not give any room for judgment on profitability.
It can inhibit the creativity of planners.
It should also be noted that each of the four strategic directions needs detailed and careful
analysis in order to determine their viability in the short, medium and long terms, before a
strategic choice is made. It is on the basis of such quantitative analysis that decisions will be
taken, and the growth matrix is not in itself a decision-making tool.
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The International Dimension

From an international perspective, growth can often be obtained by developing into new
country markets through the strategy of market development. As we have seen, it is
particularly risky to attempt to launch new products into new markets, and this is especially
true in the case of international markets. However, the degree of risk will vary according to
the degree of difference between the existing market and the new market, and the existing
product and the new product. A useful way to visualise this is by developing the Ansoff
growth matrix from its standard four-cell format to a multiple, incremental scale on both the
market and the product axes.
This modification can be used when considering options and assessing strategies for
entering new international markets. This adapted model is often referred to as the Ansoff
Incremental Matrix and is shown in Figure 7.2 below:
Figure 7.2: The Ansoff growth matrix using an incremental scale
Increasing increments of product

newness
Increasing
increments of
market
newness
The idea of this matrix is that it is possible to assess different degrees of risk in entering new
international markets by considering degrees of market newness and product newness. So,
for example, it will be more risky to launch a product into a new country with considerable
distance, both geographically and culturally, from the country markets that the company is
used to. For example, a UK company that has developed markets in the EU will experience
higher risks in marketing to Latin American countries or to Japan and China than it would to
Turkey and Switzerland. All the countries mentioned would be new markets, but Switzerland
and Turkey are closer geographically and culturally than the high context and geographically
distant Latin America, Japan and China. Entering these markets therefore would be a very
high-risk strategy, particularly if it were combined with the need to produce entirely new
products.
B. PORTERS GENERIC STRATEGY MODEL

In essence, strategic choice involves a company deciding how best it will compete. The
strategy selected should be one which enables a company to achieve and sustain a
competitive advantage. One of the best-known frameworks for distinguishing between
strategic alternative bases for competing is that proposed by Michael Porter, based on his
notion of "generic strategies. Porter identifies three alternative generic strategies cost
leadership, differentiation, and focus.
Cost Leadership
This strategy is based on the company being the lowest-cost producer for example
by pursuing economies of scale, low-cost supplies, basic product designs or minimum
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service levels. Such an advantage is, though, difficult to sustain, because competitors
often copy these strategies, and the advantage is therefore only short-term.
Nevertheless, many successful international companies pursue this strategy, although
not necessarily to lower prices to customers but to achieve higher profits in the long
run. It can also prove to be an effective barrier to entry to new firms entering the
market since it provides scope to reduce market prices in the short term.
Differentiation
This is where a company offers a unique product or service as the basis of its strategy.
Some organisations are able to offer something to their customers which enables them
to charge more for their products/services i.e. some added value. This is often
associated with brand names that customers feel (not always correctly) are superior; or
it may be, for example unique designs or packaging. Some companies differentiate on
quality and levels of service.
In order to be successful, it is essential that customers value, or can be "persuaded" to
value, that element which is being used to differentiate the company's offerings from
competitors.
Focus
This third alternative strategy is where a company concentrates on catering for a small
section of the market and so competes through being specialised. This allows the
company to develop in-depth knowledge in a particular area of the market and, by
concentrating on a small segment of customers, it is better able to meet their needs.
However this can be risky if a larger competitor enters the market or if the market
segment goes into decline.
Porter suggests that these are the only three main strategies available, and that a business
not following one or other of them is "stuck in the middle". Nevertheless, whichever strategy
is followed, it is always vulnerable to changes in the environment which cannot be forecast
and over which the organisation has no control.
Figure 7.3: Porter's Generic Strategy Model
Differentiation
Stuck with no
clear strategy
Cost Focus
Leadership
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C. BOWMAN'S STRATEGY CLOCK

Whilst Porter's Generic Strategy Model remains useful, since his original work, other, more
refined, models have been developed which have added to the range of generic strategies
based on the two competitive dimensions of price and added value.
Bowman's "strategy clock" took Porter's original idea of generic strategies and refined and
extended them to give a total of eight possible alternative strategies based on different
permutations of price and perceived value to customers. These eight permutations are as
follows:.
Strategy Basis/characteristic
1 "No frills" (low price/low added value)
2 "Low price"
3 "Hybrid" (low cost base allowing low price and differentiation)
4 "Differentiation" (with or without price premium)
5 "Focused differentiation"
6 "Increased price/standard value"
7 "Increased price/low value"
8 "Low value/standard price"
The way in which these are assembled into the model of a clock is shown in Figure 7.4.
Figure 7.4: Bowman's Strategy Clock
High
4
3 5
Perceived
added 2 6
value
1 7
8
Low
Low High
Price
Strategy 1: No frills
As the term implies, this strategy is based on products or offerings which have no
additional features, design elements, service back up and so on. They represent the
most basic of products and therefore the lowest perceived added value. However, this
strategy also allows the lowest prices to be charged. This can be a very effective
strategy for market segments who are unwilling, or unable, to afford anything but the
most basic product or service.
An example of this strategy is that employed by budget airlines.
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Strategy 2: Low price

Some companies seek to obtain a competitive advantage by reducing prices while, at
the same time, attempting to maintain the quality offered by others. The major
disadvantage of this strategy is that it is easily copied by competitors and can result in
price wars. A company needs to be the cost leader, in order to successfully pursue this
strategy.
Strategy 3: Hybrid
As the term suggests this is a strategy based on relatively high perceived value but low
price. Obviously, this combines two strategies which are likely to give a company a
competitive advantage, and is therefore potentially very attractive to customers.
However, it is normally a strategy which can only be supported for a short time as
margins and profits are too low in the long run for it to be sustainable. A company may
follow this strategy with the intention of gaining market share quickly and driving
competitors away.
It is a strategy often chosen by sellers of "flat pack" furniture, such as IKEA. In this
system, costs are lowered by leaving the customer to assemble the product for
themselves, which then allows it to be of good quality at a low price.
Strategy 4: Differentiation
These strategies are an attempt to offer perceived added value over competitors at a
similar, or even higher price, thus giving the company better margins whilst remaining
competitive through differentiated products. The key to success for this strategy is that
the basis for differentiating the product or service must be of value to the customer and
must also be based on sustainable competences which are difficult for competitors to
copy or match.
In the automotive sector, a good example of a company pursuing this strategy is Toyota
with the Lexus brand.
Strategy 5: Focused differentiation
This is similar to strategy 4, the difference being that the differentiated product or
service is offered to a particular group of customers or segment of the market. This
enables a company to concentrate on those customers who will value the
differentiation being offered and also has the advantage of being potentially easier to
protect from would-be competitors.
An expanding area which lends itself to this type of differentiation is that of the health
and leisure industry. Those who can afford it prefer to pay for additional luxury, which
they also see as raising their own image above those of others.
Strategy 6: Increased price/standard value
At face value this would appear to be a seemingly attractive alternative for a company.
In fact, it often leads to ultimate failure. In the short run this strategy can be used
where, for example, the customer cannot buy from somewhere else or where they are
unaware of a more competitive alternative offer. However, for most companies in the
long run this is not a viable strategy, because customers will eventually "see through it".
Strategy 7: Increased price/low value
This is a variation on strategy 6. It takes increased price and low value to the next
level. Needless to say, this strategy is only really feasible for an organisation which
has a monopoly, and there are fewer and fewer of these today. Many state-run
organisations come under this category and the success of privatisation initiatives
throughout the world shows this as an unsustainable strategy.
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Strategy 8: Low value/standard price

Although in this strategy prices are lower than in the two previous strategies (6 and 7),
so also is the value. Again, this is not a viable strategy in the long term. Many would
argue that this is the strategy which led to the demise of the British car industry in the
face of Japanese imported cars offering higher value with standard pricing.
Bowman's strategy clock provides a useful way of identifying alternative strategies based on
"perceived added value" versus "price". However, whereas the first five of the strategies are
likely to be successful, the others seem to be destined for failure.
D. HARREL AND KEIFER'S BUSINESS PORTFOLIO

Companies all have different strengths and, understandably when it comes to identifying and
selecting international markets, the business should be looking to match its strengths to the
most attractive markets. In this way, it should be possible to build a portfolio of operations in
different country markets which provides a strategic fit with the company's mission and goals,
and its experience and strengths.
A useful approach linking company strengths and the attractiveness of different country
markets has been developed by Harrell and Kiefer (1993). Country attractiveness is
measured by criteria such as market size and growth, economic and political stability and the
lack of tariff and non-tariff barriers. Company strengths are measured by criteria to evaluate
the relative competitive position, the degree of co-operation to be expected from distribution
channel members and the fit between the existing range of products produced by the
company and the need to adapt products to make them acceptable in the country market.
The market share available for the company in the country market is also usually very
important because it influences the economies of scale and experience that can be gained in
that market.
The country attractiveness/company strengths matrix can also be used to help identify
suitable strategic options. Countries that are, in themselves, highly attractive and which
overlap with countries in which the company already has a high strength, will be countries in
which the company should develop strategies for investment and growth. On the other hand,
countries with low attractiveness in which the company has few strengths, will require
strategies to harvest the profits that are available or the company should consider selling off
its interests in the market (see figure 7.5 below).
Figure 7.5: The Harrell and Kiefer country attractiveness/company strength matrix
Company Strength
High Medium Low
Dominate/Divest/
High Invest/Grow
Joint Venture
Country
Medium Selectivity
Attractiveness
Low Selectivity Harvest/Divest
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Companies might well wish to develop their own modified versions of the Harrell and Kiefer
Matrix using their own criteria with regard to what constitutes the important elements
underpinning country attractiveness and company strength.
E. STRATEGIES FOR HYPERCOMPETITIVE MARKETS:

REDUCING THE IMPACT OF COMPETITION
In most markets companies face other organisations trying to capture their customers,
increase market share, compete for recognition, launch new products first and so on. This
constitutes competitive rivalry. The degree of competitive rivalry experienced by most
organisations has increased in recent years, with larger numbers of ever more aggressive
competitors. In some markets competition can become so intense that they become
dysfunctional, with few companies making any profits at all and with large numbers of
bankruptcies and company failures. When competitive rivalry reaches this level it is often
referred to as "hypercompetition". Such a situation has several disadvantages, as follows:
(a) Excessive competition usually lowers the overall profits of every company in the
market.
(b) Excessive competition increases uncertainty and risk, with returns being highly volatile
and competitors unpredictable.
(c) Customers tend to be less brand-loyal, instead constantly looking for the "best deal"
and switching between suppliers.
Because of these adverse effects organisations often pursue strategies designed to reduce
this intense rivalry. Four possible strategies for achieving this are discussed below.
Increasing barriers to entry
Intense competition often occurs when new competitors enter the market. New
entrants are usually attracted by the prospect of high profits and or rapid growth in a
market. An organisation already active in the market can try to make it difficult for new
competitors to enter the market by creating "barriers to entry". There are various ways
by which this can be achieved.
For example an organisation can increase levels of marketing, and particularly
advertising /promotional spend, thereby making it difficult for new, often smaller
companies to enter the market. Another barrier to entry is the use of patents and new
technology whereby a company that developed a new product or technology can
prevent new would-be competitors from acquiring the new technology. Aggressive
pricing too can also be used to deter potential new entrants to a market.
Agreements/strategic alliances
A second approach to reducing competitive rivalry in a market is for the organisation to
seek agreements with other competitors about limiting competition in some way. For
example two or more competitors may agree not to compete directly on price.
Alternatively they might "agree" not to target each other's customers. Agreements
between competitors may take many forms, ranging from the tacit unspoken
"understanding" with no formal arrangements, through to highly formalised and
structured agreements between competitors such as those when, as discussed earlier
in this Unit, competitors form strategic alliances.
Though this approach is to reducing competitive rivalry is widespread it can be a risky
strategy, particularly when agreements are with a view to maintaining prices and profits.
Price-fixing agreements, cartels, and so on are looked upon unfavourably by legislators
in most countries, and by transnational bodies such as the European Union, and
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companies can find themselves in serious trouble if they are found to be trying to
manipulate competitive market structures in this way.
Mergers and Acquisitions
At least some mergers and acquisitions are prompted by a desire to reduce
competition (although this is arguably not the best motive for merging with or acquiring
a competitor company). This approach to reducing competitive rivalry has the
advantages of immediacy and predictability. However, again the main problem is the
potential for attracting the attention of the legislator. In many countries there are strict
rules governing mergers and acquisitions which appear to be prompted by, or simply
result in, reduced competition.
Building brand loyalty
This fourth approach to reducing competitive rivalry is potentially one of the most
powerful and effective. A company which can build brand loyalty effectively insures
itself against competition. Brand-loyal customers are less likely to switch to
competitors' products and services even when tempted by low prices and special
offers.
Brand loyalty can be built in many ways including, for example, superior service,
superior quality, strong brand image and so on. Building brand loyalty though is a long-
term process and can be costly. It is nevertheless a very positive strategy for reducing
some of the worst effects of excessive competitive rivalry.
F. MARKETING MIX STRATEGIC OPTIONS

In determining the strategic approach to the development and marketing of a product or
service on an international level, there have traditionally been two alternatives
standardisation and adaptation:
Standardisation refers to the approach taken in which the marketing mix is used in the
same way in different countries.
Adaptation relates to the approach in which the business strategy is deliberately
changed so that it relates to each market.
Note that there is an important distinction to be made between the same and similar. It is
unusual for exactly the same business strategies to be used in different countries. It is more
frequently the case that the intention is to introduce the same approach but that minor
changes are required for different markets. We will regard this as standardisation.
More recently, a third option has emerged. After looking at standardisation and adaptation,
we will move on to examine the issue of globalisation as a strategy. In itself globalisation
could be regarded as an extreme form of standardisation. As you will see, although
globalisation does involve some standardisation, it does not depend upon it.
Standardisation
The ability of companies to develop standardised approaches to different markets is a major
debate in international business strategy.
Approaches to Standardisation
It is possible to view standardisation both as a process and in terms of implementation:
Process standardisation
Because a company can control the processes it uses, this is an easier form of
standardisation than implementation. A company can establish the particular planning
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methods that it thinks appropriate. In this way, analytical methods, planning and
international strategy can be controlled substantially within the company and it can
insist that the same approaches are taken by subsidiaries in different parts of the world:
(i) Analysis can be similar, based on policy decisions to use the same marketing
research methods and surveys. Information can be collected, stored and
disseminated in the same ways using a common information system.
(ii) International strategies can be developed from the same analytical methods
using a standard format of business models and techniques.
(iii) Business planning can be based on similar lines in the company headquarters
and in country subsidiaries.
(iv) The business operations can be developed along standard planning approaches.
For example, the company could use the same planning methods for advertising
decisions.
Implementation standardisation
It is much harder to standardise implementation than the processes of international
business. The reason for this is that the implementation involves direct contact with
customers, potential customers, distribution channel members and others. Direct
contact will be influenced by the market structure and behaviour in the market. For
example, in some markets there may be strong competitors with aggressive business
strategy programmes designed to increase market share, whereas in other markets,
competition might be much less aggressive. Another direct contact issue is the need to
take account of the culture of the country market.
Thus, we can see that, when a company attempts to implement its chosen strategies, it
may find that its various customers do not all react in the same ways. The company
has little or no control at the implementation level and it is more likely, therefore, that
the company will have to change parts of its business strategy in order to satisfy
customers:
(i) Product This is a part of the marketing mix that many companies aim to
standardise. The augmented view of the product includes the physical product
plus the brand and company name and trademarks. It includes the packaging,
warranties and guarantees. It is possible, therefore, to standardise part of the
product and adapt other elements. Some companies will keep the same physical
product, but may change the packaging and the labelling. Language change is
an obvious adaptation.
(ii) Price It is very difficult to standardise price because it is influenced by so many
country factors. There are many differences in the tariff rates charged for
imports, value added tax rates, distribution channel margins and the prices set by
the main competitors. In addition, there are considerable differences in the ability
of consumers to pay a particular price level. Whilst a company can have a policy
to charge good value prices in the middle of the market and, therefore, have a
standardised process approach, the practical implementation will give rise to
many detailed adaptations.
(iii) Promotion The selling part of promotion is usually adapted. The reason for
this is the interface between the sales force and the country distribution channel.
Because distribution channel members are strongly influenced by the culture in
the country, the sales force, if it is to be successful, has to adapt to local
requirements.
Public relations and sales promotions are also often adapted to fit local
requirements. It is the advertising decision that stands the best chance of
standardisation. This is because it uses media that are less culturally specific
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than the other elements in the marketing mix. It can also standardise the
advertising message if customers have similar buying motivations and if they
seek similar benefits.
(iv) Place (Distribution) This is a marketing mix element that is strongly influenced
by market and country forces. It is difficult to standardise the implementation of
distribution although thanks to initiatives of organisations such as Tesco and
Wallmart the phenomenon of the hypermarket is becoming global.
In the case of service products of course, the traditional 4Ps of the marketing mix can
be extended as follows:
(v) People Perhaps as one might expect, this is one of the most difficult elements
of the services marketing mix to standardise. By definition, people are individuals
and in addition, of course, people differ between different cultures.
Standardisation can be achieved to some extent, however, through careful and
methodical training.
(vi) Process As you are aware, the process element of the services marketing mix
relates to things such as how the service is delivered, ordering systems and so
on. Compared to the people element, process is generally much easier to
standardise so, for example, McDonalds processes for taking orders, cooking
these orders and treating customers in their outlets are very highly standardised
throughout the world.
(vii) Physical Evidence Like process, this element of the services marketing mix,
too, can be standardised to a high degree. Again we can use the example of
McDonalds where the layout and dcor is more or less standardised throughout
the world. Standardising physical evidence is particularly important in trying to
develop a uniform company image, and is often a key part of franchise services
marketing.
The Arguments for Standardisation
The main arguments for standardisation are based on two areas cost and customers:
Cost
The general and financial management of companies presents a strong argument for
standardisation. It can be demonstrated that the elimination of variety and the constant
repetition of company activities around the same products will give economies of scale
and experience benefits. Economies of scale relate particularly to manufacturing,
whereas the experiences effect can be gained in any part of the organisation through
the efficiency gains resulting from familiarity.
Within the marketing mix the main areas of saving will be based on the high cost areas.
The highest costs, for most companies, will be in the product area. Most companies
will attempt to reduce the amount of variety in the products that they produce. They will
prefer to produce one product that can be sold in all markets. Unfortunately, this ideal
state is rarely found.
The other main area in which companies seek to standardise is the marketing
communications (promotion) area. Companies that have large budgets for media
advertising can often make substantial savings by using the same advertisements in a
number of different country markets.
Customers
When customers are mobile between one country and another, as for example in the
purchase of film for cameras, there are benefits in selling the same product and
promoting it in the same way. If the product and the way it is presented change,
customers can become confused and end up buying a different product. For the
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customer, a strong consistent brand image that does not exhibit variations in different
countries will be reassuring.
Even in markets in which customers are not internationally mobile, there can be
customer benefits in a standardised approach. If the same customer segments are
found across country boundaries, it makes sense to use similar products and
advertising. Whilst the benefits in this instance relate to cost savings, there is the
marketing logic of developing a marketing mix that is based on customers. If the
customers are the same, in terms of the benefits that they seek, why not make the
marketing mix the same?
In many companies the cost-saving argument will be stronger than customer similarity
it is easy to demonstrate cost savings and harder to show customer similarity.
However, it is important for companies to be responsive to customer requirements. It is
quite possible that cost savings through standardisation will be pursued too vigorously
and ultimately to the dissatisfaction of the customer. Customer satisfaction, though,
can be achieved at the same time as benefiting from standardisation based on
customer similarity. The important proviso is that similar customer benefits have been
identified in different countries.
Adaptation
The reasons for adaptation lie in specific attempts to develop an appropriate strategy to
satisfy a specific customer group.
The type of company culture or orientation can have a strong influence on the extent to which
changes are made. In a company with a polycentric orientation, adaptation is the likely
consequence. As each subsidiary becomes more and more familiar with its host country
market, it becomes more and more aware of the differences that exist between that countrys
requirements and the head office view of what it should be doing. This leads inevitably to a
situation in which the subsidiary aims to customise its business more precisely.
The ways in which this customisation will take place will be influenced by the overall
company policies and the strength and independence of the subsidiary. If the subsidiary is a
major contributor to sales and profits, and if the subsidiary regularly meets its corporate and
marketing targets, it will be granted more independence than a subsidiary with inexperienced
and unproven management.
Approaches to Adaptation
In a consideration of the business and the ways in which adaptation takes place, it is clear
that most companies will concentrate attempts to standardise on products and on marketing
communications. Price and distribution are influenced by so many local factors that very
precise standardisation is impossible. Some companies will use a standard price list and
some will use a standard distribution channel approach, but these are the exceptions.
For service products, as we have seen, it is process and physical evidence elements of the
mix which are likely to be standardised, especially where the operation is a franchise
operation. For the reasons stated earlier, the people element of the services business can
be much more difficult to standardise.
The main areas, therefore, in which the standardisation/adaptation argument will take place
will be products, marketing communications, physical evidence and process.
For many companies it will be easier to adapt marketing communication than products. It will
be usual for the company to have a sales force that is adapted to local customers and to their
requirements. Many companies use sales promotions in a tactical way that relates very
closely to the market and the competitive situation that exists in the country. Furthermore,
public relations is frequently developed around knowledge of local media and journalists, and
is often, in addition, based on events and activities that are country-specific. For example, in
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the UK with its intense liking for animals as pets, PR events can be based on dogs and cats,
whereas that could be unworkable in many other countries.
International advertising, particularly if it is dependent upon the visual TV, Internet and
Cinema media is likely to be the exception to the obvious need to standardise. However,
the extremely high cost of developing a TV commercial is one factor that encourages its use
across many countries. A further factor is the difficulty in finding an advertising approach with
a strong, positive, demonstrable effect. If the company develops a very good TV
commercial, there will be strong pressure on company subsidiaries to use that same
commercial.
Imposed Adaptation
Adaptation is not necessarily the outcome of a conscious decision by a company to change
its marketing mix to meet the needs of its customers in a particular country. A whole series of
rules, regulations and laws may also be imposed on companies requiring them to adapt the
business that has been developed in other countries, usually the company headquarters
country. Examples of such forced changes are given in the following table.
Causes of imposed adaptations
Marketing Mix Element Cause of Imposed Change
Product Safety standards legislation

Technical standards
Product liability laws
Price Laws on prices

Different tax levels
Distribution Restrictions on the types of retail outlet, the types of product

they can stock
Promotion Laws on which sales promotions can be used in a country

Legal and voluntary controls on advertising content
Controls on the amount of advertising that the media can carry
(which is particularly the case for TV and radio).
People Employment legislation
Physical evidence Local planning regulations
Process Health and safety regulations
If we take the example of a car, we can see a number of imposed changes necessary in
different markets. The product will need to meet the safety standards required in different
countries, resulting in changes to seat-belt fittings, external and internal surfaces to reduce
injury on impact, the type of braking system, the strength of the body cage, etc. The product
will also need to be adapted for left-hand drive or right-hand drive. Other changes will be
imposed by local climatic and driving conditions for example, in hot countries air-
conditioning might be an almost standard part of the car.
Other adaptations to the same product may not be imposed, but will be influenced by market
demand. These will be used to enhance the cars appeal in a specific market through such
adaptations as colour schemes, different levels of instrumentation fitted as standard or
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different warranty arrangements (in one country the warranty might be for one year, whereas
in another, because of competitive factors, it could be as long as three or five years).
Globalisation
Globalisation is a particular form of standardisation, perhaps even being seen as its ultimate
form.
The increasing convergence of customer demand for some products and services enables
those products and services to be thought of as serving a world market. For example, a
worldwide market exists for fuel for cars and lorries, for film for cameras and for many
consumer durable products. The demand for music and film entertainment services is a very
wide one across country boundaries.
With a market demand existing across many countries, and as communications and
transport systems in the world improve, it is not surprising that some companies have sought
to co-ordinate their marketing approaches. Companies have grown larger and have
resources that enable them to take a wider and wider view of world opportunity.
Approaches to Globalisation
The types of co-ordinated approach are obviously related to standardisation as we discussed
previously. We can see globalisation in the following ways:
Globalisation as a process
In this way companies can view the world market as a total opportunity. They can
develop analyses, plans, and international strategies using a standardised format.
Some companies will also develop a standardised approach to competitive strategy
that can be co-ordinated across the world, defending in some country markets and
being aggressive in others.
Using the process approach, companies can develop a completely similar strategy
across the world, or they can develop one that has major elements of standardisation,
or one that shows considerable degrees of adaptation, as shown in the following table.
Global process standardisation
Type Comments
Completely similar The world standard brand this hardly exists in its
absolute form. Even Coca-Cola and McDonalds make
some minor adaptations in various countries.
Major elements of This will reflect some significant customer differences in

standardisation parts of the world. Companies might take a different
approach in, say, Asia and in Europe.
Major adaptation This is most likely to occur in markets that are culturally
highly sensitive. Food products often, but not always, fit
into this category.
Global implementation standardisation

At the implementation level, standardisation is possible in certain parts of the strategy,
but other parts will continue to demand adaptation to the particulars of different country
markets. The following table summarises the different approaches.
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Global Implementation Standardisation
Type Comments
Completely similar This does not exist. There are always local and country
and trading bloc differences that cause some adaptation,
even if it is quite minor.
Major elements of Standardisation might be groupings of countries, or by

standardisation standardising the product and perhaps the advertising and
then adapting the other elements.
Major adaptation This approach will benefit from the process

standardisation, but at the implementation level will look
as though everything is totally different. Companies like
Nestl will benefit from similar planning and strategy and
control processes, but will exploit market differences to the
full by using a highly adapted marketing mix.
The Range of Globalisation Strategies

At first sight, the choice of strategies with regard to approaches to global markets would
seem to be a choice between the two alternative strategies of standardisation or adaptation
for both process and implementation aspects of business. However, we can distinguish
between three alternative strategies with respect to globalisation as follows:
Global strategy
A truly global strategy is characterised by an attitude and an approach to planning in an
organisation where no distinction is made between domestic and foreign markets.
Plans are developed on a global basis and the only consideration in considering each
market is the extent to which the market will contribute to the achievement of overall
corporate objectives. A company which has this truly global approach to its markets
and business, therefore, will not think of itself as primarily, say, an American or a
Japanese company, even though the company may have been founded in one of these
countries and may still have its headquarters there. A global strategy involves a
company looking for and planning for global opportunities irrespective of where in the
world these occur.
A global strategy may or may not involve standardisation depending on the
circumstances of the markets and other factors such as competition, the company itself
and so on. However, companies that pursue global strategies are often looking to
standardise their business plans as much as possible.
Multi-domestic strategies
Essentially, this strategy is based on developing different strategies for different parts of
the world and as such is based on the notion that the differences between markets are
more important than the similarities. This approach may still be underpinned by a
degree of standardisation, particularly with regard to the process elements of business
planning, but the elements of the marketing mix and, in particular, price and distribution
are likely to be adapted. Nevertheless, a company pursuing this type of strategy can
still seek to prosper from global opportunities. A company adopting this strategy is
often said to be thinking global, but acting local.
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Grouping/clustering strategies, global segments

This approach represents something of a middle ground between the first two
strategies and essentially is a segmentation and targeting approach. In this approach
customers and/or markets are grouped together according to the similarity of their
needs and wants. Once grouped in this way, these customers can then be targeted
with a standardised, or at least relatively standardised, strategy. Examples of ways in
which customers can be grouped and targeted in this way include groupings by
geographical area, grouping by trading blocs, grouping by stage of economic
development and so on.
Global Branding
Perhaps one of the most significant developments associated with global business in recent
years has been the growth of the global brand. Companies such as Nike, Levis, McDonalds,
IBM, Sony, Coca Cola and many more are all successful global brands.
A global brand is generally considered to be a brand supported by the same strategy
everywhere in the world. However, under this strict definition, it is very unlikely that there is a
global brand at the moment or that there will be many in the near future. If, though, we
amend the definition to allow for some minor adaptations in the strategy between country
markets, then we can identify many global brands now and it is probable that more will
appear in the future. By minor adaptations, we would include changes to translate the
meaning of the brand packaging into different languages as well as other minor business
strategy changes to accord with country rules and regulations. The substance of the product
would, though, be the same in each market and, importantly, the brand name and its
trademark would remain unaltered.
Global brands offer some key advantages and benefits both to companies and customers. In
the case of companies, global brands facilitate the growth of worldwide customer loyalty.
This, in turn, enables easier access to new markets and, in particular, to distribution
channels. Finally, a global branding enables a company to build a global presence whilst at
the same time achieving global economies of scale in areas such as advertising and
promotion.
As far as customers are concerned, global brands often bestow status on the customers who
display them. This is particularly important in some of the lesser-developed economies.
Similarly, global brands reduce the risks associated with purchase for customers, both in
consumer and business-to-business markets. Finally, global brands help facilitate the buying
process by making a companys products easily identifiable.
No wonder, then, that global branding has been such a growth area. However, there are
disadvantages to developing and supporting the global brand. For example, the business
must pay careful attention to managing and co-ordinating brands throughout the world. This
can be very difficult where some degree of adaptation is required in different markets. There
is also a risk with global brands that if there are any brand scares or problems such as the
recent problem with the Mercedes A Class product (which initially was found to be prone to
rolling over) these can have a very rapid knock-on effect for the reputation and image of the
brand throughout the world. Finally, global brands bring the attendant problems of pirating,
counterfeiting and parallel imports.
Customised Business Strategy
Finally, no discussion of globalisation including aspects such as global branding would be
complete without a brief mention of the trend towards more customisation throughout the
world.
There is some evidence to suggest that customers are increasingly looking for customised
solutions to their needs, i.e. individual products and brands to satisfy their requirements.
Obviously, global brands and standardised business strategy are a complete anathema to
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this. At one time, of course, developing customised marketing mixes for customers would
have been impossible apart from in the more specialised markets such as sales of high
priced fashion items, industrial products and services and so on. However, a number of
developments have begun to facilitate at least a greater degree of customised business
strategy that at least some customers are looking for. So, for example, manufacturing
systems have changed to include flexible product customisation based on computerised
systems. Coupled with this, as we have seen, businesses now have access to intelligent
databases and intelligence systems that enable them to identify more closely the needs of
individual customers. Finally, the Internet is increasingly facilitating the speed and ease with
which companies and customers can communicate on a real time interactive basis.
Company Size and Globalisation
The very large companies are those that most frequently attempt to change from the
polycentric orientation of the multinational enterprise to the geocentric orientation of the
transnational global company. These very large companies, for example Ford, Unilever or
Procter and Gamble, compete in a substantial way in many markets in the world. They are
able to make considerable gains by seeking process and implementation standardisation on
a worldwide scale.
Smaller companies are not necessarily prevented from taking a global stance. They are not
necessarily smaller in the relative terms of their position in the world market for the
products/services that they provide, for example, in the high technology area or, perhaps, in
entertainment services. Smaller companies can, therefore, develop both a process and an
implementation standardisation in a global way.
Many companies will not consider globalisation because of a limited management view. As
we have indicated before, some companies will be confined closely to their own domestic
market because of their ethnocentric orientation. Other companies will serve markets that
exist in few country markets (the markets for frogs legs or snake soup, for example) and
cannot develop a global view.
G. STRATEGIC DIRECTION AND IMPLEMENTATION

Development strategies contain a number of elements, which can be considered by asking
the questions:
What is the basis of the strategy?
Which direction is it going to take?
How will it be carried out?
We have already discussed a number of strategy options, and here need to briefly consider
the options in respect of direction and implementation.
Note that decisions with regard to generic strategy, direction and method are not
independent. As Johnson and Scholes point out, an organisation which is following a generic
strategy of providing a product or service which differs from that of its competitors, i.e. a
strategy of differentiation, can also be following a strategic direction of product or service
development and still have further choice as to the method which is to be used to achieve
this end.
Strategic Direction
The direction of the strategy can take several different forms:
Withdrawal from the market, either full or partial, can be the correct direction to take.
For instance, withdrawal from the market of those parts of a business which are
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underachieving will release resources which may then be used more effectively
elsewhere.
Consolidation. In a mature market, consolidation can mean putting more money into
the market, as Nestl have decided to do. In declining markets it can be productive to
take over the assets of competitors who are leaving the market, as a means of
consolidating the business.
Market Share Growth.
Strategic Implementation
Again, there are three basic options.
Internal development
By developing products internally rather than using outside agencies, the company can
have the advantage of using skills and knowledge acquired during the development in
order to market the product more effectively.
Similarly, developing new markets through the use of internal staff helps the sales force
to better understand the market.
Acquisition
One of the advantages of acquisition as a method of carrying out a strategy is that it
enables the company to obtain new products or markets very quickly.
In order to test the effectiveness of acquisition Drucker has suggested five simple rules:
(i) The acquiring business must consider what value it can add to the acquired
business. This may include management, technology, distribution, etc. Finance
is necessary, but unlikely to be sufficient on its own.
(ii) A common core of unity must exist between the businesses in terms of markets,
products, technology, etc. This helps to create a common culture or at least
sympathy between the two separate ones.
(iii) The acquiring company's management must understand the business being
acquired.
(iv) The acquiring company must put a quality management team quickly into the
acquired business.
(v) The acquiring business must be able to retain the best management from both
businesses.
As managers will see the acquisition both as a risk (and may therefore leave) and as
an opportunity (and will stay), a clear promotion and management development
strategy must be in place at the time of the takeover.
Porter suggested that the rate of acquisition failures is between 60% and 74%, where
there is a mismatch between the core competencies or experience of the acquirer and
those of the acquired business. The greater the mismatch, the greater the risk of
failure.
Joint development/alliances
One of the ways that businesses develop is through franchises, where the franchiser is
responsible for setting up an outlet (such as McDonalds or Holiday Inn) and for
marketing, training, etc., and the franchise holder undertakes specific activities such as
selling.
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Joint ventures are arrangements between organisations which remain independent, but
have an equal share in the new organisation. In these arrangements the assets are
jointly managed but can be separated.
1. Consider how Bombardier (November 2010 case study) may decide upon its future
strategy bearing in mind its main SBUs and the sub divisions.
2. What strategies would be appropriate to Acer (June 2010 case study) in the next five
years.
3. What approach to globalisation would you suggest that Marks and Spencer adopt to
their international business?
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139
Chapter 8
Market Entry Strategies
Contents Page
Introduction 140
A. Market Entry Options 140

Exporting 140
Overseas Production/Service Branches 142
Ownership Strategies 143
B. Selection of Entry Modes 144

Sales Generation 145
Profit Earning Capacity 146
Investment Payback Period 146
Balance of Direct and Indirect Costs 147
Exposure to Risk 147
Speed of Achieving Market Coverage 147
Degree of Control 147
Match Between the Product and Entry Route 147
Sources of Global Finance to Support Entry Strategies 147
C. The Entry Decision 148

Subjective Approaches 149
Objective Approaches 149
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140 Market Entry Strategies
INTRODUCTION
The strategic decision to enter a new market is an important one for any organisation. It is
particularly so when that new market is in another country.
The main choice facing a business is whether to conduct its business in the new country
from its home base by means of exporting, or whether to base at least some level of
operations in the new country itself. Within these two options, there are a range of possible
methods for actually conducting business, including various ownership options if it is decided
to establish branches in other countries.
The decision will depend on a number of selection criteria covering aspects such as sales,
profit, investment, risks, timing, control, suitability/relevance and broad financial incentives.
A. MARKET ENTRY OPTIONS

Companies have a range of choices for how they can enter a new country market. These
can be broadly grouped into two main areas, exporting and overseas production. In addition,
companies need to determine the degree of ownership and involvement that they wish to
commit to in developing their international business.
Most companies, large and small, use exporting as an entrance route for some of their
country markets. To generalise, smaller companies often use exporting for all their
international business. On the other hand, larger companies will often use a range of
exporting, foreign production and ownership approaches. The difference stems from the
greater resources of the larger companies and therefore their ability to choose between
different approaches.
Exporting
There are two main means of exporting:
Direct exporting which takes place when the distribution intermediaries used are
based in the country market that is the target for the exports, for example, agents or
distributors.
Indirect exporting which takes place when the country market is developed through
distribution intermediaries, such as export management companies, who are based in
the same country as the exporting company.
Direct exporting
The main methods of entering foreign markets through direct exporting are as follows:
Distributors
A distributor earns a profit by selling products that have been previously bought by the
distributor. Distributors usually have a sales force and provide some logistics and
marketing inputs in addition to the sales function.
Agents
Agents act on behalf of a principal. In the case of export distribution, the agent sells
products on behalf of a principal who is based in another country. The agent provides
a sales function, but does not own the product that is sold. Agents receive lower levels
of sales commissions than distributors because they provide fewer services to the
principal. Agents are usually smaller organisations than distributors, and indeed may
be just one person who acts primarily in a sales capacity.
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Market Entry Strategies 141
Agents are similar to distributors in that they often represent a number of companies,
sharing their time and efforts between a number of products and clients. The
companies that use agents and distributors need to manage them and to motivate
them to sell their products. There is a tendency for agents and distributors to cherry
pick in the sense that they put their main efforts behind those products that are easiest
to sell and those that provide them with the best profit earning possibilities.
Company sales force
A company can also use its own sales force to sell in another country market. If the
market potential is sufficiently large, the company can use salespeople who are based
in that country. If the market is smaller or risky, the company is more likely to use
salespeople who merely visit the country and its customers from time to time.
An important consideration in using this method of entry is the nature of its cost. Most
of the costs of using the company sales force are fixed or indirect costs. This means
that if the level of sales is poor, the same indirect costs will be spread across a small
number of sales.
The decision as to which entry route is appropriate will partly relate to company experience in
international business, but it will also relate to the type of product. If the product requires
high levels of after-sales service, then there will be a need for in-country presence and
service capability. Some companies have the resources to be able to carry out customer-
responsive servicing, while other companies will need to delegate this to local companies. If
this is the case, the company would need either to appoint a distributor to carry out these
tasks or to appoint a service company in addition to the agent.
Indirect exporting
Indirect exporting is the method used by companies that wish to reduce their risk and
exposure carrying out business on an international stage. It is a way in which companies can
attempt to sell some of their excess capacity without incurring the problems associated with
dealing with customers in different countries. The main problem with indirect exporting is the
lack of control over how the companys products are marketed. It is quite common for the
company to be unaware of who its customers are and how some of the marketing mix
elements are used even to the extent, at times, of being unaware of the final price charged
to customers.
The main methods of entering foreign markets through indirect exporting are as follows.
Export management companies (EMCs)
Export management companies (or export houses) have similarities with agents and
distributors, but are different because they are based in the exporters own country.
For the exporter, the export management company seems easier to deal with because
of the absence of any language, cultural and export documentation difficulties.
EMCs, by selling a range of products, can offer an interesting package of products to
foreign buyers whilst at the same time splitting the costs of selling, marketing and
physical distribution across a number of products from different client companies. They
usually, though, specialise in some way for example, by part of the world, by product
type or by type of customer. An EMC might therefore specialise in selling toys to
retailers in Asian countries on behalf of UK companies, and this offers the companies
the ability to have its products sold into a large number of different country markets.
Piggyback operations
This method of entry is based upon the use of the established distribution
arrangements of one company by another company. One company gives a ride to the
other company. The ride consists of the selling and export administration, and benefits
from the ongoing nature of the sales contacts that the company has. The rider
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company receives an immediate benefit by gaining access to the working system that
has been built up by the other company. The carrier is either paid a commission and
acts as an agent, or buys the product and acts as a distributor.
Purchase in domestic market
Some companies sell their products to companies that send buyers, or who have
established buying offices, in the domestic market of the selling company. Some large
retailing companies from countries such as the United States or Japan will buy products
in this way. This method, whilst creating export sales, keeps the selling company away
from a direct understanding of the country market and minimises their need to handle
the full range of export documentation.
Overseas Production/Service Branches

Overseas production in the country market will rule out exporting. There will be no need to
transport products physically across country borders as the products will be produced within
that country.
There is a range of methods of achieving foreign production:
Wholly-owned subsidiary
This would be a company set up in another country which is 100% owned by the parent
company. A wholly owned subsidiary with a complete production facility is the most
obvious means of achieving foreign production.
Foreign assembly
The company could produce most of the product in the domestic market and merely
assemble it in the country market.
Contract manufacture
The company could arrange for another company to produce the product for them
through contract manufacturing, as is the case with computer companies Acer and
Foxcom in China.
Licensing
Licensing is an arrangement whereby one company, for a fee or royalty payment,
allows another company to be responsible for production and distribution, using a
patent or a trademark, within the areas defined by the licensing agreement. This is a
low-cost, low-risk way to enter markets. The enterprise is only directly involved with the
market through the company with which it has its licensing agreement. It is a method
used by small and medium-sized companies, particularly those in advanced
technology, because it enables quick returns to be made with the use of extra capital.
The difficulties with licensing relate to the usually low profit returns available, and the
difficulty in selecting suitable licensees. It is not uncommon for licensees to use the
licence as a quick way to learn about new products and new technologies, and in this
way the licensee can often become a competitor. Another difficulty with licensing is the
lack of market control.
Franchising
Franchising is similar to licensing in that the franchisee is responsible for production
and distribution, but allows the main company to retain more control over the use of the
product, usually through specifying the use of not only the trademark, but also the
name and logo, the particular method of operation. The franchiser also, very often,
retains responsibility for advertising.
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Franchising is particularly used in fast food operations (for example, Kentucky Fried
Chicken (KFC) and Burger King) soft drinks (for example, Coca-Cola and Pepsi-Cola)
and service based businesses such as car rental (for example, Hertz and Avis) and
hotel groups (for example Hampton Hotels/Hilton).
Ownership Strategies
Companies will need to decide on the level of direct ownership they desire when making
entry decisions. The extreme positions are complete ownership or complete reliance upon
other companies, with the intermediate option of entering into part-ownership schemes.
Ownership decisions will usually be corporate strategic decisions in addition to operational
decisions. The decision will be strongly influenced by the level of political and economic
stability in the chosen country. The higher the level of risk of interference, the more likely it
will be for the company to want others to bear the risks of ownership.
Distribution-channel decisions are also significant and have important and relatively long-
term consequences for companies. The decision to include company ownership as part of
the distribution-channel decision serves to increase the commitment and results in a major
medium- to long-term view being taken about the market.
The following represent the major alternatives with regard to ownership:
Wholly owned
Here, the alternatives are the setting up or acquisition of a subsidiary in the country
market, or using the companys own sales force. Both these methods have been
outlined above.
Partly owned
There are two main possibilities for part-ownership of foreign companies:
(a) Joint venture A joint venture is a kind of partly-owned subsidiary in which a
multinational enterprise decides to share the management of a company with one
or more collaborating companies. The reasons for entering into a joint venture
are often to reduce political and economic risk. In some countries, joint ventures
might be the only way in which a company can invest in the country (this is
usually called inward foreign investment). Other reasons for using joint ventures
include using the specialist skills and cultural knowledge of a local partner, to gain
access to the distribution channels of a joint venture partner, and as a means of
limiting the capital requirement of international expansion.
(b) Strategic alliance There are differences between joint ventures and strategic
alliances. In a joint venture, two or more companies contribute specific amounts
of capital to form a new company. In strategic alliances the arrangements
between, usually, two companies are more flexible. The alliance may or may not
result in a new company. The usual purpose of a strategic alliance is to combine
and gain benefits out of each partners skills and resources.
Alliances are most common in connection with providing access into distribution
channels (entry) and also as a means of gaining research and development
expertise for new product development and manufacturing capability.
Alliances are a comparatively recent method of conducting international
business. It is possible that the very flexibility of the alliance will result in its
eventual transition into a new company or a more formal joint venture, or the
take-over of one company by the other.
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Owned by others
Here, the strategy will be to operate through separate companies, the methods
including those considered above such as licensing and franchising, distributors and
agents, and EMCs and piggyback operations.
From this, we can see that the degree of involvement, in terms of ownership and
commitment, in the country can range from high to low:
Figure 8.1: Spectrum of ownership options
High involvement Wholly-owned subsidiary

Partly-owned joint venture
Strategic alliance
Licensing/Franchising
Distributors
Agents
Using the company sales force
Export management companies
Piggyback operations
Low involvement Purchase in domestic market by buyers from other countries
B. SELECTION OF ENTRY MODES

A companys selection of entry routes is a key organisational decision and will depend upon a
series of factors. The main factors are:
Potential for sales generation
Potential for profit earning
Investment payback period
Balance of costs between direct and indirect
Exposure to risk
Speed of achieving market coverage
Degree of control
The match between the requirements of the product/service and services provided
through the particular entry route
Sources of global finance to support entry strategies.
Before looking at the implications of each of these factors for the selection of entry routes, we
should note some of the constraints on the decision.
A company is likely to have different business objectives in different countries. In some
countries there might be significant long-term potential, in which case the company would
wish to follow a key market concentration approach. In other markets, the levels of risk might
be high or the sales potential might be low, so the company would be looking for a low
commitment method of entry. Therefore, the preferred entry method will vary from country to
country.
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In the previous section the entry choices were listed in order of involvement in the country
market (Figure 8.1). The entry method with the highest involvement is to set up and run a
wholly owned subsidiary the company becomes extensively involved in the country
because it is manufacturing and marketing there. The selection of this entry method has
major consequences for the company. The fixed nature of the assets needed to establish the
subsidiary makes the company vulnerable to changes in the political and economic
management of the country.
At the other extreme, the company that sells its products in its own domestic market to
buyers who will sell the product in other country markets has a very low involvement or no
involvement at all in that country market. When looked at from a sales and profit-generation
perspective, the wholly owned subsidiary route offers the possibility of large returns that
could grow substantially. The domestic sale route, on the other hand, provides quick but
comparatively small sales and profit opportunities, with very limited opportunities to expand
the business in the future.
The preferred entry method might also not be available or might be blocked in some markets.
For example, the company might wish to establish a wholly owned subsidiary, but find that
country regulations only allow a joint venture with a local company. Even then, the company
might not be able to find a suitable joint venture or alliance partner. Where the ideal strategy
for a company may be to use an agent as the means of entering a country, it is quite possible
that there will only be a few good quality agents those with the requisite geographical
coverage, technical knowledge of the product, or customer base. However, the agents that
exist may be already contracted to competitors, in which case the company would need to
find a different strategy to gain entry. In countries with distribution systems that have been
subject to considerable adaptation through cultural influences, such as Japan, it will be
particularly important to select distribution partners who have the right customer contacts.
We will now look at the various selection possibilities for each of the main entry methods.
Sales Generation
Companies will be concerned about the speed with which sales will grow in the country.
Obviously companies would prefer sales to grow rapidly, provided that they have the
production and organisational capability to sustain such growth. The slowest method of
increasing sales will be the wholly owned subsidiary, since the company needs to become
established and production levels built up before sales can begin, and this might take a
number of years. The fastest methods of generating sales are to use companies that are
already established in the country and who are regularly selling to the right type of customer.
In this way the extra lines for the new company can be added on to the sales list and sales
can therefore begin almost immediately.
For the generation of sales, this will be the slowest of all methods, but in the long term
this offers the highest total sales.
Joint venture/strategic alliance
The initial sales generation will be slow because of the need to find and to negotiate a
suitable agreement with a partner. Once this is completed, sales can develop rapidly,
because one of the normal bases of the agreement is the local knowledge and
distribution capability of the other partner.
Licensing/franchising
Initially, sales will be prevented because of the need to find the correct companies for
the licence or franchising deal. Once this has been achieved, sales can take off
rapidly. The extent to which sales grow rapidly will depend upon the qualities of the
licensee or franchisee.
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Agents/distributors
Sales are most likely to develop more quickly through this method than from other
methods. Agents and distributors will already have established contacts so sales could
commence at once. In practice, the initial sales levels will be influenced by the
unknown nature of the product and the company in that country.
Own sales force
Sales will start slowly because of the need of the sales force to establish contacts with
suitable customers. To sell successfully, the various linguistic and cultural barriers will
need to be overcome.
Profit Earning Capacity

Organisations are always very concerned about profit-earning capacity, and this criterion will
have a strong influence upon the final decision about which method to use:
This will be the slowest way to earn profits, but again in the long run it offers the
highest profit potential.
Joint venture/strategic alliance
These have moderate to high profit-earning capabilities. The shared costs and the
input of expertise from the partner organisations give good chances of profits, provided
that the partners have been selected carefully.
Licensing/franchising
Licensing gives a less strong profit payback because of the limited basis on which the
company providing the licence acts within the arrangement. In franchising, the wider
range of marketing mix activities employed and a more proactive approach give a
better rate of profit return.
Agents/distributors
The profitability from these two methods is comparatively modest. Profit flows will start
quickly, but will not grow to the potentially high levels achievable from most other
methods.
Own sales force
Initially the high indirect costs will eliminate the possibility of profits for anything more
than infrequent flying sales visits. If the company establishes a resident sales force in
the country, it will take some time before customer contacts and sales negotiations will
generate a flow of sales revenue sufficient to cover costs. For some very large sales of
capital equipment, for example Rolls Royce aero engines, the high profit potential from
one order will make it worthwhile to base a large team of company personnel in the
country to negotiate the order.
Investment Payback Period

The wholly owned subsidiary route will take a long time before the breakeven point is
reached and even longer until an overall profit point is reached. The shortest payback
periods are for agents and distributors. Here, the initial investment costs relate to the costs
of searching for suitable agents and distributors and the costs of training them in the
company products and systems. Costs will include travel expenses and may include visits of
the agent/distributor to the companys headquarters.
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Balance of Direct and Indirect Costs

The agent/distributor costs are primarily based upon direct costs that relate specifically to the
sales of the product. Indirect costs related to training programmes and other non-sales-
related costs will be incurred, but in the main the costs are direct. All other methods have a
higher percentage of indirect costs and these will be at their highest in the wholly owned
subsidiary.
Exposure to Risk
This will be lowest in the case of agents and distributors and highest in the case of wholly
owned subsidiaries. However, there are risks associated with this approach, primarily that
they will not gain sales and underachieve on their agreed sales targets. In addition, they may
alter the marketing mix without prior agreement. It is important, therefore, that the contract
signed allows the company to cancel the agreement without legal difficulty if the
agent/distributor fails to deliver his or her side of the bargain.
Speed of Achieving Market Coverage

For some companies, it will be important to gain widespread distribution very quickly. This is
most likely to be the case for consumer products, which will be supported with national
marketing communications programmes. Other companies might wish for a rapid build-up to
beat competitors into the market place.
The fastest methods of gaining market coverage will be through the use of
agents/distributors. However, appropriate companies need to be selected and trained before
sales can commence. This is, though, a much quicker process than the other methods.
Agents/distributors will have an existing customer list that can be activated very quickly.
Usually individual agents/distributors will only cover part of a country. In order to gain
complete national coverage a number of agents/distributors will be required.
Degree of Control
The degree of control relates quite closely to the degree of ownership. The agent/distributor
route offers little control as they are likely to have their own organisational objectives. They
will usually handle the sales of a number of other products and the company will need to plan
and manage agents/distributors to gain the best performance from them. In licensing and
franchising, the ability to control will relate directly to the contract. In joint ventures and
strategic alliances, control has to be balanced between the participants. In some situations
the battle for control can cause the venture to disintegrate. It is only in the company sales
force and the wholly owned subsidiary that the company has complete control.
Match Between the Product and Entry Route

It is sometimes difficult to find the correct blend of services provided by other organisations.
In some countries, there may not be a tradition of providing that particular product at the
desired service level. In other countries the organisations may exist, but be contracted
already to competitors. Because of this, companies will often have to accept a less than
ideal situation and rectify the deficits through inputs from their own company. Sometimes, of
course, the solution will be through a wholly owned company operation.
Sources of Global Finance to Support Entry Strategies

A final factor affecting the choice of entry strategy concerns the availability and sources of
finance to support any proposed entry strategy. We have already seen that the different
entry strategies involve different commitments with regard to the initial levels of investment
required. So, for example, entry via a wholly owned subsidiary will require much higher
levels of investment than, say, using piggyback operations as a method of entry. We can
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also see that often a company, which would otherwise prefer to select a more direct entry
strategy, may be forced to use one of the more indirect entry strategies simply because of
lack of capital. The business, therefore, must be aware of the financial investment
implications of the range of entry strategies and also some of the sources of global financial
capital that might be available to support a preferred entry strategy.
Obviously, a company can use its own internally generated funds to fuel overseas expansion
and such funds, of course, are generally cheaper than external sources of finance. Where
internal finance to support a proposed entry strategy is not available, then the company can
turn to conventional external sources of finance such as banks, and the issue of new shares.
However, when it comes to funding entry strategies, businesses can also draw upon a
number of other potential sources of global finance to support a proposed entry strategy:
Host governments
Sometimes the government of a country that the business wants to enter may be
prepared to offer financial incentives and inducements. So, for example, the United
Kingdom government has, in a variety of ways, provided special financial incentives to
Japanese companies wishing to invest in direct manufacturing facilities in the United
Kingdom. Clearly, there are a number of reasons for such financial incentives, such as
boosting local employment and providing access to new technologies and skills that
would otherwise not be available.
International funding bodies
International organisations such as the World Trade Organisation and the International
Monetary Fund will, under certain circumstances, help companies to build up their
international trading activities.
International venture capital
Increasingly, there is now a global fund of capital available to companies who are
wishing to exploit international business opportunities. These global funds are
operated by venture capital companies sometimes connected to, for example, the
larger world banks. Such global capital funds began to develop in the 1960s and,
some say, have in the past been a major source of international financial instability
inasmuch as they are often operated outside the control of individual governments.
Customers
Particularly in business-to-business markets, customers may help provide finance to
help a valued supplier invest in overseas markets. We have seen that, increasingly,
business customers are seeking to develop long-term relationships with suppliers to
maximise the potential of all the value chain activities as part of their competitive
strategy. Some of the larger global companies will often help a smaller supplier invest
in, say, manufacturing facilities in a country in order to ensure effective just-in-time
delivery.
C. THE ENTRY DECISION

The decision on which entry method to use is, as we have said, one of major strategic
importance. It is a decision that many established businesses have not taken before.
In the domestic market, few established businesses have to make conscious decisions about
which distribution channel to use, since in most situations these decisions will have been
made previously. The main activity is based upon improving and enhancing the existing
distribution arrangements and in balancing other activities of the business such as production
processes and the marketing mix.
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In international business, the large number of country markets around the world gives rise to
various opportunities to decide upon the best form of entry. It is unusual for companies to
market their products in every country more usually, companies tend to be restricted to less
than 50 country markets.
The decision approach to entry can be made on subjective or on objective grounds. The
significance of the decision strongly supports approaches that attempt to be systematic and
to use formal evaluative criteria.
Subjective Approaches
Elements of subjectivity are inevitable because of a lack of complete and reliable information.
It is often difficult to obtain factually correct data about prospective agents, distributors or joint
venture partners, and it is always difficult to forecast future sales, particularly in a new
situation. Once the company has been established in the market, it can use past sales data
to help in the forecast of future sales. The company needs to make judgments about the
various information gaps and it is therefore forced to make decisions which have various
amounts of subjectivity contained within them.
The most common subjective approach would be to use a particular entry method because
that is the way that the company has entered other company markets for example, the
company uses agents in its other markets and therefore automatically looks for agents when
it wishes to enter a new country market.
The most likely entry routes to be the subject of the less rigorous subjective approach are the
use of the company sales force (especially if the sales force remains based in the domestic
market), the use of agents and distributors, and sales that are made domestically. All of
these approaches lessen the risk to the company, so that if things go wrong, the company
will not suffer major loss. It is worth remembering, of course, that the company could be
missing substantial sales and profit opportunities by selecting inappropriate entry
approaches. Because the lost sales can only be estimated, it is easy for the company to
ignore the missed potential.
It is unlikely that a company will take a subjective approach with distribution methods that
require a lengthy period to pay back the initial investment. Therefore, the wholly owned
subsidiary particularly, but also the joint venture, strategic alliance, licensing and franchising
would normally be evaluated in a formal way.
Objective Approaches
It is advisable for companies to examine the advantages and disadvantages of each entry
method before making a decision. You will see already that it is improbable that any one
approach will have no drawbacks. The final decision will not be easy. Furthermore, the
decision will be based upon imperfect information. It is difficult to estimate what the future
demand patterns will be for each of the entry approaches. Will agents generate more sales
than distributors? How easy will it be to motivate agents? If we set up our own wholly
owned subsidiary, what will the economic and political situation be in five to ten years time?
These and other questions make it very difficult to develop a reliable evaluation of the entry
options.
The two main approaches that companies can take are to:
Evaluate entry options through applying scores to the different options
Carry out a computer simulation to estimate expected revenues and profit paybacks.
The decision between the two will be influenced by the importance of the decision to the
company and its sophistication in using decision-making techniques.
The more the decision is based on reliable information, the more likely it is that the decision
will be successful. Thus, subjective judgment should be minimised and the company needs
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to collect the information necessary to make a rational decision. However, the cost and the
time taken for this is likely to influence the way in which it is approached. The main decision-
making techniques are:
The weighted factor score method
The weighted factor score method can be used in all situations, even if information is
limited, and is preferable to complete subjectivity.
The method works by the company establishing the major factors that it should
consider in making the decision and assigning weights to reflect the relative importance
of each factor. Each option can then be rated against these factors and compared to
identify the best option.
If we take an example in which some of the options have already been eliminated
because the company wishes to gain direct contact within the country market, this
leaves eight options using the company sales force, agents, distributors, licensing,
franchising, strategic alliance, joint venture and a wholly owned subsidiary. Assuming
that the company wishes to develop its international sales rapidly and in the long term
achieve a substantial global position, the factors that would be relevant and their
weightings might be as shown in Figure 8.2.
Figure 8.2: Factor weightings
Factor Factor Factor Rating

Weight Score
(A*B)
(A) (B)
The speed of sales growth 0.3
Investment payback period 0.1
Amount of learning about international markets 0.2
Degree of control 0.1
Long-term profit potential 0.3
Total Score
The total scores for each of the options can be calculated. In this way the company will
make a careful evaluation of each option. Subjectivity is still part of the process. There
are elements of subjectivity in deciding which factors to include and which to exclude.
The factor weights and the factor scores both contain elements of subjectivity, but,
nonetheless, it does provide a useful way to make the important entry choice.
Simulation method
A computer simulation could be developed to quantify the profit and sales revenue
positions for each option. The options could then be decided by reviewing the payback
period, the return on capital employed, the market share obtainable and other similar
measures.
To be able to compute the solutions, various estimates would be needed to forecast
sales revenue, profit contributions, business operations expenditures (for example, on
advertising and sales promotion), the capital expenditures and the probability of results
being achieved. The estimation of all this, and other, information would again involve
making subjective judgments about the future. However, the advantage with this
method is that it encourages a comprehensive review of costs, revenues and profits for
each of the options.
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1. What methods of market entry are open to a retailer such as Marks and Spencer
attempting to develop its first presence in a new country? Consider the relative pros
and cons of the main alternatives.
2. Toyota has production plants and research facilities in many countries. What were the
factors that influenced this policy?
3. Under what conditions might Acer (June 2010 case study) consider licensing as a
method of market entry into countries such as Russia and Brazil?
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153
Chapter 9
Management, Organisation and the International Business
Contents Page
Introduction 154
A. Organisation and Management 154

Centralisation vs Decentralisation 154
Specialisation 155
The Influence of the Type of Business 155
Types of Structure 156
Management Structures 158
Factors Affecting Choice of Organisational Structure 160
B. Organisational Culture 160

Country Influences 160
Company Factors 160
Management Style and Structure 161
Employee Composition 161
C. International Human Resources Management Strategy 162

The Role of HRM 162
Staffing Policy and the International Business 163
In-House and External Resources 164
The Expatriate and the National Manager 165
Building the Global Company 166
The Concept of the Equidistant Manager 168
D. International Labour Relations 169
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154 Management, Organisation and the International Business
INTRODUCTION
This chapter considers the way in which the international business may be configured in
terms of its management, organisation and staffing. These aspects are central to both
effective implementation and the development and co-ordination of strategy.
Management and organisational issues often underlie the problems of business
organisations, both domestically and internationally. The issues are compounded for
multinational businesses by the relationship between the home and host country, not just in
terms of the co-ordination and control functions of management, but also in relation to the
integration of cultures and staff.
A. ORGANISATION AND MANAGEMENT

The type of organisational structure that is appropriate for an organisation will depend upon
many issues. Some issues are fairly obvious. For example, small and medium-sized
businesses will have smaller and less complicated organisational structures than very large
companies such as Unilever or Procter and Gamble. The number of different country
markets and the current size of the company market share in different markets will influence
the need for the number and type of people to be employed internationally. The types of
product and service and the overall product mix will affect the organisation. For example, a
management consultancy firm such as McKinsey and Company will require different types of
people from a manufacturing company such as Ford or Electrolux.
Perhaps less obvious as an influence on organisational structure will be the amount of
experience that the company has in international markets. New and inexperienced
companies in international markets are likely to use different approaches and have different
tasks when compared with companies who have been established successfully in the market
place for a number of years. Another important influence on the organisation is the level of
challenge of the objectives that have been set by the organisation. If the company is seeking
to grow rapidly, it will need a different type of organisation from a company that is attempting
to hold a stable position. Another important influence on the international organisation is the
extent to which the company is trying to standardise its activities. A company with a policy of
running separate country operations may organise itself quite differently from a company with
a pan-European or a global standardisation approach.
Centralisation vs Decentralisation
As in any organisation, the international business must weigh a number of competing bases
upon which to divide its operations and decision-making. There are several conflicting
pressures as companies expand their business internationally.
Decentralisation
As the company enters new country markets and expands its product mix, it comes under
pressure to decentralise. By allowing more autonomy at the local country level, it can
develop and implement plans that are more appropriate for the specific needs of the
customers in that country. As the company allows more decentralised decision-making, it is
likely to find that products become extensively adapted or even totally different between one
country and another. Company and brand names, trademarks, and advertising campaigns
will spread apart. In allowing differences, the company is denying itself the opportunities to
make cost-saving economies it is denied large economies of scale and also some of the
benefits of increasing experience, because the experience effect is limited to the country
operation. If the company operations were more similar, then the total volume of production
and sales would build up and thus allow economies to be achieved.
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Management, Organisation and the International Business 155
Centralisation
A different pressure is to centralise. Companies may wish to centralise their key activities in
order to co-ordinate and control their international activities. The centralised approach has
the benefits of organisational neatness, of standardisation and of the opportunities to profit
from scale and experience advantages. More recently, some companies have sought a more
centralised approach to allow them to develop an organisational capability to launch products
simultaneously in a number of different country markets. Another reason for more
centralised control is to mobilise the ability to plan and to implement international competition
strategies.
Certain difficulties result from an over-rigid approach to centralisation. The main problems
are that central headquarters will be too remote, geographically and culturally, to understand
the particular requirements of specific country markets. A further difficulty is the not invented
here syndrome. Managers who are required to manage programmes that have been
developed at central headquarters will not feel involved with the plans and will, therefore, not
be so highly motivated. The extent to which the objectives of the plans are achieved will be
influenced by the enthusiasm and motivation of the people employed at country level. The
not invented here syndrome, therefore, needs to be taken seriously.
Specialisation
In developing the international organisation, the company will need to take account of
specialisation across the dimensions of function, product and geography:
Function is concerned with occupational specialisation. Functional specialisation
becomes more important with the growth in organisational size and complexity so, for
example, the marketing function in a large organisation itself will require functional
specialists in marketing management, selling, sales promotion, marketing research and
so on.
Product is concerned with the co-ordination, integration and control of activities based
on the product. This type of specialisation enables the company to deliver high levels
of expertise in relation to particular products.
Geography is concerned with matching the company with its external environment. In
the domestic market, most companies organise their sales force with specialisation
based on areas and regions within the country. In international business, it is usual to
base at least some of the organisational structure around countries, trading blocs and
world regions. In this way, closeness to customers and an improved knowledge of the
factors influencing the markets are achieved.
In most organisations a balance between the conflicting interests of these three dimensions
needs to be reached.
The Influence of the Type of Business

The extent of international involvement is a factor in determining the structure. We can build
a match between these stages and the type of organisation appropriate to the approach to
international business. This is outlined in the following table:
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Table 8.1. Stages of International Business Growth.
Stage Organisation form
Export selling Ad hoc arrangements
Export business Export department
International business International division
Multi-national business Growing use of groups of

countries/continents-based organisations
Global business Matrix and transnational organisation
As the company expands its international sales and profits, it inevitably finds that ad hoc
arrangements are insufficient. The early arrangements are primarily concerned with
facilitating the order by arranging the physical despatch of the product, and the necessary
financial details of which currency is being specified and how the invoice will be paid. With
more orders the company will benefit by developing a specialist department to handle the
various demands of exporting. Over time the export department becomes less burdened by
the administrative detail of exporting and begins to become more proactive in developing
business plans.
Increasing size will cause the company to consider the need to expand the function and
status of the export department into a division. Further company expansion in its
international business will bring forward the need to co-ordinate activities by parts of the
world for example, Asia or South America and at its ultimate to attempt to develop a
transnational organisation.
Types of Structure
Examples of international structures are given below:
Figure 8.1: Export department in a functional structure
Board of Directors
Chief Executive Officer
Production Marketing and Finance

Sales
Export Sales and Administration Domestic Sales
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Figure 8.2: International division in a product structure
Board of Directors
Domestic Domestic Domestic International

Product Product Product Division
Division A Division B Division C
It is probable that the international division would have specialist geographical regions based
on the most important regions for the company.
Figure 8.3: Continent/world region organisation with a functional structure
Board of Directors
ASEAN EMEA North American

Free Trade Area
Production Marketing Finance
Figure 8.4: Matrix organisational structure - product divisions and world regions
Board of Directors
Global Product Global Product Global Product (Continent/

Division A Division B Division C world/regional
managers)
General Managers General Managers General Managers
EMEA EMEA EMEA EMEA

ASEAN ASEAN ASEAN ASEAN
NAFTA NAFTA NAFTA NAFTA
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Management Structures
You will be familiar with the pyramid representing the basic management structure in any
organisation as follows:
Figure 8.5: Management levels in a basic pyramid structure
Strategic
Tactical
Operational
In all organisational structures, it is probable that there will be these three levels of
management responsibility. The recent moves by many companies to reduce costs and to
improve organisational responsiveness by reducing the number of layers in the organisation
would tend to flatten the pyramid, but there will still invariably be a small number of senior
managers involved in strategy and a larger number of tactical managers (middle
management) concerned with organising and leading lower level operational management
(supervisors).
The extent and the importance of these levels of management may vary with different
horizontal forms adopted by international businesses. These differences were considered by
Majaro who identified three organisational types the macropyramid, the umbrella and the
interglomerate:
The macropyramid organisation
Here, the whole of the strategic function is performed in head office. In these types of
organisations the strategic planning is handed down to product, function and
geographic managers to plan in detail and then to implement. In Figure 8.6 three
country subsidiaries are shown.
Figure 8.6: Macropyramid organisation
Central
Headquarters
Region A Region B Region C
In the macropyramid the main elements of business decision making are managed
from the main head office, and most processes are standardised as much as possible
across the whole company. Local involvement in the main strategic decision process is
limited. Unless the head office is very well briefed about local conditions, its planning
may result in missed opportunities at a local level.
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The umbrella structure

This is a decentralised system of planning and control. Subsidiaries are given full
independence at all three management levels. The centre concentrates on providing
very broad corporate objectives and has high-level expertise in various functional areas
that can be used to provide advice and support to subsidiary companies. The umbrella
structure is based on the multi-national enterprise with a polycentric orientation
operating in a multi-domestic way.
Figure 8.7: Umbrella structure
Central Services
Region A Region B
Whilst the umbrella organisational structure encourages local managers to plan for
their own market using their specialist local knowledge, it can be wasteful. It can result
in many broadly similar strategies in different countries, yet with fewer of the benefits of
shared knowledge or scale economies.
The interglomerate
In this organisation the centre is concerned with financial returns. The strategies to
achieve the required returns are the responsibilities of the subsidiaries.
Figure 8.8: Interglomerate organisation
Region A Region B
Here, each subsidiary is responsible for its own strategic planning. This type of
structure, for example used by Hanson, is most likely to apply to large complex
organisations that have subsidiaries in different industries, using different technologies.
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Factors Affecting Choice of Organisational Structure

We have already touched on several factors that will affect the choice of the most appropriate
type of organisational structure for international business. In summary the following
represent the major factors:
Company size.
Organisational culture.
Overall corporate and marketing objectives.
Extent of international market spread.
Range and diversity of products/services.
Level and nature of involvement in international business.
Company capabilities and resources.
It is felt that the ultimate deciding factor is the culture of the organisation and this is further
detailed in the next section
B. ORGANISATIONAL CULTURE
Organisational culture refers to the values, beliefs and attitudes that influence decision-
making and behaviour within a company.
Here, we shall consider the following aspects of what constitutes organisational culture and
review their implications for the international business:
Country influences.
Company factors.
Management style and structure.
Employee composition.
Country Influences
All companies originate from a particular country, and for many, their organisational culture is
strongly determined by their country of origin. We have mentioned on a number of occasions
how Japanese companies differ in their organisational approach. Japanese society is
characterised by politeness and consensus decision-making, therefore organisational culture
will be different from the typical US company with its stronger emphasis on directness and
individualism.
The strength of the country influence on the company will vary. Companies with a
macropyramid structure might be unduly influenced by the location of the central
headquarters, which in turn is invariably based in the origins of the company. Atlanta in the
United States and Nottingham in England are the central headquarters of Coca-Cola and
Boots respectively, because this is where these companies started. As these companies
have grown, they have become less and less ethnocentric. Such major companies
deliberately strive to change their company culture in order to grow effectively.
Company Factors
Company factors will revolve around the history and age of the company. Companies that
are new will have a different set of values from companies that have been established for a
long time. The origins of the company in craft practices might influence attitudes in the
company long after production techniques have changed.
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The type of the EPRG (Ethnocentric, Polycentric, Regiocentric and Geocentric).orientation

influences the attitudes of people employed within the company. For example, a company
with an ethnocentric orientation may find it difficult to develop international markets, because
the company is centred on the home market so, for example, production might find it
difficult to spare the time in the production schedule to produce a strange foreign order or
the advertising manager might be more interested in the home market. On the other hand, a
polycentric orientation will limit standardisation and co-operation, and regiocentric will
concentrate on one part of the world to the exclusion of other opportunities. Geocentric
culture will be much more expansionist, although it might, however, result in lost
opportunities at the country level.
Management Style and Structure

The values of managers are influential in shaping the culture of the company. Companies
often evolve into recruiting a certain type of manager to perpetuate the existing management
style, with different styles being related, for example, to defending the existing business, to
being more entrepreneurial by constantly looking for new market opportunities, and to
seeking more careful growth through the rigorous analysis of market opportunity.
In considering management style, we find that some management styles might also be
culturally related. For example, Chinese managers might be very hard working and inclined
to consider higher risk markets and product developments, whereas UK managers have
sometimes been criticised for failing to take risks and avoiding commercialising the apparent
opportunities that have developed out of research and development programmes.
Management structure can also influence the culture of the company. The three styles
implicit in the macropyramid, the umbrella and the interglomerate, illustrate that controls will
be exercised very tightly in some companies and much more loosely in others. The
macropyramid style will be more enveloping than the umbrella style. The umbrella style will
give subsidiaries considerable autonomy, provided that they achieve the agreed objectives.
In one sense, the interglomerate will be even looser. However, the financial controls set are
usually based on challenging financial objectives. The controls are fewer but the fear
engendered in failing to achieve the financial objectives can substantially invade the culture
of the company.
Employee Composition
Most companies start by employing people from within their own culture and/or nation state.
In some countries this will mean the same thing, for example, most people in Japan are
Japanese and therefore Japanese companies located in Japan will employ Japanese people.
A company in the US, though, whilst employing US citizens, might employ people from a
wide range of cultural influences some employees might be of Italian, Irish, Dutch, Puerto
Rican or Mexican origin. The degree of international spread incorporated within the company
will initially, therefore, depend considerably on the country and the employment policies of
the company.
Growth in the company and in its involvement in international markets will result in the
employment of more and more people from different cultures and different countries. The
company can seek to develop a more international organisation by recruiting, training and
developing, and promoting people of different nationalities to achieve a team of multi-cultural
international managers.
International companies face difficult decisions about the use of expatriates managers and
other specialists drawn from the company's home nation to staff their international
operations, as opposed to nationals from the country of operations. It is quite common for
extensive use to be made of expatriate managers on short to medium assignments of six
months to three years in order to provide expertise and consistency to the more remote parts
of the organisation. However, there is a risk that doing so will hold back the development of
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national managers to reach company standards of competence, and slow down the move
toward a more international organisation. Once the national managers have shown their
ability to perform, expatriate managers are used less and less frequently. The more
successful national managers will be promoted into international positions.
Truly transnational organisations will be particularly anxious to develop a team of very
experienced and culturally sensitive international managers. Ohmae refers to the need to
develop equidistant managers in the true global business. Such managers develop and
respond to the most important strategic issues wherever they arise around the globe. This
contrasts with the typical manager who tends to be most influenced by home-country events.
However, the global manager, with equidistant cultural abilities, is quite rare, and it is
arguable anyway whether there are companies that are operating on a truly global basis.
Nevertheless, it is certainly true that there is a shortage of international managers with a high
level of country-specific knowledge across many countries and a cultural awareness that
enables them to analyse, develop and implement successful strategies.
We shall discuss the issue of deciding between using expatriates, nationals or global
managers in more detail in the next section, together with the related issue of whether to use
in-house or external resources.
C. INTERNATIONAL HUMAN RESOURCES MANAGEMENT

STRATEGY
One of the challenges that face organisations as they globalise their operations is the
adaptation of their management to the different cultures in which the organisation is
operating and the creation of HR practices that are both comfortable to the organisation, and
appropriate for those cultures. This challenge is true for companies all over the globe.
As organisations become more global and begin to do business in greater numbers of areas,
the number and variety of cultures represented in their workforce also changes. As this
number increases and as organisations attempt to treat each different culture with respect,
practical issues can arise that may make doing business increasingly more difficult.
In this section, we shall be looking, therefore, at the management and control of human
resources in international business and in particular, some of the issues which arise when
choosing between and managing local, expatriate and global staff.
The Role of HRM
The last 20 years has seen a major shift in focus for HRM. In particular, the activities
engaged in by HR professionals has seen them move away from more transactional types of
work towards those concerned with developing organisational capability and business
development. It is in these areas that HRM can make a significant contribution to
organisational success, and this is every bit as true in international business as in any other.
In the UK, the Chartered Institute for Personnel and Development (CIPD) has identified the
success of the HRM contribution as being dependant on:
The organisational drivers for internationalisation being well understood;
The key delivery mechanisms for HRM being in place, and being coherent and
consistent; and
The organisational drivers and delivery mechanisms meshing with the global HRM
activities.
Where any one of these factors is absent, there may be problems in developing appropriate
HRM strategies.
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The key drivers for international operations will generally include:

Maximising shareholder value whether implicitly or explicitly stated.
Forging strategic partnerships with similar organisations, groups or suppliers.
Creating core business processes driven by business needs.
Building global presence to be visible in the market place.
Organisations may exhibit several of these drivers at the same time.
The key delivery mechanisms for HRM would normally comprise:
e-enabling HRM, using new information and communications technology.
Knowledge management, to exploit the internal knowledge stock.
Cost-reduction/HR affordability, offering cost-effective solutions.
Creating centres of excellence, avoiding replication and duplication of effort.
For a company to undertake any of the basic strategies outlined above, and have their
organisation fit with this strategy, the staffing and other HRM functions must also fit with and
complement the strategy and organisation. A critical aspect of creating global HR strategies
is the ability to judge the extent to which an organisation should implement similar practices
across the world or adapt them to suit local conditions.
With the concern for being global, but simultaneously being sensitive to local conditions,
several strategic concerns relevant to international HRM arise. For example, can and how
do MNEs link their globally dispersed units through human resource policies and practices?
Can and how do MNEs facilitate a multidomestic response that is simultaneously consistent
with the need for global coordination and the transfer of learning and innovation across units
through human resource policies and practices?
Slogans like think globally and act locally sound good, but it requires effective HRM policies
for these slogans to be put into action.
The Acer corporation is a good example of an organisation that clearly values the roles
played by its managers and employees. Its HRM strategy is a key part of its corporate plan.
Staffing Policy and the International Business

Staffing policy is concerned with the selection of employees who have the skills required to
perform a particular job. Staffing policy can be viewed as a major tool for developing and
promoting a corporate culture. In companies pursuing transnational and global strategies we
might expect the HRM function to pay significant attention to selecting individuals who not
only have the skills required to perform a particular job, but who also fit with the prevailing
culture of the company.
There are three main approaches to staffing policy within international businesses. These
have been characterised as an ethnocentric approach, a polycentric approach and a
geocentric approach.
An ethnocentric approach to staffing policy is one in which all key management
positions in an international business are filled by parent-country nationals. The policy
makes most sense for companies pursuing an international strategy.
A polycentric staffing policy is one in which host country nationals are recruited to
manage subsidiaries in their own country, while parent country nationals occupy the
key positions at corporate head quarters. While this approach may minimize the
dangers of cultural myopia, it may also help create a gap between home and host
country operations. The policy is best suited to companies pursuing a multidomestic
strategy.
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A geocentric staffing policy is one in which the best people are sought for key jobs
throughout the organisation, regardless of nationality. This approach is consistent with
building a strong unifying culture and informal management network.
As companies grow and become more dependent upon international business to contribute
to their total sales revenue and profits, they will employ more and more people
internationally. The ways in which staff are deployed is of great importance and we shall
examine three aspects of this in this section.
The capability of an organisation to manage its tasks effectively is both an in-house and
an external resources decision. Whilst lower cost is an important factor in the decision
to use external resources, there are important cultural benefits to be gained from using
locally based agencies and consultancies.
Expatriates have been used by many multinational organisations to inject unavailable
local expertise. They have also been used to provide glue for the organisation. The
movement of expatriates from corporate headquarters to subsidiaries around the world
provides the means to diffuse the culture of the company.
Whilst expatriates can help the control and co-ordination of the company, they can
block the development of local managers. A challenge facing management in the
future is how to develop local management and how to develop multicultural
management teams based on talent rather than on headquarters country citizenship.
For the worlds largest companies the equidistant manager will be the very difficult goal.
In-House and External Resources

The general trend in many businesses is use direct employment of people within the
organisation to concentrate on the main activities of the business. For activities that are
undertaken less frequently or are less central to the company, the organisation will buy-in
agencies, consultancies and people on short-term contracts, that is it will use external
resources.
The overall position is that it is unlikely that a company will possess, in-house, all the
knowledge and specialist expertise that is necessary in international business. It will,
therefore, be necessary to buy-in external resources. The balance between in-house and
external resources will vary considerably from company to company. Some companies will
have a policy of handling most activities in-house. This is likely to be the case if confidential
information is an important part of company success. If the knowledge required for the
product or service is very specialised, this will limit the chances of finding suitable outside
people with the appropriate levels of knowledge.
The main reasons for using outside specialists are:
Outside specialists may have more specialist knowledgeable than in-house personnel.
For example, in foreign exchange dealing or in handling marketing research surveys
across a number of countries with widely different cultural behaviour.
It is cheaper to use outside specialists. This is likely to be the case if the amount of
work in-house is insufficient to justify full-time direct employment.
To manage a temporary need for extra people to handle a particular issue. For
example, the need for interpreters for the duration of an international trade fair.
Outside specialists have the appropriate language and cultural fluency for particular
markets.
In addition to these four factors, companies will, sometimes, need to undertake a step-
change in their approach to international business. For example, a large multinational
company may wish to develop a more global approach. If this is the case, specialists will be
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useful to help define appropriate strategic directions and to devise ways in which the
corporate culture can be changed to a more geocentric orientation.
The Expatriate and the National Manager

In this section we will look at the reasons for using company personnel working in their own
country and compare these with the reasons for using company personnel, but basing them
in another country. Company personnel based in a different country are often referred to as
expatriates. Expatriates may exist at any level or functional specialism within the company,
but the main area of concern is at management level.
To look at the strategies for using expatriate and local managers we must first look at the
main types of manager employed by international companies:
Locals Managers who are citizens of the countries in which they are working.
Home-country expatriates Managers who are citizens of the country in which
company headquarters are based.
Third-country expatriates Managers who are citizens of a different country from the
company headquarters and the country where they are working.
We could posit that most companies will want to use local managers to fill the positions in
both the company headquarters and the companys various subsidiaries around the world.
Thus, the typical company would have something of an ethnocentric bias in its headquarters
and polycentric influences in its subsidiaries, because of the proportions of nationalities and
cultures that it employs in its various countries of operation.
However, the position is likely to be more complicated depending on a number of different
factors. Figure 8.9 sets out some of the strategies applicable in varying conditions.
Figure 8.9: Different strategies for employing local and expatriate managers
Country A Subsidiary Country B Subsidiary

Mainly locals Mainly locals
A few expatriates from In this case more expatriates
company headquarters. are used because of a
shortage of suitably skilled
local candidates. Home-
country and third-country
expatriates will be used.
Headquarters of
the Company
Mainly locals
Country D Subsidiary Country C Subsidiary

Almost all locals Almost all locals
In this country the rules This subsidiary is very
governing employment successful and long
make it very difficult to established. It has little
employ expatriates. obvious need for expatriates.
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The position illustrated for Country A Subsidiary shows how companies will usually wish to
use a number of expatriates in their subsidiaries to control the organisation and to ensure
compatibility in the way in which systems are developed and implemented. Country B
Subsidiary shows an example of situations in which a large number of expatriates might be
needed for example, if there are few local marketing specialists in a company, expatriates
will be needed to fill the gap. Country C Subsidiary illustrates the situation found when a
subsidiary earns a high degree of independence from company headquarters because of its
consistent ability to meet its objectives. The example of Country D Subsidiary is one in which
the company may wish to employ expatriates, but is prevented from doing so by rules,
regulations and laws in the country concerned. Many countries in Africa have considerably
restricted the numbers of expatriates that multi-national companies can employ.
The main reasons why companies use expatriates can be summarised as follows:
To provide immediate technical competence. Expatriates often have the required
knowledge and skills (for example, in the use of specialised technologies) which do not
exist in the local workforce.
To facilitate co-ordination and control between the subsidiary and the complete
organisation. Expatriates familiarity with communications and the culture of the
company provides a basis for developing similar systems and culture in the subsidiary.
To enhance the (expatriate) managers development in the international arena.
There are problems with using expatriates, however. For many people the difficulties caused
by geographic mobility are too great the move affects not only the manager, but also the
managers family. There are also difficulties in career progression at the conclusion of the
expatriate assignment. If the company does not manage the return of expatriates so that
managers are able to enhance their career prospects, they will resist attempts at expatriate
assignments in the first place.
Cost is another important factor. The relocation costs, housing and costs such as the
education of the children from expatriate families, are often surprisingly high. In addition,
costs of living in other countries, particularly major cities, can be higher than the expatriates
domestic residence. In a survey of the cost of living in the worlds biggest cities by the
Economist Intelligence Unit, Tokyo was by far the most expensive city. Using New York as
the base, rated at 100, Tokyo was just over 200. The next city was Zurich at 125; Paris,
Seoul, Hong Kong, Moscow, Singapore, Frankfurt and London ranged between 125 and 100
in descending order. Mumbai and Belgrade at about 50 represented the cities surveyed with
the lowest living costs.
A further problem with the use of expatriates is the way in which it can inhibit the
development of local managers. If all senior appointments are made to expatriates, not only
does this prevent local managers from developing the experience necessary to operate at
higher levels in the international organisation, but it is also a serious demotivating force
discouraging people with the potential to be high flyers. Their reaction might well be to seek
employment in other organisations in which their talents will be more aptly rewarded.
Building the Global Company

Figure 8.9 represents the type of approach taken by many multinational enterprises in the
past. However, companies are now developing ways in which they can be more flexible and
more attuned to the cultural requirements of their different operating environments. One way
in which this flexibility is being sought is through approaches being propounded by gurus
such as Tom Peters. They propose breaking down typical organisational hierarchies to
enable companies to be disorganised, to allow them to cope with the disorganisation and
change they face in their environment and in their markets.
The other main development is the borderless world view of Kenichi Ohmae and the need to
build management teams and managers to cope with the new complexity of international
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business. One strong view propounded by Ohmae is the need to develop what he terms
"equidistant" managers who have the knowledge, experience and cultural flexibility to
operate on a global basis without their decisions being flawed through self-reference criteria.
This is obviously very difficult to achieve. We return to this below in more detail.
Figure 8.10 represents a more global company. This company still has the major
headquarters based in the country in which the company was originally founded. However,
the company aims to use specialist centres based in different parts of the world and uses
managers more on the basis of merit than the fact that they are nationals of the company
headquarters.
Figure 8.10: Strategies for building the global company
Country A Subsidiary Country B Subsidiary

Developed into a centre for This subsidiary is in the
worldwide IT development development phase. It will
and support. be developed into a
specialist centre for
production.
Headquarters of the
Company
Provides all functions.
Uses locals as well as
extensive use of third-
country expatriates.
Country D Subsidiary Country C Subsidiary

This subsidiary is still in the Developed into a centre
development phase. for worldwide marketing.
Country restrictions prevent
major development.
In all subsidiaries, except the restricted case of Subsidiary D, the company employs a
number of home-country and third-country expatriates. It aims to develop managers from
each subsidiary, some of whom will be moved to company headquarters, others to other
subsidiaries.
Developing the International Manager
The important issues in the development of the international manager centre on building
personal competence in respect of management and business skills in general, and in the
particular requirements of the international arena, including developing cultural flexibility and
language skills.
Companies will face the process of management development in a number of ways, but the
main aspects will centre on planned experience and training programmes:
Developing experience
Experience needs to be developed in a progressive way. Managers will be exposed to
jobs in various countries with progressive difficulty, success at one level being the
normal prerequisite for progression to the next level. Experience needs to be
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developed in various countries. Each country will pose different cultural challenges. In
particular, it will be the ability to apply management solutions successfully in different
countries that will be crucial. Progression beyond the country management level to the
grouping of countries level needs to take place.
Training and development
In most instances, managers will be given in-house training and training from external
providers. This training will be used to develop managers general and international
management expertise. In addition to specific management courses, though, the
manager should attend courses for cultural preparation and inter-cultural analysis and
to improve language skills. For managers operating in many different countries, it will
be impossible to learn every language to a high level, such as is required for
negotiating or presentation purposes. However, he/she should possess high-level
language skills in at least one other language and social survival language skills in all
the important languages that relate to his or her geographic responsibilities.
The Concept of the Equidistant Manager

In the major companies of the world, the imperative of global management is strong. These
companies compete in global markets and in order to do this, they need to develop
managers who avoid continual reference to constricting experience and values. Kenichi
Ohmaes concept of the equidistant manager provides the basis of this.
The equidistant manager develops strategy and implements plans based on the importance
of the customer or market, not on geographic proximity or home-country cultural terms.
He/she avoids:
A vision dominated by home-country customers.
A vision dominated by specific company subsidiaries.
A view that everything outside the company and the country is part of the rest of the
world.
The words overseas, subsidiaries and affiliates because these serve to separate the
home domestic operation from the rest of the world.
The whole process is, of course, very difficult. The main issue for those businesses who
need to operate globally is that they must develop values and attitudes amongst their
managers that are global.
The UK is a part of Europe. Some people in the UK regard the UK as an essential
component of Europe and the integration of the UK into Europe as crucial for the future
prosperity of the UK. Others in the UK wish to retain a traditional country independence. So,
even from the more limited perspective of the UK and Europe we can see how difficult it is to
develop a reliable, equidistant view across national boundaries. When this is attempted on a
global scale, the whole process is exceedingly difficult.
The equidistant manager will need a strong educational foundation. This foundation must
incorporate a fluency in several languages and an understanding of culture through
immersion in differing cultures. The company will need to use selective international
experience and training courses, within a company that is developing an equidistant culture,
to build on the educational foundation. Of course, in addition to this, the manager must be
capable and successful in international management and business. Specifically the
equidistant manager must have the knowledge, experience and cultural flexibility to operate
on a global basis without their decisions being flawed through self-reference criteria. This is
obviously very difficult to achieve.
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D. INTERNATIONAL LABOUR RELATIONS

One of the characteristics of the international labour market, and of relations between
employers and their workforce in particular, is that they are significantly different in different
nations and these areas of differences influence operations worldwide. For example:
The structure of unions and their influence over organisations vary by country
Labour laws are virtually unique to every nation
Levels of employee participation in setting HRM policies also vary
Government regulation of business differs across borders.
In respect of the structure and power of unions varying between countries, we can take the
example of France. Although membership of unions is comparatively low, their political
power is high and the right to carry out industrial action seems to be implicit both in the
constitution and the culture. Therefore, the impact of any industrial action, and the working
conditions achieved through that, are significantly different to other European countries
notably the UK where the power and hence the influence of the unions has been much
curtailed as a result of legislation originating in the 1980s.
In Japan there are over 60,000 unions but unlike the general rule where unions are literally
trade unions linked to specific fields of work such as the Teamsters (Transport Workers) in
the United States and UNISON (Public Sector Workers) in the UK, Japanese unions are
directly related to companies. They are known as enterprise unions and are essentially in-
house unions and are very similar to the works councils in many European countries.
The main concerns of organised labour include fears that the global company may counter
union bargaining power by threatening to shift production elsewhere, or will try to import and
impose unfamiliar labour practices from other countries.
According to Hill (2001) organised labour has responded to the increased influence of
international companies through:
Trying to set-up their own international organisations
Lobbying for national legislation to restrict the power of multinationals
Trying to achieve regulation of multinationals through international organisations such
as the United Nations.
However, it would appear that none of these efforts have been that successful to date.
The roles of unions are typically seen as anti management, but working closely with unions
can help organisations meet external challenges leading to significant changes in working
practices. Most unions are realistic and recognise the realities of the business environment,
particularly at the global level. The significant changes in the car manufacturing industry in
the United Kingdom are evidence of this. The demise of the UK car industry over the last 30
years that was in part caused by poor labour relations has lead to traditional UK car brands
being taken into foreign ownership. However Japanese manufacturers, such as Nissan,
Honda and Toyota have successfully opened car manufacturing plants to the extent that the
UK is now once again a significant exporter of cars. The fact that the workers and the
management were able to cooperate in order to counter the significant decline in sales
during the recession of 2008 and 2009 shows that most workers and their unions understand
that the success and the ultimate survival of the organisation in the modern global world
relies on flexible working relations. There is a growing realisation that the way in which work
is organised within a plant can be a major source of competitive advantage and, increasingly,
trade unions are acting to facilitate the flexibility required to achieve this.
Nevertheless, a company's ability to pursue a transnational or global strategy can be
significantly constrained by the actions of labour unions. A key issue in international labour
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relations is the degree to which organised labour is able to limit the choices available to an
international business.
Traditionally, labour relations have been decentralised to individual subsidiaries within
multinationals. Recently, however, the trend is moving towards greater centralisation. This
enhances the bargaining power of the multinational vis--vis organised labour.
1. Toyota is a global car company, with corporate headquarters in Japan, employing over
320,000 employees working in various locations across the world and various functions
from manufacturing, research and development to sales and marketing.
(a) What factors will influence the management structure of the organisation?
(b) How might they set about developing managers at a new manufacturing plant in
Scotland
2. Bombardier (December 2010 case study) decided to relocate its global headquarters to
Germany from Canada. What were the benefits of doing this and what were the
HRM/organisational implications of such a move?
3. "The concept of the equidistant manager is an unrealistic pipedream." Make the case
for and against this statement.
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171
Chapter 10
Finance and the Multinational Company
Contents Page
Introduction 172
A. Obtaining Funds Internationally 172

Borrowing 172
Capital Structure 173
B. Transfer Pricing 174

Determining Transfer Prices 174
Reasons for Manipulating Transfer Prices 176
Large Transfers of Funds 176
C. International Investment Decisions 177

Factors Affecting the Investment Decision 177
International Investment Appraisal 178
Repatriation of Profits 179
Overseas Taxation 179
Foreign Direct Investment 180
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172 Finance and the Multinational Company
INTRODUCTION
Multinational companies those that operate in more than one country, and usually several
face a number of specific challenges in respect of their finance. They have a wide choice of
source of funds through the global capital markets, but there are considerable risks
associated with foreign investments, not least those associated with the political and
economic conditions, and their stability, in the country concerned.
The creation of foreign subsidiaries within a multinational group also opens up the prospect
of trading between the separate divisions of the company. This can offer considerable
opportunities for savings by moving funds and profits to those countries with the most
favourable financial regimes. However, there are strict rules about such measures which
companies need to follow with care.
A. OBTAINING FUNDS INTERNATIONALLY

When considering options for financing a foreign investment, an international business has
two factors to consider:
how to finance it, in terms of the source of the necessary funds and most importantly,
if external financing is required, the company has to decide whether to borrow from
sources in the host country, or to borrow from sources elsewhere
how to configure the financial structure of a foreign affiliate.
Borrowing
MNCs often use international sources of funds, for example, Eurobonds, Eurodollars and
overseas capital markets, to finance both themselves and their subsidiaries. The borrower
must be of high credit standing and must need large sums of money, as these markets are
for the international gathering of capital resources and are not aimed at the smaller
organisation. Thus, the larger Multi National Corporations (MNCs) rarely have any difficulty
in raising funds because of the scale of their operations, but smaller organisations may have
problems obtaining funds for global expansion.
However, host government regulations or demands may impose a local limit to the amount of
borrowings which is allowed and this may restrict borrowing from the global capital market.
In such cases, the discount rate used in capital budgeting must be revised upwards to reflect
this.
In addition, the global financial crisis has had an impact on all organisations and there has
been a squeeze on lending partly as a result of the globalisation of the major banks.
A company needs to consider the cost, timing and speed of overseas loans, as well as the
size of loan and the currency the borrower wishes to obtain. The security required should
also be borne in mind, as should any potential to reduce exchange rate exposure.
Company treasurers should not forget that interest rate parity can show how, when
considering exchange rate movements, the real cost of interest rates in different currencies
are similar. However sometimes, because of market imperfections, there can be
opportunities to obtain cheaper loans in alternative currencies.
A common method of financing an overseas subsidiary is to finance its fixed assets with a
long-term loan in the host countrys currency, thus allowing the repayment of the loan using
the profits generated in that country. This is known as matching of assets and liabilities,
and is a method used to reduce exchange rate risk.
When considering such loans, companies also need to consider likely fluctuations in
exchange and differential interest rates creating an interest rate trap, where a lower interest
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Finance and the Multinational Company 173
than that achievable on the domestic market becomes more expensive in both domestic and
foreign currency terms due to changes in the exchange rates.
Arbiloans (international interest arbitrage financing) are variations on currency swaps that
may be of use in financing MNCs. A subsidiary based in a low interest rate country borrows
and converts at the spot rate to its parents currency. The parent then agrees to repay the
loan at the term end and at the same time buys a forward contract. This is common when a
parent faces credit restrictions and high interest rates.
Capital Structure
In deciding the financial structure of an overseas subsidiary, the parent must consider a
number of features:
The level of gearing (i.e. percentage of borrowed capital to the total amount of capital),
the subsidiary should have, and from what source
How much equity should be placed by the parent in the subsidiary and how much from
outside (and from what sources)
The level of reserves and working capital the subsidiary should aim for.
These choices will often be determined by political and legal restrictions in the parents
country and the host country, and the expected level of permanence of the investment. For a
longer-term investment, long-term sources of funds such as equity would be used in
preference to short-term funds such as trade credit, which would be used for a short-term
investment.
Moreover the company, in common with all organisations, needs to consider the cost of
capital, including the cost of local finance. Whilst the factors affecting a domestic company
when deciding on its capital structure also need to be considered by an MNC, the decision is
made somewhat harder by the greater choice of capital available from international capital
markets, taxation and other legal restrictions (such as on dividends or the flexible repayment
of loans to parents) in the various countries in which the MNC operates, as well as potential
subsidies from host governments.
A further factor to consider is that subsidiaries may have a guarantee from the parent
company, thus permitting a higher level of debt than would otherwise be the case.
Governments will often wish to encourage MNCs to establish operations in their country,
thereby creating wealth and increasing employment. This is often achieved through grants,
subsidies, favourable loans and guarantees. Whether help is given to a business applying
for such help will be dependent upon whether its proposals qualify.
Capital gearing is the term used to measure the extent of external borrowing compared to the
total capital, with the formula for its calculation as follows:
Long term debt
Gearing
Equity shareholde rs' funds Long term debt
When taking an investment decision the gearing ratio must be monitored carefully,
particularly with regard to the needs of shareholders. They supply the long term capital for
the company and will expect a return on their investment in the form of dividends. However,
companies are not obliged to pay dividends and in poor years there may not be sufficient
funds available. Interest on loans must, though, be paid and this restrict the availability of
funds. Further, if the rate of interest increases, this could lead to a decline in profits overall
and may even mean that the returns on the investment are greatly reduced.
So, shareholders like to see the gearing ratio being lower and in their favour! In addition,
they have voting rights at general meetings and can affect major investment decisions.
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B. TRANSFER PRICING
The underlying philosophy of the process of divisionalisation and the creation of SBUs is
that, by allowing individual divisions to trade and operate autonomously, the management of
each division able to cultivate its profit motivation in a competitive atmosphere. However,
where this involves inter-divisional trading ( through an internal market), this can cause many
problems.
When a company expands into operations in other countries, it may become involved in
selling semi-finished or finished products from one subsidiary to another. This may involve a
situation where divisions supply not only the outside market, but also other divisions within
the same company, in competition with other companies for example, Ford Motor Company
supply engines for other car manufacturers. Within an internal market, the question of
pricing has to be addressed.
The price at which goods are exchanged internally is called the transfer price.
Transfer pricing is an issue both for individual subsidiaries, because the level of the transfer
price affects the profits made by the subsidiary, and for host governments, because the level
of profits made by the MNC subsidiaries in their own country influences the amount of tax
receipts for the country concerned. For some countries, tax revenue from MNEs can have a
significant effect on total national income.
The usual approach is to transfer at cost plus some element for profit contribution. The
amount of the profit contribution can be changed to give the MNC the best overall
international position, both in terms of minimising tax returns and in terms of its international
competitive position.
This is potentially a controversial area of multinational companies activities because
transfers may be made at a price which suits the needs of the group as a whole and ignores
the needs of the subsidiary or the requirements of the host country. The issues associated
are:
If divisions are to be judged by the criterion of profit and yet carry on trade with each
other, profit or some representation of it must be built into the transfer price.
If divisional behaviour is not to cause loss to the overall group, divisions may be
directed by central management to provide or sell goods and services to their fellow
group members.
Alternatively, transfer prices may be determined centrally in order to ensure
optimisation of the groups taxation policy. For example, group ABC (a multinational
concern) finds that company A is facing high taxes on profits in a certain country.
Company A can then be forced to transfer its goods and services to company B (also
part of the group) at such a low price that company A makes little profit and company B
makes a very large profit. The group as a whole gains by avoiding the taxes in the host
country of company A.
The problem is that such direction may act against maximising individual divisions
performance, compared with what would have been achieved, say, by trading with outsiders.
Determining Transfer Prices

Transfer pricing needs to meet two objectives:
(a) No divisional action must be allowed, by way of transfer price system inadequacies, to
enhance the position of the division at the expense of the corporation
(b) it is important to promote divisional managerial motivation in the profit-orientated
environment.
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Within this, there are a number of methods of calculating transfer prices:

Full cost
Where full cost is used there is an obvious danger. The user-divisions taking units of
service or commodity from a supplying division at full cost (to the supply division) will
regard this full cost as a variable cost to themselves. The more they use or buy, the
greater the cost incurred by them. In fact, the cost they regard as variable will have a
fixed as well as a variable content so far as the supply division is concerned. Now,
the user-division will have its own fixed/variable cost pattern, although some of what
they regard as variable cost is, in fact, partially fixed.
Marginal cost
This clearly points to the use of a marginal cost basis that will, however, leave the
problem of disposing of the supply divisions fixed costs. This could be achieved either
by charging them to the user-divisions in blocks (perhaps related to usage) or passing
them to the central head office for charging to the consolidated accounts, the user-
divisions receiving, in effect, a two-part tariff charge.
Full or marginal cost plus profit
Full or marginal costs could have profit additions made to them to allow
profit/investment measures to be unaffected by inter-group trading. The danger will be
that user-divisions, possibly twice or more removed, will have a cost/selling
price/discounts policy rather confused by the strata of internally added profits.
Current market price
Current market prices are the ideal solution to transfer pricing because they are
objective and related to factual situations in the outside world. Unfortunately,
however, there will be few conditions where a clear one-to-one situation will exist
between a divisions product and one in the open market. External products will
invariably have minor design or quality differences, packing charges and discount
structures, which make exact comparability impossible. In addition, where the supply
divisions output is a half-processed unit, i.e. work in progress, or some intermediate
process, such as polishing or packing, a comparable market price will not exist anyway.
Negotiated price
The above situation may lead to the use of negotiated prices, but, then, might not
individual managers spend more time and ingenuity squabbling over the negotiations
than on advancing the overall corporate effort, perhaps leading to central dictation
again?
Which method to adopt will depend on prevailing circumstances in the company, namely:
The degree of central control or freedom of action imposed upon or allowed to divisions
by the corporate management.
The existence of comparable markets for the products of the divisions at the
intermediate stages of production.
The extent to which divisions are free to buy from, and sell to, the outside market,
rather than being restricted to using fellow divisions as suppliers or outlets.
All methods of transfer pricing are beset with practical difficulties related to circumstances in
the company. Perhaps the most favourable technique is to have some two-part tariff
arrangement, where each divisions fixed costs are charged to user-divisions regardless of
their use of them. The variable costs, possibly with a profit addition, are charged on the
basis of consumption by the users.
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This suggestion, of course, tends to assume that usage is a sequential pattern with A passing
to B, and B to C, etc. Often, in practice, a reciprocal position may arise, where subsidiarys
costs are interdependent.
Also, are the fixed costs to be amalgamated with Bs and passed on? In view of the
optimising/allocation nature of the problem, a mathematical programming approach may
produce the best answer.
Reasons for Manipulating Transfer Prices

One of the most common reasons for the manipulation of transfer pricing is known as tax
planning, which involves the careful and systematic avoidance of taxes to make sure that
profits are not taxed twice (i.e. by two governments). Another reason is the fear that, if too
large a profit appears against a particular subsidiary, pressure will be applied by government
or customs to reduce prices, or by trade unions seeking large wage increases.
Another influence on transfer prices is the market conditions in which a subsidiary operates.
The family network of a large worldwide group may make possible a price war to gain a
market advantage.
Governments are always finding ways to cancel out any tax advantages a company may
discover. They can make a careful check on comparative import and export prices, and will
soon discover if transfer pricing is being allowed to distort the position. For example, in the
UK, the Controlled Foreign Company legislation was introduced to prevent transfer prices
being manipulated and tax havens used for undue tax avoidance.
Large Transfers of Funds

One of the most controversial aspects of the MNC is its ability to move enormous sums of
money between subsidiaries in different countries.
The reasons for large transfers of funds around the world include:
Funds for new investment
Payments of profit and interest
Making and repayment of loans between member companies
Payments for goods, services and expenses.
The main fear of international companies is that money will be lost due to factors beyond
their control, such as restrictions on the return of profits from a subsidiary to a parent
company, and the effects of changes in the value of currencies. This is why one of the trends
in international business is to pay the parent company as large a profit return as possible,
even if loans have to be made in order to keep the subsidiary in liquid funds.
If international trade were entirely a matter of arms length transactions i.e. between
separate and unconnected companies in different countries the movement of funds would
be easier for governments to follow and control.
(When a subsidiary in another country is not fully owned problems are likely to arise as group
objectives pull one way and those of the subsidiary the other. For this reason MNCs much
prefer to make their subsidiaries wholly owned.)
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C. INTERNATIONAL INVESTMENT DECISIONS

The criteria by which investment opportunities are selected will vary between companies.
MNCs often prefer to invest in their own domestic market, and will only go abroad if they can
secure a higher return on capital by so doing. However, sometimes the MNC will undertake
a foreign investment that is uneconomic. The main reasons for this are:
To ensure an outlet for some other aspect of its worldwide operations for example, an
oil company may construct a refinery as an outlet for its own crude oil production.
To safeguard its existing interest for example, by producing a new but uneconomic
car, in order to keep a brand name alive for the sake of a larger, successful model.
Studies indicate that many MNCs do not usually have a master plan for international
investment, but review each individual project on its merits. It is generally the viability of the
project, rather than the finance available for investment, that is the key to the investment
decision.
Factors Affecting the Investment Decision

The decision to locate, or relocate, part of an MNCs operations in a foreign country will
follow detailed research and often complex negotiations. Of the issues that will primarily
concern the management team, the following will be of particular significance:
The political, economic and currency environment, and particularly their stability, of the
country. These factors affect number of important factors, including:
(i) The stability of the market for raw materials.
(ii) Controls on the movement of product and currencies, and particularly how
difficult the repatriation of funds may be in the future.
(iii) Inflation and local taxes.
(iv) Whether it would be politically wise to have a local participation in the chosen
country.
(v) The support, assistance (and interference) of, and by, the government of the
country.
Is it best to operate as a branch or should a separate local company be created? The
answer to this question will depend on local considerations, including the tax laws of
the country concerned, as well as strategic policy regarding decentralisation of control
of subsidiaries. It may be advantageous to have a branch overseas if unprofitable,
converting it to a subsidiary when it becomes profitable. Special EU rules (for example
on mergers) can create other problems or advantages when deciding on the structure
of overseas operations.
Will the investment be temporary or permanent? For example, a temporary
investment, such as a mine, will be worked out within a finite period of time. In such
cases a loan will generally be the best method of financing, whereas for permanent
investment equity will usually be the best approach.
Where borrowing is envisaged, should funds be borrowed locally, provided through the
parent or raised through the euro markets, and what exchange risk will be involved?
What is the cheapest and safest way of providing capital?
Other aspects of the business environment such as communication facilities, the ability
to acquire an established company or whether a green field operation can be
developed, the availability and cost of suitably qualified labour and management, and
the industrial relations record of the country, and the level of competition already
established in the region.
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Entities trading internationally face particular difficulties based around different currency
units that can cause potential problems in translating one unit of currency into another.
They also have the problem of different laws, taxes, business practices and cultures
that may be incompatible with existing operating methods.
International Investment Appraisal

The assessment of the viability of overseas projects has many features in common with the
assessment of domestic projects. There are, of course, also marked differences so that
domestic budgeting techniques form only the foundation of overseas capital budgeting.
Investment appraisal in an MNC is conducted in a similar manner to the assessment of
domestic projects, using such techniques as net present value (NPV) and internal rate of
return (IRR). However, there may be differences adopted to reflect the differing nature of the
investment:
Cost of capital
The first issue is determining the cost of capital to be applied for example, by using
the capital asset pricing model or the dividend growth model. However, if the
risk/return pattern of the project is in any way different to that of the company as a
whole, then due allowance should be made by calculating a project-specific return.
Because the project is overseas based it is possible that the elements used to finance
it will be a mixture from the two countries concerned. If overseas funds are utilised
then further adjustments may be necessary due to the following:
(i) Retained earnings of the subsidiary or project that may be subject to withholding
taxes or tax deferral (which we shall look at shortly).
(ii) Local currency debt this is the after-tax cost of borrowing locally in the country
concerned:
Discount rate applied
An increase in currency and political risk may lead to the company increasing the
discount rate used to evaluate projects; or the company may use the discount rate
determined by its overall systematic risk level (if it is assumed to be unchanged by the
potential investment) and adjust the cash flows for the expected political and currency
risk. In practice, the discount rate is adjusted for political risk, because all cash flows
would be affected by adverse political circumstances, whereas currency risk may have
either beneficial or detrimental effects on cash flows and as such is accounted for their
adjustment.
Parent or project cash flows
The project must be shown to be beneficial both in the host country and its currency,
and in terms of funds remitted to its parent, in order to fully justify it, both from the point
of view of the parent company and in comparison with other (potential) projects in the
host country.
However, the cash flows that are generated by the project are not necessarily those
that will be received by the parent. There may, for instance, be exchange control
regulations limiting the transmission of funds, in which case some of the methods
outlined earlier under the unblocking of funds may be used. It is important that the
distinction between the two is understood, as decisions made on the strength of project
cash flows can be very misleading.
The factors affecting cash flows, which must be allowed for in investment appraisal,
include the following:
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(i) Exchange rates with the added complication that cash flows have to be
converted from the host currency to the domestic one
(ii Differential tax rates between those in the home and host country
(iii Royalties and fees payable out of the income, which may cause differences
between cash flows to the project and to the parent company
(iv) Restrictions imposed on the flow of funds from subsidiary to parent, which may
alter the complexion of the project from the parents point of view
(v) The different rates of inflation between the host country and that of the parent.
Repatriation of Profits
The aim of investment in overseas subsidiaries is to increase group profits for the MNC and
central to this is the ability to transfer value through the group.
Those companies with inter-divisional trade need to determine the level at which to set
transfer prices for goods and services provided by one group member for another. The basis
on which the transfer price is set will affect the profit share of the group, and should be
determined in order to maximise group profits by developing the motivation of subsidiaries
and circumventing any repatriation controls imposed by the host government.
Transfer prices of goods and services provided by group members for each other are one
way of obtaining cash returns from an overseas subsidiary. Others include:
Royalties charged to the subsidiary for making goods, or providing services, for which
the parent holds the patent.
Management charges levied in respect of services provided by head office.
The subsidiary may borrow from its parent, and thus pay interest charges to it.
Dividends that can be paid to the parent on the equity provided by it.
The choice of method of obtaining cash returns, and level received from each (often by
manipulating the various factors, such as the rate of interest for parental loans), will be
determined by the requirements of the parent and the subsidiary, any exchange controls
present and the perceived risk of the investment.
This manipulation can make the interpretation and evaluation of the accounts of MNCs and
their subsidiaries extremely difficult. The problem is exaggerated by the differing accounting
policies used in different countries, the differing choices made as to which exchange rates
(actual (and at what date) or predicted) to be used in setting forecasts and translating
accounts into the parent companys currency, and the different economic and political
circumstances a subsidiary may be operating in.
Overseas Taxation
The impact of overseas taxation can play an important part in the investment decision, as
noted above.
Withholding taxes, for instance, will be met quite regularly. These are taxes collected from
foreign corporations or individuals on income earned in that country. A UK resident in
France, for instance, may find that any dividends received could be subject to a withholding
tax of 20% that is then paid over to the French revenue authorities. Credit is usually given in
the home country for any taxes paid abroad. Thus, if a UK resident was in the 40% tax
bracket and had suffered the 20% withholding tax above, he/she would be liable for 20% of
UK tax on that particular income. It is often the case, however, that if the withholding tax rate
exceeds the home country tax rate then no credit is given for the excess tax paid abroad.
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Thus, double taxation relief is available in income earned abroad. An important strategic
consideration that must be taken into account when setting up an operation overseas is
whether to operate it as a branch or subsidiary. If the former, then UK tax is paid on income
which is repatriated, and there may be cash flow advantages in manipulating dividends to be
taxed in a different accounting period.
If income from abroad is not repatriated then it will be subject only to foreign tax and not to
withholding tax or UK tax.
If the profits of an overseas operation were transferred to a tax haven they would not be
subject to UK tax, but the withholding tax would be deducted. A tax haven is a country where
tax on resident companies, foreign investment and withholding tax paid on dividends paid
overseas are low. For these reasons they are often used by MNCs as a means of deferring
tax prior to the repatriation of funds. For this to be successful, the tax haven requires
adequate financial services, a stable exchange rate and a stable government.
UK companies may also consider transferring residence in order to avoid paying UK
corporation tax (this is subject to various Inland Revenue rules).
Foreign Direct Investment

There are several reasons why a company may grow via foreign direct investment (FDI) and
become a multinational. Often, in making the decision, financial considerations are
outweighed by strategic reasons. The common reasons quoted for FDI are listed below, but
you should note that there is often more than one reason why a company may decide to
invest overseas:
The provision of raw materials such as oil and minerals , many MNCs base part of
their operations at the location of their raw materials, for cost or logistic reasons, or in
order to comply with the political and legislative wishes of the host government
The provision of cheap and productive sources of labour often cited as the reason
given for many MNCs locating in the Far East and Mexico
Location in the market for the companys goods for example, the major Japanese car
manufacturers of Honda, Nissan and Toyota have located in the United Kingdom in
order to have easier access to the EU market (as well as there being an existing skilled
labour supply a legacy from a much larger domestic car industry).
Location in centres of knowledge for example, several Japanese and European
companies have purchased companies in the US (often located in Silicon Valley) in
order to gain access to technological knowledge in the field of electronics, and
Microsofts Research facilities in Cambridge is an example of a company investing in
Britain for this reason
To permit diversification opportunities not available in the companys domestic markets
To allow growth if there are limited opportunities for the company at home such
growth can take the form of diversification, horizontal or vertical integration.
For companies based in countries with unstable or unpredictable political regimes, FDI
may be a way of ensuring safety from interference in, or expropriation of, their
business. Such fears led to FDI in Australia and North America by Hong Kong-based
companies prior to its repatriation by the Peoples Republic of China.
To avoid import controls or to obtain grants and concessions.
The most common forms of investment abroad are:
The takeover of, or merger with, a company already established in the target country.
This option has the same advantages and disadvantages as a domestic takeover in
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terms of established markets, production and distribution facilities, but often poor
performance, financial status and management.
Joint ventures with an overseas partner local to the area where investment is to take
place, either for a fixed period of cooperation on a defined number of projects, or a
continuing long-term joint-equity venture. Joint ventures are common in the Middle
East , India and Japan where legislation prevents or makes difficult 100% foreign
ownership of companies. It is also becoming increasingly popular in areas with high
research and development costs such as the aerospace and car industries.
Companies may also start up overseas subsidiaries or branches from scratch. This route
reflects the same advantages and disadvantages as domestic start-ups with the additional
problems/opportunities that may occur as a result of differences between the two countries
concerned.
1. Car manufacturers such as Toyota and Kia (from South Korea) are among many
companies that have undertaken foreign direct investment in the United States. What
are the benefits to them in doing this and what are the implications for them regarding
taxation?
2. The enlarged Kraft Foods Group (including Cadburys) have significant global
investments. What have been the main influences on these investments and what
sources of funding have been used?
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183
Chapter 11
Implementation, Evaluation and Control
Contents Page
Introduction 184
A. Managing the Implementation Process 184
B. Performance Evaluation and Control 185

Difficulties in Measuring Performance 185
Evaluation Criteria 187
Use of Critical Success Factors 187
Control Systems 188
C. Techniques of Performance Management 189

Self-assessment/Business Audits 190
The Learning Organisation 190
Benchmarking 190
The Balanced Scorecard 191
The Application Of New Technology 193
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184 Implementation, Evaluation and Control
INTRODUCTION
Planning is central to the determination of effective strategy, and we have seen how the
development of business plans works through the analysis of the environment, the
identification of strategies and the specification of objectives for implementation to achieve
the organisation's mission and goals. The final stage of the planning process, which is not
usually thought of as planning at all, is the monitoring of the effectiveness of those plans.
However, planning is not complete without some form of review which considers how
successful the process has been - in terms of both the plans and their implementation.
A. MANAGING THE IMPLEMENTATION PROCESS

Good implementation requires different skills from good planning. Many otherwise excellent
international business plans come to nothing because they are not effectively implemented.
Effective implementation requires several aspects to be managed effectively and we shall
consider four key aspects here.
People management
The implementation of business strategies and plans takes place through people.
Because of this, the international business must have the necessary skills in managing
people. One key skill in this area is the ability to empathise with the views and
problems of other individuals. All business activities are fraught with uncertainty and
risk and can therefore be very stressful, particularly where change is involved as a
result of implementing new strategies.
The international business must be aware of these issues and be able to see and
anticipate problems as others see them, able to direct individuals whilst at the same
time being fair in dealings with staff and allowing those members of staff to feel
comfortable in approaching management.
Incentives and rewards
Our second factor affecting the implementation of international business strategies
could also be said to be a people management issue, in so much as it relates to
systems for rewarding, and therefore encouraging or motivating, staff charged with
implementation activities.
It is essential that incentive and reward systems in an organisation be geared to key
performance standards in a business plan. So, for example, if the business plan
requires a long-term perspective in terms of, say, increasing market share in a country,
it is important not to have incentives and reward systems which are geared to short-
term success.
Sometimes, because the development of international business is essentially a team
effort, incentives should be group-based rather than individual-based. Incentives
should be seen to be fair by all those affected by them and should seek to encourage
extra performance.
Communications
Again, related to the people aspects, effective implementation depends on good
communications throughout an organisation. Staff must be kept informed of objectives
and plans and any changes that affect these. Communications should be both
horizontal and vertical and should make maximum use of both formal and informal
channels.
Problems of communication can be exacerbated in international business due to, for
example, geographically distant operations or sometimes an insular headquarters.
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Implementation, Evaluation and Control 185
Regular meetings, status reports, newsletters and so on should be used to

communicate. Increasingly, computerised information and decision support systems
are helping to facilitate improved organisational communication in international
business.
Organisational structures and design
Organisational structures for international business were covered in an earlier chapter.
We saw there that there are several different types of organisational structure for
international business and considered their relative advantages and disadvantages.
Different organisational structures have different implications for implementation, with
some structures being more effective in this respect. So, for example, more
decentralised and flexible organisational structures are felt to increase the
effectiveness of implementation as they tend to result in more functional
communication and teamwork. Sometimes a company may require special
organisational structures specifically to implement new international ventures. Such
tasks teams may be composed of individuals from different functions of the
organisation who are brought together to facilitate implementation.
These, then, are some of the important considerations for the organisation when trying to
implement international business plans. Failure to manage these aspects effectively can
give rise to several problems including, for example:
Decision making being delayed or deferred
A lack of speed in responding to changing business and environmental circumstances
Poor motivation and high staff turnover
Increased conflict and lack of co-operation
Increased costs and inefficiency.
B. PERFORMANCE EVALUATION AND CONTROL

In this section, we start by considering the process of evaluating business performance and
in particular some of the more conventional approaches to, and difficulties of, evaluation.
Difficulties in Measuring Performance

It is difficult to arrive at reliable and fair ways to measure performance in the international
arena. The reasons for this are as follows:
Markets are not equal between one country and another markets vary considerably in
size, in potential, in the variety of competitive forces that exist and in the ways that
potential buyers react to changes in business strategies
The strength of the company in different markets is not consistent many companies
have a long-term established presence in some markets, but not in others, and may
have used a disproportionate amount of resources in certain markets. It is, therefore,
difficult to disentangle the measurement of current performance from what has
happened, or is happening, elsewhere
Performance by the company in a particular market is influenced by various
interactions at different levels in the company. This is not a problem for companies with
modest levels of sales, but for large companies with extensive international operations,
the interactions are considerable. For some companies there are three or more layers
within the company, as shown in Figure 11.1.
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Figure 11.1: Layers of the company
World Region
level, e.g.
Europe,
America, Asia
Company at
the
headquarters
corporate level
Country level
We have previously examined important strategic decisions such as those that that
relate to country selection, the mode of market entry, and standardisation and
adaptation. If we apply these at the three levels, we can imagine that sometimes the
managers at a country level might argue strongly for an adapted approach, but that the
corporate and regional level might impose a global standard or a regional standard with
very little country modification being permitted.
The evaluation of international performance is significantly influenced by changes in
foreign exchange rates. If evaluation is proposed on sales revenue or profit
contribution, it is certain that some of the figures that are calculated will merely reflect
exchange rates. Obviously, in evaluation it is important to measure the right things.
The company has no control over changes in exchange rates. What the company
needs to find is a measure that can be used to compare cross-country performance
that is largely independent of currency changes.
We can illustrate some of these problems by reference to market share. This is often
recommended as a basis for evaluating performance, particularly as it has been used by
many companies as an objective of long-term strategic planning in international markets and,
indeed, forms the basis of a number of strategy formulation models (for example, the BCG
Growth-Share Matrix). However, there are problems in measuring market share accurately,
including the following difficulties.
Within country markets it is difficult to find a 100% accurate method. Most markets are
measured through marketing research techniques and thus suffer statistical errors. In
international business, there are further problems that relate to the variability of
marketing research techniques used in different countries. This is very much the case
in LDCs and this will result in critical statistical errors.
Business statistics based on government data might be influenced by incorrect
reporting to minimise tax returns, by unhelpful ways in which information is classified in
sub-groupings, or by unreliable import/export data. This is likely to be the case if cross-
border smuggling takes place and where there is a high incidence of black market
activities.
Market valuations will be influenced by the foreign exchange problem. This does not
affect the size of the market share, but it does affect the value of that market share.
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Growth-share matrices are dependent on market growth rate and relative market share
data. It might be possible to estimate growth rates without necessarily having reliable
data for market size or relative market share.
Evaluation Criteria
It is most unlikely that a company will be able to develop evaluation methods that do not
entail some problems. It is equally certain that relying on just one form of evaluation will
provide an incomplete picture of company performance. For example, it is quite usual for
short-term sales to increase, but for short-term profits to decline, or even become losses,
when a new product is introduced, whereas over the longer term, the company hopes to
show good profit increases. Thus, companies will vary in the number and range of
evaluation criteria used.
The most likely ways in which performance will be evaluated are:
Comparing performance against the agreed business objectives.
Comparing performance against industry averages and against competitors, including
(despite all the above comments) market share.
Profitability. This is the basis that most companies use, at least as one measure of
performance, since it is the key measure at corporate level. There are, though,
obvious problems in using profitability in a comparative way foreign exchange
variations, the way in which transfer prices have been calculated and different country
taxation structures all interfere with accurate inter-company profit performance across
country boundaries.
At a subsidiary company level, companies will use profit return on capital employed,
profit return on sales and similar criteria. It is usual for this to be assessed at a pre-tax
level, because after-tax includes the tax element over which the local manager has no
control.
Measurements of quality, customer satisfaction and shareholder value. The first two of
these are of particular interest to business as both quality issues and customer service
and satisfaction levels have become more and more important in recent years, both in
domestic markets and internationally.
Most measurements will be on a quantitative basis and ratio analysis is frequently employed
for example, in the ratio of marketing costs to sales revenue for each of the different
elements of the marketing mix. Performance criteria that relate to sales and profitability will
be communicated through the company accounting and financial control systems. Those
that relate specifically to measures obtained through, say, analysing market performance will
be communicated through reporting systems based on research, often on a monthly,
quarterly or half-yearly basis.
Use of Critical Success Factors

A critical success factor (CSF) is anything on which the successful achievement of a
specified objective depends whether at the strategic or operational level. It is important,
therefore, that business plans should make sure that all CSFs are identified.
CSFs will relate to the key areas of competition, upon which successful performance is
crucial. They should, though, be kept to a minimum and specified in such a way that
performance can be monitored. For most organisations, achieving their critical success
factors will need constant review of their organisational capabilities, and at least incremental
changes to ensure that they are remain compatible with the business strategy.
At IBM, defining CSFs is part of the strategic planning programme, using a consensus
approach with groups of senior managers. This takes place in the following stages:
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(a) Understand the mission

The team collectively agrees a mission statement, in no more than three or four short
sentences, which clear defines the circumstances in which the mission will have been
successfully accomplished.
(b) Identify issues which will impact on the mission
The team focuses on the mission and identifies dominant issues by listing one-word
descriptions of whatever they think will impact on the mission's achievement, by means
of a brainstorming activity in which everyone contributes. Nothing is ruled out, no
judgments are allowed, and the facilitator writes down everything so that all team
members can see it.
(c) Identify the CSFs
By referring to the list of things they believe will impact on the mission, the team
identifies the CSFs.
(d) CSF statements
These define what the team believes needs to be done to accomplish the mission.
They are not only necessary to the mission, but also, together with the other CSFs, are
sufficient to achieve the mission.
(e) List of CSFs
There should not be more than eight CSFs, and they should include a mix of strategic
and tactical factors. Absolute consensus must be obtained for those CSFs listed.
(f) Identify and define actions necessary to meet the CSF requirements
This stage involves identifying and listing what has to be done to meet the CSFs, and
defining the business processes needed to enable those actions to be successfully
carried out.
(g) List CSFs and processes
A matrix is produced which lists the CSFs and the processes relevant to each.
(h) Ensure that CSFs and processes will achieve the desired results
The team reviews each CSF to ensure it has all the necessary processes which are
sufficient to achieve the required results.
(i) Implement the action plan
The team confirms the action plan associated with the processes and sets up the
implementation programme. Monitoring and follow-up arrangements are also put in
place.
Control Systems
The analysis of performance against the above types of criteria is, as we have seen, more
difficult in the international context for a variety of reasons. This is also true of control
systems. Of particular importance here are the extra problems that result from geographic
distance that reduces the amount of face-to-face contact and gives rise to extra
communication difficulty. Furthermore, there are cultural differences that affect the
usefulness of control systems. Managers from low context cultures will have more difficulty
in interfacing with managers from high context cultures than with managers from similar
types of cultural background. This will be further influenced by the local manager/expatriate
balance and by the extent to which a real international management culture has been
achieved. In addition, country-related differences might influence performance to a greater
degree in some countries than others. These differences are difficult to isolate.
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Control systems are essentially concerned with isolating the causes of performance
problems and taking corrective action.
At the simplest level, corrective action may be just making an extra effort in implementation
for example, motivating agents or distributors to better levels of sales performance. At
another level, more resources might be required. For example, a larger marketing
communications budget might be needed, or an extra budget to fund price reductions, or to
prevent price increases, which could be necessary if there are unfavourable currency
fluctuations. In the short term, it might be advisable to reduce the level of profit contribution
in an attempt to reduce the impact of such price rises. At another level, it could be that the
strategy chosen was incorrect. This might mean that a complete review of the planning
process would have to be undertaken environmental analysis, the identification of strategic
options, the selection of the preferred strategy and its implementation.
It has been suggested that strategic control needs to take account of a number of key
elements:
Selecting the right evaluative criteria
These need to be as measurable as possible and should be limited to the most
important criteria. The criteria need to have short-term and long-term measures and to
be benchmarked against key competitors.
Achieving good strategic performance
It must be seen that top management is concerned with performance that directly
relates to the achievement of the key criteria. There must be regular reviews of
progress against the criteria.
It is essential in doing this that there is a balance between certain objectives where
conflict is possible for example:
(i) Achievement against different criteria, where there might need to be a trade-off
between the various criteria.
(ii) Achievement of short-term and progress towards the long-term strategic targets,
where, if attention is focused on the short-term, the end result may be a failure at
the strategic level.
Achieving good strategic control
It is important to achieve a high level of strategic planning. If the strategic plan is
fundamentally flawed, the control mechanisms will not be able to correct under-
performance, and the strategic planning process will need to be repeated. Control
needs to take place both through formal and informal appraisals. If things appear to be
going wrong, then top management involvement is signalled through rapid intervention.
C. TECHNIQUES OF PERFORMANCE MANAGEMENT

As we have seen throughout the different elements of international business, this is a very
dynamic and fast changing area. Organisations are constantly looking for ways to improve
the effectiveness and efficiency of their activities and this is just as true in the area of
evaluation and control as in any other area of business planning. In fact, as we shall see,
approaches to evaluation and control in international business are changing dramatically.
There are a large number of specific developments in the techniques of evaluation and
control, but the main thrust of change in this area has been two-fold:
The development of more outward-looking and much broader approaches to evaluation
and control which seek to take greater account of both customer and competitor
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considerations in the evaluation of business performance and include more qualitative

aspects than the more traditional evaluation and control techniques.
The use of new technology, and in particular information technology, that has enabled
much more sophisticated techniques of control to be introduced.
Some of the more important approaches in these areas are considered below.
Self-assessment/Business Audits
Increasingly, companies are undertaking full business audits. A business audit examines
every facet of a companys operations with regard to both efficiency and effectiveness. In
doing so, the audit acts as both a control and an input to planning activities based on a
comprehensive and wide-ranging review of a companys total business efforts.
The audit therefore covers responses to changes in the business environment and the
implications for future opportunities and threats, and assesses how valid and relevant the
companys objectives and strategies are. Obviously, an audit is a very wide-ranging
assessment of a companys business performance and needs to be done on a regular,
perhaps annual, basis using objective appraisals carried out by the audit team.
The Learning Organisation

This is not so much a technique of evaluation and control, but rather an approach with regard
to the control and evaluation process. The notion of a learning organisation centres on the
idea that, as a result of evaluation, a company should gradually and continuously learn to
perform better. In other words, the learning organisation would require fewer imposed
control procedures if it takes the time and trouble to learn from its past mistakes.
Essentially, the idea is that, eventually, in the learning organisation, imposed control
procedures will not be necessary. This does not mean to say that the company will no longer
need to measure performance, or indeed that what constitutes effective performance might
not change over time, but in the learning organisation the control process becomes one of
self-control with managers taking responsibility for their own actions and learning to improve
over time. This idea of a learning organisation leads us to consider the notion of
empowerment in the control and evaluation process.
Benchmarking
Benchmarking is essentially comparing a companys business performance against the best
in class competitors. There are a number of approaches to benchmarking:
Truly competitive benchmarking compares a companys business performance against
the best direct competitors.
Functional benchmarking compares a particular aspect of a companys business
activities, such as procedures for dealing with customer complaints, against those
organisations that are considered best in this area.
Generic benchmarking is based on comparing business practices with the best
companies in the world, irrespective of whether or not they are direct competitors.
For the international business, the benchmarking exercise should be done by comparing a
companys performance with other international businesses rather than purely domestic
ones.
Benchmarking has the advantage of ensuring that a company does not become insular in
evaluating its own performance, perhaps judging that it is doing well in terms of its business
when in fact, compared to the best companies, it is performing badly. So, for example, a
company might consider that it is effective in developing and launching new products until it
considers its best-in-class competitor who can bring a new product to market twice as fast
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and at 15% lower cost. Needless to say, many companies that have embarked on
benchmarking exercises and have compared their performance against their best-in-class
competitors have experienced a nasty shock.
Since its introduction, the use of benchmarking to evaluate performance has become
widespread. The first step in a benchmarking exercise is to determine what constitutes the
important measures of business performance. In establishing these measures, it is important
to look at customer perspectives as to what constitutes effective market performance rather
than simply consider internal measures of performance such as profits, etc. This
understanding of customers wants and needs is vital to an effective benchmarking exercise.
A company can then establish the key factors for success and proceed to measure its
performance with regard to these factors against the best practices.
Benchmarking should extend to every facet of the value chain and we should always be
looking for ways to improve competitive market performance. For benchmarking to be
effective, it is important to have the right attitude towards this process. In particular, it should
not be seen and used to expose individual weaknesses in performance in order to punish
those responsible. Nevertheless there is no doubt that the use of international benchmarking
has helped sometimes insular organisations to realise that they need much better levels of
performance if they are to compete in world markets against the best.
The Balanced Scorecard

This approach to the evaluation of performance is specifically intended to move away from
purely quantitative measures, and particularly the financial measures of company
performance. Again, important though these financial measures are, as the name of this
approach to evaluation and control implies, they are considered unbalanced inasmuch as
they do not reflect the full range of indicators of business performance. In order to address
this imbalance, it is suggested that the organisation identify key performance indicators
appropriate to the company and markets in question.
It was originated by Drs. Robert Kaplan (Harvard Business School) and David Norton as a
performance measurement framework that added strategic non-financial performance
measures to traditional financial measurements to give managers more 'balanced' view of
organisational performance.
There are four perspectives to this, as illustrated in Figure 11.2 below:
The financial perspective
The customer perspective
The internal business perspective
The learning and growth perspective.
The balanced scorecard provides a framework that not only provides performance
measurements, but helps planners identify what should be done and measured. It is also a
management system that helps organisations to clarify their vision and strategy, and translate
them into action. It provides feedback around both the internal business processes and
external outcomes in order to continuously improve strategic performance and results.
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Figure11.2: The four perspectives of the balanced scorecard
FINANCIAL
"To succeed
Objectives
Measures
Initiatives
financially, how
Targets
should we
appear to our
shareholders?"
CUSTOMER INTERNAL BUSINESS

PROCESSES
"To achieve our
Objectives
Measures
Initiatives
vision, how "To satisfy our
Objectives
Targets
Measures
VISION
Initiatives
should we shareholders
Targets
appear to our AND and customers,
customers?" STRATEGY what business
processes must
we excel at?"
LEARNING AND GROWTH

"To achieve our
Objectives
Measures
Initiatives
vision, how will

Targets
we sustain our
ability to change
and improve?"
Adapted from Robert S. Kaplan and David P. Norton, Using the Balanced
Scorecard as a Strategic Management System, Harvard Business Review
(January-February 1996)
The financial perspective

Notwithstanding earlier comments, finances are an important factor. Timely and
accurate financial data will always be a priority, and managers will do whatever
necessary to provide it. In fact, often there is more than enough handling and
processing of financial data. However, the point is that the current emphasis on
financials leads to the "unbalanced" situation with regard to other perspectives. There
is perhaps a need to include additional financial-related data, such as risk assessment
and cost-benefit data.
The customer perspective
This perspective recognises the importance of customer focus and customer
satisfaction in any business. Other important measures of performance are likely to
encompass aspects such as customer retention levels and service levels. These are
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leading indicators if customers are not satisfied, they will eventually find other
suppliers that will meet their needs. Poor performance from this perspective is thus a
leading indicator of future decline, even though the prevailing financial picture may look
good.
The business process perspective
This perspective refers to internal business processes. Measurements based on this
perspective allow the managers to know how well their business is running, and
whether its products and services conform to customer requirements (the mission).
The learning and growth perspective
This perspective includes employee training and corporate cultural attitudes related to
both individual and corporate self-improvement. In a knowledge-worker organisation,
people the only repository of knowledge are the main resource. In the current
climate of rapid technological change, it is becoming necessary for knowledge workers
to be in a continuous learning mode. Metrics can be put into place to guide managers
in focusing training funds where they can help the most. In any case, learning and
growth constitute the essential foundation for success of any knowledge-worker
organisation.
The Application Of New Technology

Information technology is changing the process of evaluation and control by opening up new
possibilities for information acquisition and analysis. Some of the more important
developments in this area are as follows:
The computer has facilitated the growth of sophisticated data collection and handling
systems that facilitate more effective evaluation and control. Using these systems, the
international business can increasingly speed up the control cycle. Information is
available in real time, which enables the business to respond almost immediately to
any adverse trends.
In many companies, computer technology and databases are combined to provide
decision support systems (DSSs), which allow managers to manipulate and analyse
data at will and act accordingly. Again, such data and decision-making can be done
on-line. Associated with DSS is the use of increasingly sophisticated software
programs to assist managers in their planning and control processes.
Developments such as Extranets, Intranets and the Internet have facilitated improved
communication both within the company and between the company and the other
members of the value chain. This has led, once again, to much speedier on-line
decision-making. This is particularly important in international business where
distances are greater and traditional methods of communication are sometimes
inadequate.
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1. Looking at the Delta Airlines case study in Chapter 1, what are the critical success
factors in the international aviation industry?
2. For the Bombardier Transportation Division (December 2010 examination). suggest an

appropriate performance measurement framework.
3. Conduct a balanced scorecard analysis with regard to Marks and Spencer to show its
importance in enabling them to assess its performance.
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195
Chapter 12
Management and Change in International Organisations
Contents Page
Introduction 196
A. The Dynamics of Change 196
B. The Driving Forces of International Change 196

Pressures from the External Environment 197
Pressures from the Internal Environment 198
C. The Nature of Change 199
D. The Process of Change 201

Lewins Force Field Analysis 201
Planning Change 201
Lewins Three-Step Model of Change 203
Change Agents 204
Overcoming Resistance to Change 205
The Role of Managers 206
E. Organisational Culture and Change 207

Managing Cultural Change 209
The Importance of Innovation 209
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196 Management and Change in International Organisations
INTRODUCTION
All organisations are subject now to almost constant change in their environments and this
means that they are also under constant pressure to change their operations, often in
fundamental ways, to survive and prosper. In this chapter we consider where the pressures
for change come from and how organisations can manage the process of change itself.
A. THE DYNAMICS OF CHANGE

Organisations are dynamic enterprises that are constantly changing to be able to cope with
changing external and/or internal environments. The international aspect adds a further
dimension and exposure to change. The management of change is difficult irrespective of
whether that change is minor or major.
The change process starts with the recognition of a need to change, resulting from
understanding the implications of changes in the external and/or internal environments.
Pressure comes from these environments for the organisation to adopt a new position. The
organisational response to recognition that change is required will be to define that new
position in terms of new goals, strategies and objectives, and finally new activities and
methods of operation. This involves specifying:
New working practices, in respect of the existing output or to accommodate new
outputs; and/or
New management structures, involving changes to the way in which authority and
responsibility are distributed throughout the organisation; and/or
New approaches to markets and servicing the needs of customers.
In theory, it is managements prerogative to introduce and impose the new position.
However, this would require complete compliance from the workforce affected and this is
highly unlikely. People are, in general, resistant to change where they do not see it as
offering greater satisfaction, particularly where there is any uncertainty about the outcome.
For change to be effective, the people affected must accept the new position before they will
amend their working practices and behaviours to that required.
To achieve this, management needs strategies for change, which will effectively move the
organisation from the present position to the desired new position. There is a range of such
strategies, which involve overcoming resistance to change through a process of involvement
and participation among those affected, such that they share the goals of the new position.
Increasingly, in recognition of the need for continual change in response to a turbulent
environment and the fact that there will never be satisfaction with the current position,
organisations have attempted to build in some degree of permanent flexibility to
accommodate the ability to change. Organisational development is a process whereby
certain change strategies are institutionalised into the management of the organisation to
allow change to occur, so providing the means to identify and respond to environmental
pressures and adapt organisational practices and behaviour on a continual basis.
B. THE DRIVING FORCES OF INTERNATIONAL CHANGE

Certain forces in the environment act as long-term drivers of change. The two main forces in
recent years have been rapid changes in technology, leading in turn to shorter life spans of
such technology, and the need for lower costs and increased efficiency in the face of
increasing competition, often achieved by economies of scale. In addition, globalisation of
markets has led to world-wide searches by companies to obtain skilled labour, raw materials,
total market share, etc.
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Management and Change in International Organisations 197
Nestl, for example, the world's biggest food company, improved sales growth by over 5% in
the first half of 2001. This was achieved by means of what they termed their "Globe" project,
which was aimed at increasing business efficiency by increased spending in launching new
products as well as the planned acquisition of other companies in the food sector, particularly
the mineral water and nutrition businesses.
Organisational change comes about as a result of a change in strategy. As we have seen
earlier, strategy is determined by organisational goals and policies, and changes in these are
likely to be a reflection of pressures originating in the environment of the organisation, both
external and internal. The extent to which these pressures act as driving forces for strategic
change will be a function of two forces within the decision-making structures of the
organisation:
the strength of the threat posed to the existing goals and strategy and/or the strength of
the opportunities presented for furthering the existing goals.
how these are recognised by decision-makers the threats and opportunities need
firstly to be recognised, but also, crucially, that recognition needs power backing within
the decision-making structure such that they are converted into driving forces.
Thus, understanding the pressures requires effective environmental analysis action within the
decision-making structures to effect a change in strategy.
Pressures from the External Environment

The external environment encompasses both the general external environment which we
can examine through the PESTLE analysis seen in Chapter 4 and the specific environment
of the market within which the organisation operates.
Political/legal pressures
These arise from changes in the direction of government policies which can affect the
way in which regulations are interpreted (for example, in relation to planning
permission), the pattern of public expenditure and the economic climate and the
expression of these changes in legislation.
Legislative changes have a considerable direct impact on organisations. Examples
include employment law, health and safety requirements, data protection legislation,
and environmental measures such as European Union packaging and recycling
directives.
Economic pressures
These arise from changes in the economies of the countries in which the organisations
operate. In the past, this might only have constituted the home economy but, as
business becomes increasingly globalised, organisations are more affected by
economic happenings around the world. In 2008, for example, risky lending by US
banks to domestic customers (the so called Ninja mortgages) led to a worldwide credit
crisis as a result of financial markets being globally linked.
To an extent, economic changes interact with political changes, in that governments
determine national economic policy such as interest rates, currency exchange rates
and taxes that have an effect on economic activity affecting businesses.
Social/demographic pressures
These arise from changes in such factors as birth and mortality rates, social tastes and
fashions, and public attitudes. For example, the UK has an ageing population as the
birth rate declined sharply after the 1950s. Such changes have affected product and
marketing decisions, so that many businesses are now targeting the affluent over-60s.
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Changes in social tastes are often quite subtle and not immediately discernible, but do
have an impact on businesses. Public attitudes towards green issues and ethics in
business have also impacted on organisations. Also, attitudes towards the treatment of
different sections of the population; particularly women, ethnic minorities and disabled
people, have radically changed since the early 1990s. All of this has been reflected in
employment law, policies, internal relationships and even the use of materials for
packaging products.
Technological pressures
This has been the area in which most change has taken place. Continual innovations
in communications and information technology provide the means to improve efficiency
and open up new approaches to the conduct of business for example, the availability
of personal computers, laptops and portable telecommunications linked to the Internet,
company intranets and sector wide extranets has fundamentally changed working
practices and has changed the ways in which business is done, opening up worldwide
markets and increasing the speed of communication. This has greatly enhanced the
efficiency and effectiveness of managers especially on a global level.
These changes often seem to be the most difficult to adjust to because of the speed of
change and the potentially revolutionary and radical effects the new technologies can
have on jobs, skill requirements, and keeping up with competitors.
Market pressures
These arise principally from customer demands and the competitive environment.
Organisations must react to these pressures and maintain at least some foothold in
their markets, or they will cease to exist.
Customer pressures reflect the way in which the publics expectations of both products
and the way in which they interact with the organisation are changing. Thus, there has
been a move in many areas of commerce and the public services for the voice of the
consumer to be recognised and products to meet their needs, rather than acceptance
of what the organisation may feel are appropriate products. This development of
consumer power has been particularly felt in the service sector, but may also be seen
in terms of the quality and price of all products that customers are prepared to accept.
The actions of competitors are also a significant force, since organisations have to
compete with other organisations offering the same or substitute products. Thus,
competitive advantage becomes a priority and where one competitor has established
such an advantage, all others in the market must adopt similar actions or innovate to
develop their own.
The market environment has been characterised by intense competition in recent years
and this increasingly being felt on a global scale.
Pressures from the Internal Environment

Assessment of the way in which the organisation is currently operating as evidenced by
performance in respect of existing objectives will exert its own pressures in the form of the
identification of strengths and weakness. Change will be required to build on strengths and
resolve weaknesses. In addition, though, there are other forces at play in the organisation,
which may drive the organisation to change. These are in respect of the demands of
external stakeholders such as shareholders.
Performance
The extent to which an organisation is currently achieving its objectives will naturally be
a driver for change. This is most clearly felt in respect of under-performance, indicating
that the current operational strategies and plans are not effective in delivering the
required results and, therefore, that some change is needed either in respect of the
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strategy and objectives or, if these are sound, in the way in which operations are
designed to achieve them. Note too, though, that over-performance may also be
significant, in that it shows particular strengths which it may be possible to apply in
other areas to achieve similar results. With the improvements in communication and
technology generally as noted above, the performance of international organisations is
monitored continuously and any signs of decline in performance will inevitably lead to
change.
Employee demands
The employees of an organisation are an important stakeholder group and their
interests, and particularly the way in which they may be expressed and promoted,
represent significant pressure that needs to be responded to. The interests of
employees are often thought of purely in financial terms, through demands for
increases in pay, but there are also strong demands for changes in working conditions
and activities, which are seen, as basic to their satisfaction. The commitment and
motivation of staff may well be seen as critical success factors in themselves, and
attention needs to be paid to these pressures.
Innovation
Innovation is defined as the development of new ideas or products, which have an
impact on the operational procedures, and practices of the organisation and its outputs.
These may develop inside the organisation itself, perhaps in a research and
development division; but they most often occur outside the organisation and are taken
up by it through the identification of new applications relevant to the organisations own
circumstances.
This is slightly different to the reaction to competitive pressures. It refers to the
capability of the organisation to develop its own innovations which will provide
competitive advantage. Not all such innovation comes from deliberate searching for
new products, but may arise naturally from the actions and concerns of staff in
identifying possibilities.
Any or all of the above pressures may be a driving force for organisational change.
However, we must also note the way in which the strategic reaction to them may itself bring
about clearly identifiable drivers. These may be seen in the form of strategic imperatives
which underpin the direction of the organisation. Chief among these is the imperative of
quality, where the introduction and maintenance of quality as an organisational driver implies
substantial change to the input, operational and output requirements of an organisation.
It is common for organisations to react to pressures emanating from the environment.
However, the problem with reactive management is that the organisation is always behind
the game, trying to catch up with events elsewhere. What is more effective is for
organisations to constantly scan their environments in order to try to anticipate and predict
change so as to be more proactive and hence more in control of events.
C. THE NATURE OF CHANGE

The problem for many organisations is not that they need to change, but that they do not see
any need for change. This is especially true for organisations which have been successful in
the past and cannot see why they should change what they see as a winning formula with
which everyone has become safe and comfortable. Gardner says of this phenomenon that:
Most organisations have developed a functional blindness to their own defects. They
are not suffering because they cannot solve their problems, but because they cannot
see their problems.
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And Galbraith, the famous economist, comments that:

Faced with the choice between changing ones mind and proving that there is no need
to do so, everybody gets busy on the proof.
Thus, one of the most typical initial effects on organisations of the need for change is to deny
that it is necessary!
However, sooner or later the organisation has to react to the changes in the business
environment and make internal changes. This will almost always necessitate changes to
operational and administrative systems, structures and procedures.
Change may sometimes be forced upon organisations by a sudden change of
circumstances, but in most circumstances there is some control over the pace at which
change occurs. As far as a general approach to introducing change goes, there are two
basic possibilities:
The earthquake approach, where changes are made in the shortest possible period.
The spread approach, where change is staged and each new function/process is
allowed to settle in before the next one is introduced, thus spreading the whole change
over a relatively long period.
The earthquake approach is quite common, usually coinciding with the appointment of a new
manager, a merger of two companies, or a move to a new site. The main advantages of this
approach are that it minimises uncertainty about the future and enables all the problems
inherent in change to be addressed together. Also, when carefully managed, it can create a
dynamic and exciting environment, provided that the organisational culture for innovation and
dynamism is already present. If this is not the case, this approach can easily destroy
harmonious and productive relationships. Rapid changes are often perceived as threatening
and, although the timescale may leave little room for the build-up of resistance, in the longer
term resentment and suspicion may lead to future problems.
In contrast, the spread or incremental approach minimises the change at each stage and this
is likely to be more manageable. In addition, for most people, this incremental approach is
more likely to win support more quickly by allowing time for communication, questions and
reassurance. However, time may allow resistance to build up and barriers may need to be
overcome at each stage. The ability to use this approach will depend upon the nature of the
change being implemented some types of change cannot be approached in this way.
Timing is just as important as speed. Actions need to be taken at a time appropriate to both
the challenge facing the organisation and the acceptability of the outcomes to those affected.
The outcomes of the change need to be seen as appropriate to the challenge in order to
maintain credibility, and this will require a period of reflection to devise such outcomes.
There are often hidden challenges associated with change. It would be rare for all the effects
of a change to be predicted with 100% accuracy, and in most cases a period after a change
is required for adjustment and consolidation so that minor difficulties can be addressed. The
bigger the scope of the proposed change, then the greater the risk of unpredicted difficulties
will be. Thus, in considering issues of time associated with change, the whole process must
be considered, not simply the change event itself.
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D. THE PROCESS OF CHANGE

Lewins Force Field Analysis
A good point to start is Lewins force field analysis developed in the late 1940s. Simply put,
this states that all organisations are subject to competing forces in respect of change:
driving forces compelling change, which arise mainly from the external environment
of the organisation (both general and specific), but also from the internal environment
in terms of performance results and aspects of the organisations resources; and
restraining forces, which seek to resist change and maintain the status quo, and
here we can identify such features as organisational inertia, vested interests of groups
and the fears of individuals, etc.
Lewin maintained that the present state of any situation is an equilibrium between the forces
for change and the forces resisting change. This represents the status quo.
This position may be shown diagrammatically as follows, with the strength of the forces
represented by the length and thickness of the arrows.
Figure 12.1: Force field analysis
S
T
A
T
Driving U Restraining
forces S forces
Q
U
O
To change the status quo to a new desired condition, it is therefore necessary to increase the
driving forces, to decrease the restraining forces, or to do both. Although managers tend to
think in terms of increasing the driving forces, such increases, according to Lewin, are likely
to provoke a corresponding increase in the resistance forces. Hence, movement towards the
desired state is achieved more easily by reducing the resisting forces, rather than by
increasing the driving forces. In other words, the best way to get the change accepted is to
identify those things/persons which are resisting and look for ways of satisfying their needs,
etc.
The pressures for change may be so strong that continued resistance threatens the very
existence of the organisation itself. Where the driving forces are strong, accentuating them
may be an effective strategy for overcoming resistance.
The identification of all the forces, their strengths and how they may be modified provides a
diagnostic tool which can help in developing the key actions which need to be taken in order
to solve the problem of introducing the change.
Planning Change
Change presents a threat to the status quo and powerful forces will exist in any organisation
to resist the implications of this. Management needs, therefore, to treat change in the same
way as other decisions and adopt a systematic approach to considering all its aspects before
implementing the agreed strategy in a planned manner.
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(a) Identify the required changes

Organisational change is a response to new goals or strategies, themselves arising as
a response to changes in the environment. This will give the direction to change, but
that general direction needs to be made specific through three stages.
Respecification of objectives to provide the basis for planning. This will involve
setting timescales within which the changes are required to be completed, such
that the new goals and strategies may be fulfilled.
Careful analysis of the current position and identification of the factors/elements
which are no longer appropriate in meeting the objectives. This may be in terms
of activities, methods of decision-making or in the behaviours (or, indeed,
numbers) of staff.
Specification of the new position the outcomes of change in relation to those
aspects of the current position which are no longer appropriate. This will involve
drawing up detailed plans for revised operational activities and management
structures, and establishing exact requirements in terms of behaviours.
(b) Identify and involve those affected
Organisations are made up of people and, as we have seen, change will affect them in
many different ways. It is generally agreed that staff have the right to know of changes
which will affect their working lives at the earliest opportunity at which it is feasible to do
so. This may be constrained by issues of confidentiality and sensitivity, and concern
over what form resistance may take. However, staff will have to know in the end and it
is more than likely that the informal channels of communication (the grapevine) will
carry elements of the news anyway.
It is, therefore, beneficial in the long run for management to establish open
communication with those affected, keeping them informed and seeking their ideas and
suggestions for strategy and implementation. In this respect, this stage may run
parallel to the first stage and certainly continues through those that follow.
(c) Identify and select the best overall strategy
Management needs to consider the best way of implementing the changes the
means by which the operational outcomes identified may be brought about. Initially,
this will involve agreeing strategies which will overcome any resistance to change.
There are a number of models and approaches available to draw on in developing the
overall parameters for a plan of implementation. We shall consider these in the next
section of this chapter.
(d) Draw up and implement detailed plans
Within the agreed strategy, the exact means by which the change to the new position is
to be achieved must be established. This will involve decisions on the length of the
changeover period and the programmes necessary to train staff in the required
activities and behaviours. Control of this process is essential since the credibility of
management may be affected by the way in which plans are implemented.
The financial costs need also to be addressed. Change can be expensive, but is rarely
an area in which savings may be made, since such savings are likely to be outweighed
by the costs of not implementing change effectively, both financially and in terms of
goodwill among staff and external stakeholders.
(e) Review and evaluation
As in any process there should be a review stage in which effectiveness is evaluated.
There are two aspects to this:
The effectiveness of the new position in achieving the required objectives.
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The effectiveness of the process itself in enabling a smooth transition with

minimal disruption to operations and the morale of staff.
This rational model of the change process is similar to the overall approach to planning that
we discussed in an earlier chapter and, as such may be criticised on the same basis that it
does not reflect the reality of incremental change and the emergence of change strategies,
rather than their deliberate planning. However, it provides a useful structure to understand
the different elements involved in the process and is also, perhaps, a more valid description
of what actually happens (at least at the operational level) than was the case with strategic
planning.
Lewins Three-Step Model of Change

Lewin worked on assessing the extent to which organisational change might be resisted by
members of the organisation, notably employees and managers, as we saw earlier when
considering force field analysis. His work on group dynamics has resulted in what is known
as Lewins Three-Step model, which is frequently used in change programmes.
Introducing a programme of change into an organisation tends to arouse expectations in
those involved; and so a subsequent failure to come up with the goods can lead to a state
worse than it was before the innovation, because of these hopes and expectations not being
realised. Therefore, Lewin considered that attention should not simply be focused on the
change itself, but should address what happens both before and after.
The three steps of the process are unfreezing, changing and refreezing.
Step 1: Unfreezing
The first step is to create the motivation for change in the workforce. This part of the
process is often neglected and is associated with breaking old patterns of behaviour
the existing culture so that new patterns can be established. People should know
why they are required to change and be committed to it (or at least understand the
need for change) before they can be expected to implement change.
To unfreeze the resistance to change, managers must increase the tension and
dissatisfaction with the present, and enhance the desirability and feasibility of the
alternative. This stage is therefore associated with the communication process, and
should incorporate such matters as
The reason for the change
The benefits to the organisation likely to accrue from the change
Who is involved
The benefits to individuals from the change.
Step 2: Changing
Change is concerned with identifying what the new behaviour/process/procedure is or
should be, and encouraging individuals and groups to adopt the new behaviour, etc. It
involves the development of new responses by staff, based on the new information
being made available to them, and moving them towards the new culture as necessary
to fit the strategic requirements of the organisation.
Step 3: Refreezing
This final stage encompasses consolidation or reinforcement to integrate the changes
made and stabilise the new culture in order to prevent people slipping back into the old
one. Ideally, reinforcement should be positive in the form of praise or reward for
adapting to the new circumstances, but occasionally negative reinforcement, such as
sanctions applied to those who fail to comply, may be imposed.
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Some of the ways of reinforcement include:

Setting up employee suggestion schemes
Giving staff a greater input into the decision-making process
Implementing schemes which reward good effort, such as staff member of the
month
Creating team spirit through company identification schemes such as logos,
advertising T-shirts, etc.
Producing company newsletters.
Making managers more visible, for example by open door policies.
The process as a whole is achieved through leadership, communication, education and
training. The hearts and minds of employees can only be won over by good leadership and
training. Effective training can be used to create a major change in the attitude of
employees, which must then be made permanent by creating the necessary structures,
procedures and incentives to support the new culture.
Change Agents
In chemistry, the speed of a chemical reaction can be increased by the use of a change
agent or catalyst. Such a catalyst increases the rate of the chemical reaction, but is itself not
used up during the reaction. It is used over and over again to speed up the conversion of
reactants to products. Different reactions need different catalysts.
In a similar way, organisations can speed up and facilitate the change process by the use of
change agents. These may be classified into three groups.
New blood or new ideas
This is the process of developing new ways of thinking and new approaches by
introducing forces for innovation into the organisation. This can be achieved either
through promotion or retraining of existing staff (and training is likely to be an important
element of any change programme) or by bringing in people from outside, by
recruitment into key roles or by the use of external consultants. Change agents can
also be the formation of task groups made up of existing staff (with or without external
advisers), quality circles, etc. The practice of downsizing reducing staffing numbers
can also have this effect in that new opportunities are opened up and new power
relationships develop.
Structural or systems change
This is the reorganisation of existing functions, processes and procedures. This has
been a preferred technique by central government in respect of certain parts of the
public sector, notably in the reorganisations of the health service and of local
government. Increasingly, decentralisation and outsourcing are being seen by
management as the keys to change in the pursuit of effectiveness, involving a breaking
down of existing decision-making processes and power relationships. This is the
approach taken by business process engineering.
Resource allocation
This is the application of financial constraints (usually) or pump priming to effect a
reorientation of focus in particular operational areas. Again, this has been a feature of
central government action, not only in the general constraints on public expenditure,
but also in the areas of developing spending, either on broad service areas (for
example, law and order) or in particular parts (such as youth training).
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Overcoming Resistance to Change

Resistance will be overcome when it is accepted that the new position after the changes will
satisfy the needs of those interests, groups and individuals who feel threatened by the
change. The achievement of this acceptance is, therefore, the driving force for strategies of
change. Indeed it has been noted that most employees of an organisation will recognise the
need for change it is the end result that they are concerned with.
In order to accept change, people have to fully understand the requirements of the new
position the new objectives and their organisational implications in terms of both what it
means in respect of new activities, relationships and behaviours, and how those new
activities, relationships and behaviours can result in the satisfaction of their needs. The key
to this process lies in involvement. People need to feel that their interests are a valued
element in the change process and that there is an opportunity to have those interests heard
at all stages in the process of change.
Although change is generated by senior management, successful change comes through a
participative approach. Listening to peoples concerns and acting upon them, and providing
the support, advice and assistance to enable people to cope with the change, will all help to
ensure motivation and acceptance.
It is important that participation is genuine and not something the top orders the middle to
do from the bottom. For participation to be successful there has to be genuine support from
all levels and a prevailing culture of participation.
An argument against participation is that it is a long, slow process and adds enormously to
the timescale. It needs flexibility in the plan and a willingness to change original ideas. To
make a major change usually seems to take about 18 months. However, it has been argued
that people will take this time to adjust to change anyway. If you change fast, without
consultation, you will go through 18 months of frustration, conflict, low productivity,
absenteeism, and other signs of low morale. When participation has been introduced into
the decision-making processes of the organisation in this way, it is difficult to revert to
autocracy without causing a great deal of confusion and frustration among staff.
The use of pilot projects, particularly in a global organisation, can assess the impact of
changes. This approach to the process is based on gaining acceptance through experience
over a period of time, taking advantage of the concepts of both participation and slow pace.
Pilot projects involve the introduction of change on an experimental basis and for a defined
period, on the understanding that the experience will be evaluated at the end of the period.
Subsequently, permanent changes may be made if the project was successful, incorporating
any amendments which become apparent in the review process.
The advantages of this method are:
It solves unforeseen snags
It reassures less confident people that the scheme works before they are required to
commit to it
Anticipated problems may not arise.
The disadvantages are:
It is unwise if employees are to participate in the final decision
The time of tension and uncertainty is prolonged
It usually involves closer supervision
Employees may sabotage the trial
What worked in the initial trial may not work when the plan is extended.
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The Role of Managers

We live, according to Charles Handy, in an age of uncertainty, and managing that uncertainty
therefore becomes a key part of any managers role.
It is important to recognise that the manager has a number of different hats to wear when
considering the issue of change. The manager:
may be directly involved in deciding that change is necessary and what that change
should be
will have a role in planning and implementing change strategies
will be responsible for the people aspects of change, minimising the problems,
smoothing the transition towards change and helping staff prepare for and cope with
change.
Change will also impact on the manager him- or herself. Managers are subject to the same
personal fears and uncertainties which lead to resistance to change in others and their own
needs must be recognised and addressed by their own managers.
The personal traits and characteristics of managers may play a big part in their ability to
successfully implement change. There is the potential of individual managers to act directly
as change agents as mentioned earlier.. There are two further aspects to consider here:
The role of the manager in providing the vision and leadership within his or her group to
support change.
The management of conflict which may occur as part of the change process.
Change is not something that can be imposed, except in exceptional circumstances, and we
have seen that successful change comes through a process of involvement and participation
such that employees feel their needs and interests are being appropriately addressed. When
combined with the organisations own requirements for achieving efficiency and effectiveness
in the new position, this emphasises the need for managers to provide leadership which is
characterised by both strong task and relationship orientations.
Task orientation refers to the degree of emphasis given to the organisations goals through
getting the job done, decision-making, work organisation and control, etc., whereas
relationship orientation refers to the degree of concern for group and individual goals
expressed by the leader through interaction with members of the group. Giving equal
emphasis to each would see the manager seeking to accomplish change by a committed
staff, where workers and the organisations goals are the same.
Concern for the task will be expressed through a vision of the outcomes of change for
the efficient and effective functioning of the organisation, and a focus on the
imperatives of change and the development of effective strategies for achieving new
objectives.
Concern for the group and individual goals of staff will be expressed through
involvement and participation in the process by which those strategies are developed
and the incorporation into them of the needs of staff, in respect of both the outcomes
and the process.
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E. ORGANISATIONAL CULTURE AND CHANGE

Change is closely related to the concept of an organisations culture and so any changes
which are sought will either have to be effected within the constraints of the existing culture,
or seek to change that culture.
The extent to which the potential barriers to change act as restraining forces will be
determined by the following factors.
The degree of satisfaction with the existing position of the organisation, in terms of
culture, power relationships and the satisfaction of individual needs
The degree to which the proposed alternatives are seen as more or less desirable
and/or feasible
The extent to which these are felt by strategic decision-makers either by the
individuals themselves or in respect of the power and influence they may be able to
exert (for example, in relation to employees withdrawing their labour or customers not
buying the products).
Much of the focus of the management of change is on overcoming resistance, so a closer
understanding of the operation of these restraining forces is clearly critical to the success of
the process. We shall now look at each of them.
Culture as a constraint
An organisation tends to build a paradigm for itself which is a way of seeing itself which
encapsulates the values and beliefs of its stakeholders. This has the effect of limiting
what may, or may not, be readily changed in terms of strategy. Once established, the
paradigm tends to be self-perpetuating, since members of the organisation are
reluctant to change their core beliefs or routines.
The paradigm is preserved within what Johnson has described as a cultural web of
the organisations actions, in terms of:
(i) Stories of its past events, often exaggerated into myths and legends
(ii) Its rituals and routines for example, methods for being promoted, etc. being
related to the way we do things around here
(iii) Symbols of status such as reserved car parking spaces, the key to the
executive washroom, etc.
(iv) Control systems such as head office inspections
(v) The organisational structure hierarchies, extent of bureaucracy, formality of
interrelationships, etc.
All of these add up to the way in which an organisation may appear, and the way it
sees itself.
Thus managers faced with the prospect of having to implement strategic change tend
to look to accommodate it within existing beliefs and the accepted ways of doing things.
One of the commonest reasons given for resisting change of any kind is that We have
always done it this way, and it is this attitude which acts as the restraining force.
The object of change itself may also clash directly with fundamental beliefs in the
organisational or national culture. Thus, for example, the introduction of more market-
orientated goals in public service organisations may be opposed on political grounds,
or the introduction of Sunday trading may be met with resistance on religious grounds.
This can be particularly problematic where new values imported into a country to see
through organisational change clash with the cultural norms of the host country.
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Vested interests in the status quo

These may be seen in relation to both the formal and informal organisation where
proposed changes represent a potential loss of the power to influence organisational
direction and/or the behaviour of people. We tend to think of this in relation to the
middle and lower management levels, and to the role of employee representatives; but
it may also be a restraining factor at the senior, strategic level in the organisation.
Perhaps the first thing that is shown by studying resistance to change is that it is not
found exclusively at one level or within one area of an organisation. It is common to
think of the general workforce as being more obstructive in this respect than managers,
but this is probably because there are more of them, and therefore more examples to
quote. Just as familiar as the conservative worker is the middle manager who resists
organisational change, the managing director who ignores the advice of his
subordinates about better working methods (this can happen particularly in small
companies), and the board which refuses to change policies even when current ones
are clearly inadequate.
Among the groups which resist change are those who consider themselves guardians
of the organisation employees of long standing who know its importance to their
family and their area and who do not want, for example, to see a new MD ruining it.
Role and task cultures
One of the central problems here is the nature of the bureaucratic form of organisation.
The rigidity of the structures and role culture make radical change very difficult, and
limit flexible responses to changing requirements. For example, centralised power and
decision-making are too removed from the point of impact of decision, the tall
organisational structures mean inefficient and often poor communication, the
dominance of rules and procedures constrain action to established practice, clear
delineation of discretion and responsibility limit broader-based responses (at individual
and departmental levels), reward patterns discourage initiative and risk-taking, and
short-term horizons constrain planning and innovation.
This type of organisational form works very well in circumstances of relative stability,
but has great problems coping in periods of change. Accordingly, attention is
increasingly being focused on the development of forms and cultures more appropriate
to the turbulent environment of modern society. In particular, more flexible and
responsive structures and cultures are seen as both a means of effecting change and
of ensuring a more adaptive internal environment for the future.
The model for the more adaptive and responsive organisational form is generally held
to be that of Japanese organisations. These are typified by flatter structures, more
participative decision-making and collective involvement, as well as a longer-term view
which must be the envy of many Western organisations.
The writings of Handy have also been highly influential in the pursuit of increasing
flexibility. His main concern is with role cultures and the need to move towards more
flexible federal role or task cultures as a means of coping with change. Central to this
are two aspects commonly found in Japanese organisations:
(a) Leadership as an enabling role, rather than a directing role. This means going
beyond the issuing of orders and instructions to the development and sharing of
vision as to what the organisation is about and what, therefore, the roles of
individuals are.
(b) The dominance of persuasion and consent, rather than imposition and
compliance, so reducing the traditional them and us tensions of management by
accentuating the role of groups and the manager as co-ordinator of group action.
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A constant feature of change strategies is the need to break down rigid organisational
structures and introduce more flexible forms. The degree to which such forms are
successful is, however, dependent on the change of culture and orientation which goes
with them.
Managing Cultural Change

Changing an organisations culture is a notoriously difficult thing to do. Culture is difficult to
define and even more difficult to break down into parts which can be changed. Furthermore,
an organisations culture is reflected in its recruitment policies, so that individuals who
conform to the old culture will have been recruited in the past, perpetuating and
strengthening the very cultural aspects which subsequently have to change. Most research
has shown that it can take between three and eight years to change an organisations
culture.
Establishing new patterns of behaviour and norms demands a consistent approach which
addresses the following areas:
Top managements active involvement and commitment
Managers must be seen to adopt the new patterns of behaviour, not just directing
others to do so
There must be positive support for new behaviours, preferably including recognition
(perhaps through an appraisal system) and/or rewards for adopting new patterns of
behaviour
Recruitment and selection procedures and policies may require reviewing to ensure
that individuals who will conform to the new patterns of behaviour are recruited
The new behaviours must be clearly communicated to existing employees and to new
employees via an induction programme
Training is almost always required.
These requirements suggest the need for a pattern of change which is not simply focused on
a response to a particular change event, but one which takes an overarching view to the
capacity of the organisational culture to accommodate change in any circumstances. This
approach may be affected through the process of organisational development.
The Importance of Innovation

For organisations to survive in todays increasingly turbulent and fast-moving markets, they
need to constantly innovate and find new ways of beating the competition. For this to
happen, they must have creative and flexible people and the organisational culture must be
founded on a belief in controlled risk-taking, experimentation, and learning.
To be innovative, organisations need to develop their structure, culture and technology.
Functional structures often lead to thinking in drainpipes and to departmentalised
thinking and behaviour. Empire-building is common. Divisional structures lead to
more identification with customer requirements, products or geographical area, but may
fail to see the potential in ideas because of their limited focus. Matrix or team
structures are more likely to result in synergistic working and the cross-functional
dissemination of ideas.
In terms of culture, there needs to be support, encouragement and incentives for
creativity for example, the Google organisation fully recognises these needs and
incorporates creativity into its organisational/HR ethos at all levels. If these are absent
from an organisations culture, its people are likely to keep ideas to themselves or, at
worst, take them elsewhere: to a competitor, or to start their own business in
competition. There also needs to be a learning attitude to failure, rather than looking to
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shoot the person who has failed. If organisations constantly look for scapegoats for
failures or mistakes, this will invariably lead to people not bothering to try anything new
and simply keeping their head down and maintaining current activity. Similarly,
innovators rather than maintainers need to be seen to be valued i.e. promoted or
financially rewarded.
Organisations particularly operating on an international scale such as Toyota that has
research and development centres located across the globe, need to use their intranets
or IT systems collaboratively to design and develop new ideas, to share knowledge and
to enable successful innovation.
1. Consider recent changes that have occurred in the external environment of the fast
food multinational company McDonalds. How has the company adjusted to these
changes and how successful do you think it has been?
2. Mergers and acquisitions are a major cause of organisational change. What could
have been the likely cultural reactions arising from the takeovers of Gateway and
Packard Bell by Acer, and the takeover of Cadbury by Kraft Foods?
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211
Chapter 13
Analysing the Case Study and the Examination
Contents Page
Introduction 212
A. Conducting the Analysis 212

Structuring the Analysis 212
Evaluating the Case Study Information 213
Designing Solutions 215
B. The Examination 216

Preparing for the Examination 216
Tackling the Questions 216
Formal Requirements 218
Grading Criteria 218
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212 Analysing the Case Study and the Examination
INTRODUCTION
In this final chapter we look at the actual analysis of the case and then detail how you should
approach the examination.
A. CONDUCTING THE ANALYSIS

The case study in which you will be examined will describe a situation relating to an
organisation, dealing with a range of international business issues that should be viewed at a
strategic level. You may be asked, in the examination, to analyse what has happened to
cause the current situation and any issues that are apparent. You may be asked to consider
what will be the result if the current situation is allowed to continue without adjustment and/or,
by predicting alternative paths in future operations, offer strategic or operational solutions.
Often you will be asked for alternative solutions.
The best way to approach this is to prepare your response in the form of a plan. This will
incorporate predictions of what may happen as a result of following different courses of
action, with recommendations for which course of action should be adopted.
In order to prepare for this, you will have to go much further in your analysis of the case than
just the initial reading. Here, we suggest some of the considerations to be borne in mind in
doing so.
Structuring the Analysis

In essence, the analysis should seek to determine:
What is happening and why
What should be happening
How the situation may be remedied.
The stages in making this determination are as follows.
(a) Evaluation of the data and information provided
Here you should be isolating the relevant information and assessing and organising it
so that the you get a detailed and clear picture of the situation. This is the audit
(structured evaluation of the organisation). There are many audit frameworks that are
available in helping you to carry out a structured analysis. The most common
frameworks are SWOT, PESTLE, the 3 Cs, Porters Force Field Analysis, McKinsey's
7Ss and the value chain. Bowmans Clock provides a useful way of categorizing the
situation with regard to strategy. By applying these frameworks you will be able to
have a clearer idea of the key elements, driving forces and success factors that make
up the sector.
Take care when doing your analysis to provide clear understanding and insight. For
example in your SWOT analysis, prioritise the points you make under each section and
avoid writing long lists that are not fully explained.
(b) Identification of the key issues, challenges and problems
From your evaluation, you should be in a position to clarify the key issues in the
situation. Remember that these may not necessarily be specific issues, but may also
include potential emerging issues that maybe described as challenges, difficulties,
threats or opportunities.
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Analysing the Case Study and the Examination 213
(c) Analysis of the issues

This should detail the evidence associated with the key issues i.e. the causes which
will need to be addressed in seeking solutions. These may be organisational
(structure, management, governance), process and procedural (including systems),
strategic or policy related, resource driven (including finance and personnel) or
operational. Whilst there will be a concentration on weaknesses, do not ignore
strengths it is often these which can be built upon in proposing solutions.
(d) Identification of possible solutions
Now you need to get your creative hat on and think what can be done about the issues
you have identified. It is unlikely that there will be just one solution, so you need to
consider what alternative approaches may be possible and what the outcomes of these
may be. You should try to predict the results of pursuing different courses of action,
taking into consideration potential different circumstances in which they may be played
out (contingencies).
You should also be thinking about which are the best solutions in different
circumstances, and how you would justify recommending one course of action over
another. However, do not get too fixated on particular solutions as the circumstances
in which you may need to make a decision will be dictated by the questions in the
examination, rather than just the information in the case. What is important is that you
have considered a range of possibilities and can then bring them into play in the
examination when you see exactly what is asked.
Evaluating the Case Study Information

You need to build up a detailed body of knowledge about the situation, and this will need to
go further than just the information and data presented to you as the case study. You will
have to work out what that information and data is telling you about the situation. Key
considerations in this evaluation include the following.
Concentrate on the facts
Ask yourself whether the information provided is entirely factual. You may be
presented with opinion in the form of commentaries on the situation or anecdotal
evidence supplied by persons involved in the company. How significant is this?
Apart from the validity of information, there is also the relevance of the material to the
main features of the case and its issues. You must ask yourself whether the
information is relevant to the analysis or is necessary only to provide a total description
of the situation and events, i.e. mere "padding".
In addition, you need to retain objectivity in your assessment of situations and events.
Everything you use to build your analysis must be supported by evidence even
assumptions about what you might consider to be the case must be backed by
evidence which suggests that your interpretation is true. Note that, when you come to
proposing particular courses of action, these too must be supported by evidence and
not simply your own personal opinion or what you consider right.
Don't expect everything you need to be presented to you
You are likely to have to look beyond the evidence presented to identify some of the
issues. What you are given may well just be the symptoms and you will need to use
the information to look for the underlying issues or issues. It requires the capacity to
interpret data and combine qualitative with quantitative assessments, to see a problem
clearly and objectively.
Note that the case may not be full of unsolved issues. You may need to look for
potential difficulties and challenges with ways of tacking future issues.
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Use knowledge and techniques from different disciplines

Whilst the case study is very much set in the context of international business, do not
limit yourself to just using the knowledge and skills built up in this manual. Business
success depends on the effective interdependence of all the different aspects, which
make up the total enterprise, and you should similarly apply your broad understanding
of the business world to the case study. That means bringing in concepts and
techniques from other disciplines such as economics, law, quantitative methods, and
financial management.
The information given in the case may be sufficient in some respects, but there may
often be parts of it, which, as they stand, are inadequate to make a judgment. This is
particularly so in the provision of quantitative and financial data. You need to assess
any performance figures given to you in the case and consider whether you need to
obtain more sensitive indicators, both operating and financial. For example, sets of
figures and general summaries may not necessarily identify trends or the extent of
change. The use of key ratios to indicate operational or financial performances should
be computed where possible from the information given. (Note that the use of such
techniques in support of judgments will indicate to the examiner the extent of your
analysis.)
This is also true when you come to considering possible solutions to issues. For
example, consider whether there is scope for building performance models to
demonstrate the results to be expected from alternative solutions, by using available
statistics. Could you forecast, by extrapolation and suitable weighting, the effect of
variables and different contingencies on results?
Consider interrelationships between elements of the case
Organisations consist of series of interrelated activities, and often it is success at the
interface between such activities or systems which determine effectiveness in overall
performance. So, consider how the different elements of the case fit together to
produce the overall picture and do not just look at them in isolation from each other.
For example, an expansion of business will mean an increase in labour and may lead
to issues such as recruitment, skills shortages and training.
Think about the availability and application of resources
A company operates by setting objectives, and to fulfil the objectives there must be
planning. For plans to be successful, they require adequate resources, and those
resources need to appropriately applied. Optimum utilisation of resources and the
avoidance of issues rest with skilled management.
You need to consider all aspects of this use of resources are they adequate to meet
the objectives, can additional resources be obtained, how successful is their current
management. The so called 5 Ms Money, Machinery, Men, Minutes and Means is a
good framework to bear in mind.
Consider strengths and opportunities as well as weaknesses and issues
When assessing the current situation, do not just look for issues, but consider the
strengths of the business and the opportunities that are available. For example, the
financial position may be strong (although possibly under-utilised), the market position
held by the company may be dominant (despite issues elsewhere) or the competition
may be weak or have its own issues. From strengths arise opportunities/challenges to
exploit those strengths and develop the company's position.
Don't lose sight of the environment
Companies operate in competitive markets which are subject to change and can be
affected by a wide range of variables. These present threats and opportunities. In
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assessing the current situation, you need to think carefully about the environment
within which the company is operating and how this impacts now, and may impact in
the future, on both the company's policies and its operations. Remember the PESTLE
analysis as a means of analysing the environment. Consider also the competitive
environment in terms of what the main competitors are doing and how they are likely to
react to your actions. The Porter Five Forces analysis will lead you to an informed
judgement in this area.
Designing Solutions
When you have completed your analysis of the current situation and identified what you see
as the key issues whether they are current or potential future issues, or possible
opportunities which may be exploited you need to think about what needs to be done to
achieve the best results for the company. The key questions are, how can the present
situation be changed and what will be the result of those changes?
Some of the considerations to bear in mind in answering these questions include the
following.
Consider possible alternatives
A determination to find one way of resolving a problem situation with the certainty it
would be the right one ignores the fact that, in a dynamic industrial organisation, many
variables have to be taken into account which may lead to the possibility of more than
one solution. There is rarely one simple solution to a problem, and the complexities of
organisations mean that you may find a number of ways in which the issues may be
dealt with. These may also be applied in different combinations to address multiple
parts of the issues.
Work with the information you have
You only have the information provided, and any assumptions that you can justifiably
infer or deduce from that information, to go on. When making any assumptions state
the basis for these for example, in the case of Acer any future plans will depend upon
the political situation with regard to the Peoples Republic of China and Taiwan being
resolved equitably. Any future courses of action proposed, then, must fit that
information.
Predict the outcomes of courses of action
It is important to work through the impact of changes so that you can justify taking a
particular course of action, or recommend one course of action as opposed to another.
This may be by using quantitative methods to predict changes in, say, cash flows or
production capabilities, or qualitative assessments of, say, the impact on working
patterns and staffing.
Use contingency planning
Whilst you must fit solutions to the present situation as described in the case study, it is
also important that you consider how the situation may develop (using the information
provided as your starting point, but also bringing in your own understanding of the
circumstances surrounding the case). Any solutions will need to stand up in the future
situation, so you need to test outcomes against a range of potential future scenarios.
This is the basis of contingency planning what will happen if ??
The best way to encapsulate your analysis and thoughts about future strategy is to make a
business plan. This will help bring your analyses of both the macro and micro environments
together, and lead to the development of strategies and functional plans human relations,
marketing, finance, and operational aspects.
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Planning is one of the key parts of this subject and the themes of the case study will reflect
the overall planning nature of the syllabus. (The other key parts are the continuing
drivers/aspects of globalisation, the volatility of the global environment and organisational
responses).
B. THE EXAMINATION
As always, careful preparation before entering the examination room is the key to success. If
have undertaken a thorough analysis of the case and have a clear idea of how to address
the global issues involved, you should be confident in your ability to succeed.
Many students work in groups with others in producing analyses. This can be an efficient
way of processing the information, but to make it effective it is important that you personally
fully understand the content and conclusions from these analyses. By the time that you enter
the examination room you should have developed an insider view of the organisation, so that
any strategies and plans will show good insight and understanding.
Preparing for the Examination

Since you receive the case study several weeks ahead of the examination date, you will
have plenty of time to analyse the case and build up your understanding. It is important to
ensure that the results of your analysis are at your fingertips when you go into the
examination room. As this is an "open book" examination, you are allowed to take any
material which may help into the examination room. This can be your own notes, books or
any other printed or copied material you have acquired.
You should ensure that such materials are well organised so that you can access the
information you need about any aspect of the case quickly and easily. You might, for
example, use a system with a number of headings such as company situation,
environment, threats, opportunities, specific problems/solutions, financial and quantitative
analyses and detail both the facts (and your interpretations of them) and your ideas under
each.
Make sure that all your thoughts and ideas about the case are written down do not simply
rely on your memory to recall them in the examination room. Even just a couple of words in
your notes can be enough to jog your memory.
You may find it helpful to try to predict possible questions and note them with the points
which you consider would answer them. Ask yourself what points you see as particularly
suitable for questioning there will usually be a number which seem obvious, and these are
likely to emerge from your analysis and identification of the key issues. However, do not
place so much emphasis on this that you ignore other areas. There are no guarantees that
your prediction of questions will be right and you need to be prepared for whatever is asked
of you.
Tackling the Questions

What is expected of you in answering the questions? It is required that you bring to the
analysis:
A sound knowledge of the International Business syllabus and all related subjects, and
that you apply their essential theories, principles and techniques to a realistic business
situation.
The ability to identify issues and provide a solution or alternative solutions if
appropriate to the problem, and make a recommendation which can be justified.
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The communication skills to produce a logical, clear analysis, and, if necessary,

present a well-written report, i.e. legible and free from grammatical and spelling
mistakes.
You have no doubt been urged many times to read the examination questions carefully for
their meaning and extent, and to answer directly what the question requires. This exhortation
bears repetition.
And finally, here are a few more pointers to getting the right approach to answering the
questions:
Plan to use the time allowed to give adequate time to each question.
In the examination room read the question carefully to see exactly what is required.
Remember, at this level, you will be required to show a high level of critical evaluation
and application. Answer the question as set. Make sure that you are aware of all the
aspects asked for for example, in the June 2010 case (Bombardier) the question
covering the international environment was in two parts and specifically called for an
evaluation of the major threats and opportunities. Some students have tried to guess
the questions and have produced prepared answers that do not match the actual
requirements of the question with a low level of success.
Plan the content and structure of each answer. Marshall your main points and give
brief explanations, supported by examples of techniques and data charts where
relevant and helpful. Support your diagnosis of the issues or issues with relevant
evidence, using facts and figures derived from your analysis.
Remember that the purpose of the case study is to examine your ability to apply
frameworks and business models to an assessment of the case, rather than your ability
to recall facts and theories. There is absolutely no need to repeat large chunks of the
case study materials in your answers, which is often done with regard to the financial
information. Your focus should be on the meaning of the figures as demonstrated by
relevant calculations and ratios. It is also acceptable to refer in your answers directly to
the relevant parts of the case for example, "see page 4, paragraph 3".
Note, too, that any theories, models and frameworks mentioned must be applied to the
case. There will be no marks given without application.
Treat the impulse to make assumptions with care, be objective and seek to link any
assumptions with evidence. However, if you have to answer a question in the
examination on which you think that sufficient factual information has not been
provided in the case, your answer may be subject to assumptions which you have had
to make to proceed with the analysis. Clearly state your assumptions in your answer
and justify them as far as you can by related evidence.
Justify recommendations by reasoned arguments, again supported by facts and figures
(including projections).
Do not assume the examiner can read your mind explain your answers. Relevant
examples of international practice from other industries and organisations can be
useful in adding understanding and clarifying to your answers.
Plan the presentation clearly written in short paragraphs in logical order, using figures
or diagrams where appropriate. It should always be businesslike and have the clarity
of communication that one would expect at the advanced level.
Take care with your presentation make sure your handwriting is legible.
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Formal Requirements
The formal requirements in respect of the examination are as follows:
1. You should acquaint yourself thoroughly with the case study before the examination.
2. You must take your copy of the case study into the examination.
3. Time allowed: 3 hours.
4. Answer ALL questions.
5. All questions carry different marks. Note the mark allocation and allocate your time
accordingly.
6. Calculators are allowed.
7. This is an open book examination and you may consult any previously prepared written
material or texts during the examination. You must not insert such material into your
answer book. Only answers that are written during the examination on paper supplied
by the examination centre will be marked.
8. Candidates who break ABE regulations, or commit any malpractice, will be disqualified
from the examinations.
Grading Criteria
You should also find the following table, which sets out the criteria for grading the case study
(and cites good and bad examples), useful.
Grade Knowledge and Analysis and Communication Skills

Comprehension Application
1 Quotes appropriate Applies Logical structuring of

(Distinction) theoretical knowledge theories/principles the entire answer.
e.g. theories and correctly to the Analysis and
techniques. circumstances quoted. evaluation are
Demonstrates Analyses the situation developed
adequate and inter-relates comprehensively, i.e.
comprehension of material from various no faults or gaps in the
knowledge, e.g. by use parts of the case. logic. Answer is well
of illustrative example, Considers and laid out, well presented
analogy or explanation. evaluates alternative (use of headings,
solutions where these illustrations, tables, etc)
exist. Evaluation leads and well written
to selection of a (legible, grammatically
feasible solution (not correct and effective
necessarily the 'best' style of writing).
solution).
ABE
Grade Knowledge and Analysis and Communication Skills

Comprehension Application
2 Quotes appropriate Application of Logical structuring of

(Very good theoretical knowledge theories/principles the entire answer.
pass) e.g. theories (correctly shows some Analysis and
attributed), principles weaknesses, e.g. evaluation are
and techniques. failure to recognise all developed
Demonstrates limitations or to use all comprehensively, i.e.
adequate evidence available. no faults or gaps in the
comprehension of Alternative solutions logic. Answer is well
knowledge, e.g. by use are not fully evaluated, laid out, well presented
of illustrative examples, even if the 'right' (use of headings,
analogy or explanation. solution is reached. illustrations, tables etc)
and well written
(legible, grammatically
correct and effective
style of writing).
4 Shows a reasonable Circumstances Answer is adequately

(Marginal grasp of basic inadequately analysed presented, given the
fail) theories/principles but and hence fails to limitations of analysis
some elements appear recognise major issues and application.
to be lacking. which need to be Structure is poor,
Comprehension is not considered. although knowledge is
fully proven, e.g. basic reasonably clear.
Does not demonstrate
facts are quoted Grammar is at a
the ability to apply
(correctly) but not marginal level.
knowledge which
explained, no
he/she obviously has in
illustrative examples
a practical way (these
used.
are common faults,
often demonstrated by
mere repetition of
material from the case
study).
5 Answer reveals Poor analysis of Answer very poorly

(Clear fail) fundamental gaps or circumstances. presented, and difficult
misunderstandings in Applications totally to follow.
basic knowledge, and unsatisfactory due to a
fails to reveal adequate lack of knowledge and
comprehension even of comprehension.
correct theories and
principles.
ABE
Select one recent case study which you have not looked at already, using the on-line
examination papers on the ABE website.
1. Read it through and, without looking at the questions at this stage, prepare your initial
analysis of the information supplied. Write brief notes which could be used at a later
point in the tackling the questions.
2. Now look at the questions that were asked and prepare outline answers to each.
3. Finally. look at the suggested answers and compare your own outline answers. Then
look at the relevant examiners comments.
Make a note of any differences in your own answers or in the approaches you adopted.
Think about how and why your answers/approach were different and make notes on
how you could improve your analysis and preparation for answering the questions.
Now select another case study from the ABE's website and repeat the whole process. See if
you have improved.
Good luck with your studies and we hope that you find the case study
interesting and challenging.
ABE

International Business Case Study: QCF Level 6 Unit

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i

INTERNATIONAL BUSINESS CASE STUDY

Chapter Title Page

Introduction to the Study Manual v

1 Introduction to the Case Study 1

2 International Business Planning 21

3 The World Trade Environment 37

4 Analysing the International Business Environment 63

5 The Micro and Internal Environment 89

Chapter Title Page

6 Defining Overarching Intent: Mission, Goals and Policies 107

7 Selection and Evaluation of Strategies 115

8 Market Entry Strategies 139

9 Management, Organisation and the International Business 153

10 Finance and the Multinational Company 171

11 Implementation, Evaluation and Control 183

12 Management and Change in International Organisations 195

Chapter Title Page

13 Analysing the Case Study and the Examination 211

Introduction to the Study Manual

Welcome to this study manual for International Business case Study .

The Association of Business Executives

Unit Specification (Syllabus)

Unit Title: International Business

1.2.3 The key drivers of globalisation and international

Matrix, Shell Directional Matrix, Harrell and Keifer

5.1.3 The different types of planned change depending

attitude to the environment, human rights and dignity,

Coverage of the Syllabus by the Manual

Learning Outcomes Assessment Criteria Manual

5. Understand the importance 5.1 Explain the issues underpinning Chap 12

Note about Chapters 1 and 13

A. Getting to Grips with the Scenario 4

Appendix: Delta Airlines 7

Approach to the Examination

The Case Study Approach

The Case Study Itself

A. GETTING TO GRIPS WITH THE SCENARIO

What does the Case Study Tell You

(d) Company finances

APPENDIX: DELTA AIRLINES

Preamble to the Examination:

Preamble to the Case Study:

2006 2005 2004 2003

The Delta - Northwest Airlines Merger

Regulatory Factors in the Industry

systems or telecommunication systems could reduce the attractiveness of an airlines

Airline Industry Risk and Competitive Factors

Open Skies Agreement

Deltas Operating Statistics - 2005

Delta Daily Flights: 1,534

Delta Connection Inc. Daily Flights: 2,533

Daily Flights + Partners: 6,795

Delta Destinations: 500 worldwide destinations in 105 countries

Passengers Enplaned in 2005: 118,853,189

Delta Connection Inc. Carriers: Atlantic Southeast Airlines (ASA)

SkyTeam Alliance: Aeroflot

Codeshare Partners: Alaska Airlines

Major US Hubs: Atlanta

Major International Gateways: Atlanta to Europe and Latin America

DELTA Profit and Loss Account as at 31 December (in US$ millions)

PERIOD ENDING 2008 2007 2006 2005

DELTA Balance Sheet as at 31 December (in US$ millions)