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Xaviers Institute of Business Management Studies

MARKS: 100      .        

SUB:  International Business.

 

 International Business

Section A (8 Marks Each Question) ( Attempt any 5 )

 

1.       What are basic differences between domestic and international business?

 

2.       While some see globalization as the avenue to the development of poor nations, others see it intensifying misery and inequalities. Critically examine the above statement in today's context?

 

3.       Explain - Localisation of global strategy

 

4.       Explain - Technology contracting (licensing) as an alternative to FDI or ownership strategy.

 

5.       Explain - Major factors contributing to the success of international strategic alliances.

 

6.       Explain the role of “Power Distance" in understanding Hofsted's work on cross-cultural prospective. How does this help in managing international environment?

 

7.       Discuss the relationship between an MNE and its subsidiaries in the context of the "make or buy" decision. What are the implications so far as the organization structure/design is concerned?

 

8.       Explain the role of bargaining power" in managing negotiations in international business.

 

9.       Briefly discuss the direct and indirect impacts of FDI on LDCs

 

SECTION B (20 Marks Each Case)

 

 

6. Please read the following case study carefully and answer the questions given at the end.

SEN-SCHWITZ

 

To the Florid-faced German at Frankfurt Airport's immigration-counter, he appeared to be just another business traveller. True, but a bit of an understatement. The man under scrutiny was Binoy Sen, whom the Indian media referred to as the Boom-Box king.

At 14, he had assembled, from parts scavenged from the local dump, a spool-recorder that had fitted nicely into a suitcase. By the time he time he was 37, in 1979, Sen & Sen (S&S), a company he had promoted with his elder brother, Sanjoy --- who made up for his lack of technical expertise with a razor sharp business brain --- was Asia's largest manufacturer of radios and cassette-recorders. Now, at 56, he presided over India's largest audio-Products Company. Sen-Schwitz, a joint venture with the Frankfurt-based consumer electronics giant, Schwitz GMBH.

S&S association with Schwitz had actually begun in 1984. Music had become a movement in Europe at that time, with immigrant labour of all colour and teenagers of all sizes constituting market-segments that no company could afford to ignore. But their means were slender, and intensity of output, rather than nuances of pitch and tone, was what they were concerned about. Since assembling was a labour and cost intensive process, at least in Europe, Schwitz could not manufacture low-end boom-boxes cheaply.

So, the company turned to Asia, where it was certain some Chinese or Taiwanese company could meet its requirements. None could. However, on a reach of Taiwan, one of the company's managers had spotted a couple of S&S products at a retail outlet. While this Indo-German relationship had begun as a vendor-buyer one, Helmut Schwitz, 51, the CEO of Schwitz --- no relation of Adolf Schwitz, who had founded the company just after the end of World War II --- took an instant liking to the Sen brothers. Two years after S&S started supplying it products, in 1986, the German company acquired a 10 per cent stake in its Indian supplier.

IN 1992, when Schwitz released that he could no longer ignore the Indian market and the Sens accepted the fact that they couldn't survive the threat from global competition without technology and marketing support from their German Partner, they formed a formal joint venture. The Sens and the German company both held 26 per cent stakes in Sen-Schwitz, with the rest being divided between the financial institutions and the investing.

The joint venture did well right from its inception. The transnational's superior quality standards and S&S strong distribution network worked wonders. Within 2 years, the company had managed to carve out a 45 per cent share of the Rs. 795-crore market. The Sens were happy and so was Schwitz. By 1998, Sen Schwitz's share had increased to 65 per cent in a market that had grown to Rs. 1,150 crore, And when Sen reached Frankfurt for the annual review of the joint venture that Schwitz GMBH insisted on --- the company had 7 joint ventures across Asia and Latin America --- he could not but help feeling that all was well with the world of music and money.

Sen's feelings were only amplified during the review. After the preliminary greetings, Helmut Schwiz took the oais. The room darkened, and a series of PowerPoint images flashed on the screen behind Schwiz as he spoke. Sen caught only fragments of the German's heavily accented voice, his attention was focused on the images and the bullets of text they contained. Sen scrawled a few of them on his notepad

* A turnover of $ 100 billion by 2005

* AQ growth - rate of 20 per cent a year.

* 35 per cent of the growth coming from India and China Then. Schwiz started speaking about India and Sen's attention moved from the screen to the man. What he heard pleased him. "Sen-Schwiz has a marketshare of 65 per cent in a market that is growing at the rate of 30 per cent a year. As far as our targets for 2005 go, we believe that it is our most promising joint venture."

The blow fell later, during the break for lunch. Sen and Chris Liu who headed the company's joint venture in Taiwan, were exchanging notes when Schwiz butted in and, in his characteristic overbearing fashion, quickly monoeuvrec Sen to one corner of the room.

"India is, clearly, the market of the future, Binoy," he said, biting into a roll. "You're doing a great job, and can expect support from me for all your endeavours. But I'm worried about your margins." Here it comes, thought Sen, the twist in the tall. "A post tax margin of 8 per cent doesn't look too good," continued Schwiz, "especially when seen in the light of rising volumes. We should take a fresh look at our Indian operations, Why don't you meet with Andrew?"

Suddenly, Sen was on guard. The 55 year old Andrew Fotheringay was Schwiz's President (International Operations). Sen liked him; they had worked together when the joint venture was being set up, and had been impressed by his eye for detail. But he also knew that Fotheringay was Schwiz's hatchetman. "What's on your mind, Helmut ?" he asked point-blank "oh, nothing yet," replied Schwiz, "but we have to find a way to introduce more products into the Indian market without stretching Sen-Schwitz, Talk to Andrew."

That wasn't to be Fotheringay, whose wife was 9 months pregnant, had to suddenly leave for London, but promised to fly down to Calcutta, where Sen-Schwitz was based as soon as the baby was born. Now, Sen was sure that something was up : Fotheringay wasn't the kind of manager to do something like that for nothing. Sen voiced his fears at a meeting of the Sen-Schwitz board, which had been scheduled on the day of his return. One of the board members, R. Raghavan, 53 a professor of corporate strategy at the Indian Institute of Management, Gauhati, felt that Sen was over reaching I don't think it is quite what you think, Sanjoy he started although Sen hadn't put any specifics to his fears. "Sen-Schwitz is, as BUSINESS TODAY keeps reminding us, evidence that there is, indeed, scope for a win-win joint venture even in the Indian context."

He was wrong. Sure, the joint venture has benefited from the German parent's technical expertise. In turn Schwitz GMBH had profited substantially from Sen Schwitz's dividend pay-outs : more than 25 per cent every year. Werner Kohl, 48 Sen Schwitz's Technical Director, seemed to agree with the professor. Kohl was a Schwitz nominee on the board, and had been a Vice-president (Operations) at the transnational's Hamburg plant before being seconded to Sen-Schwitz for a 5 year period. But Kohl Sen knew was not likely to know what was happening back home.

The one person who agred with Sen was Rajesh Jain 44, the IDBI nominee on the board, who expressed the opinion that Schwiz GMBH could possiibly, be planning another joint venture with some other company. That sounded far-fetched even to Sen. Sen-Schwitz's closest per cent. Besides, no company could match Sen-Schwitz;'s distribution network. So, he decided to let his fears abate till Fotneringay could either dispet them --- or make them come alive.

True to his word, Fotheringay, now the proud father of his first daughter landed up in Calcutta a week later. He first met the company's functional heads, and gave them a pep talk: " Sen-Schwitz's volumes-thrust should be backed by a profitability focus. Once we ensure margins of 13 to 15 per cent, we will be on our way."

Alone with Sen, though, Fotheringay quickly laid his cards on the table. Schwitz, he informed Sen, wished to set up a 100 per cent subsidiary in the country. Sen's mind was, suddenly, clear. He had been a fool not to see it coming. All that talk about restructuring the joint venture, introducing newer models, and the need for higher margins led up to just one thing: a fully-owned Schwiz subsidiary." So what does this mean for us, Andrew," he asked, "Is this advance warning about a parting of ways?"

Fotheringay was quick to dispel this notion. "The subsidiary will not compromise the interests of the joint venture. Schwitz has a long-term commitment to the India market, and this subsidiary is just a step in that director."

All this talk-about commitment, realized Sen, was taking them nowhere. He sounded just a little imitated when he spoke: "I just can't understand why you people are even considering a subsidiary when the joint venture has been so successful. We have a great brand, good products, the finest distribution network in the business, and an excellent supply chain Together, we have created a matrix that has delivered. Why does Schwitz want to reinvent the wheel?"

Fotheringay's answers didn't satisfy him. He made some noises about the subsidiary taking upon itself a large portion of the expenses involved in building the Sen-Schwitz brand, thereby reducing its operational expenses, and improving its margins. Sen was quick to point out that the Government of India did not view proposals for fully-owned marketing subsidiaries favourably. "Besides, does this mean that we transfer our marketing and distribution network to the subsidiary?" he asked incredulously.

Fotheringay side-stepped the issue: "No, no, the subsidiary will only manufacturer products." Reading the look on Sen's face, he hastened to enumerate Schwitz's gameplan: 'Of course, none of our offerings will complete directly with Sen-Schwitz As you are aware,the audio systems market is fairly segmented, so there is a great deal of potential for new offerings. We want to set up a committee from Sen-Schwitz and Schwitz to decide on the respective roadmaps of the joint venture and the subsidiary so as to avoid any conflict."

"That apart," he smiled, here comes the carrot, thought Sen and he wasn't wrong,"the Sens will have the option to buy upto 49 per cent of the subsidiary's equity when it goes in for an

IPO." The subsidiary is not even off the ground, thought Sen and Andrew is already speaking in terms of US and THEM

Fotheringay took Sen's silence to mean acceptance."The other reason," he continued, "is that we cam use the subsidiary to introduce our premium brands into the country. There is evidence that the market for premium audio-systems is all set to boom. Think about it, Binoy. The subsidiary will only strengthen the strategic relationship between the Sens and Schwitz GMBH."

The Sens aren't involved, thought Sen; this is an issue that concern Sen-Schwiz andSchqitz. But he didn't want to split hairs, and promised, instead, to think about it.

Sen-Schwitz's Executive Committee thought about it for 3 months. And it still didn't make sense to them. Schwitz GMBH operated through joint ventures in every part of the developing world. Only in the US, UK, and France did it have fully-owned subsidiaries, using the subsidiary as a sink that would absorb the joint venture's marketing expenses didn't make sense too.

"It sounds altruistic," said V.K. Kapur, 44, the company's head of marketing. "If launching more products is the only behind the subsidiary, there is no reason why the joint venture cannot serve that purpose." Sen and the rest of the Committee had to agree. "There's also no reason why we cannot improve our margins by focusing on our operational efficiencies," argued Ajay Singh, 46, Sen Schwitz Director, operations, and Sen had to agree.

He decided to discuss the matter with Sanjoy, who had retired from the business, and was involved in managing a charity. But Sen didn't get a chance. News-agency had picked up a report that had appeared in the Financial Times Schwitz's decision to set up a 100 per cent subsidiary in India. The report created a major stir in the Bombay stock Exchange, with the price of Sen-Schwitz's stock falling by 30 per cent a day.

It was evident to Sen that no matter what Fotheringay and Schwitz thought, the stock-market perceived the subsidiary as a threat to the joint venture. It was also evident that the stock-market viewed Schwitz as the more valuable brand."I understand,"Sanjoy told Binoy, when the situation had been explained to him. The technology is Schwitz's. The brand, at least the more powerful one, is theirs. And they have access to our distribution network. Face it, we don't have a plank to fight on."

Questions:

(a)    Identify the sequence of events that has led to the current problem. (b) Analyse the problem in the context of the process of globalization that has been increasingly witnesses over the past decade or so. (c) Examine the "fairness" of establishing a 100% subsidiary by Schwitz GMBH when the alliance is on. (d) What future course of action would you suggest to S&S? Give reasons for your answer.

 

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7. Please read the following case study carefully and answer the questions given at the end.

 

Sunlight Chemicals

 

Starting at the vast expanse of the Arabian Sea from his comer office at Bombay's Nariman Point, Ramcharan Shukla the 53-year old executive vice-chairman and managing Director of the 500-crore Sunlight Chemicals. (Sunlight felt both adventurous and apprehensive. He knew he had to quicken the global strides Sunlight had made in the last four years if the company was to benefit from its early gains in the world markets. However, he was also shaken by a doubt: would his strategy of prising open international markets by leveraging the talents of a breed of managers with transnational competencies succeed? Globalisation had been an integral part of Sunlight's business plans ever since Shukla took over as managing director in 1990 with the aim of making it the country's first international chemicals major Since then Sunlight --- the country's third-largest chemicals maker --- had developed export markets in as many as 40 markets, with international revenues contributing 40 per cent of its Rs. 500 crore turnover in 1994-95. The company also set up manufacturing bases in eight countries --- most recently in China's Shenzhen free trade zone --- manned by a mix of local and Indian employees.

These efforts at going global first took shape in December 1991 when Shukla, after months of deliberations with his senior management team, outlined Sunlight's Vision 2001 statement. It read " "We will achieve a turnover of $ 1 billion by 2001 by tapping global markets and developing new products." The statement was well-received both within and outside the company. The former CEO of a competitor had said in a newspaper report: "Shukla has nearly sensed the pressures of operating in a new trade with a tough patents regime."

But Shukla also realised that global expertise could not be developed overnight. Accordingly, to force the company out of an India-centric mindset, he started a process of business restructuring. So, the company's business earlier divided into domestic and export divisions, was now split into five areas: Are I (India and China), Area 2 (Europe and Russia), Area 3 (Asia Pacific), Area 4 (US) and Area 5 (Africa and South America). Initially managers were incredulous, with one senior manager saying: "This is crazy. It lacks a sense of proportion."

The Cynicism was not misplaced. After all, the domestic market --- which then contributed over 90 per cent of the company's turnover --- had not only been dubbed with the Chinese market, but had also been brought at par with the areas whose collective contributions to the turnover was below 10 per cent Shukla's explanation, presented in an interview to a business magazine: "Actually, the rationale is quite simple and logical. We took a look at how the market mix would evolve a decade from now and then created a matrix to suit that mix. Of course, we will also set up manufacturing facilities in each of these areas to change the sales-mix altogether."

He wasn't wrong. Two years later, even as the first manufacturing facility in Vietnam was about to go on stream, the overseas areas' contribution to revenues rose to 20 per cent. And the mood of the management changed with the growing conviction that export income would spoon surpass domestic turnover. Almost simultaneously, Shukla told his senior managers that the process of building global markets could materialise only if the organisation became fat flexible, and fleet-footed. Avinash Dwivedi, am management

consultant brought in to oversee Sunlight's restructuring exercise, told the board of directors: "Hierachies built up over the years have blunted the company's reflexes, and this is a disadvantage while working in the competitive global markets."

The selection of vice-president for the newly-constituted regions posed no immediate problem. For Sunlight had several general managers --- from both arms of marketing and manufacturing -- whose thinking had been shaped by the company's long exposure to the export markets. For obvicus reasons, the ability to build markets was the primary criterion for selection. The second criterion was a broad business perspective with a multi-functional, multi-market exposure. That was because Shukla felt it did not make good business sense to send a battalion of functional managers to foreign markets when two or three business managers could suffice.

But Specific markets also needed specific competencies. That was how Sunlight chose to appoint a South African national to head Area 5. The logic" only a local CEO could keep track of changes in regulations and gauge the potential of the booming chemicals market in the US. However, the effort was always focused on using in-house talent. Shukla put it to his management team: "We should groom managerial talent --- whether local or expatriate --- for all our overseas operations from within the company and should rotate this expertise worldwide. In essence, we should develop global managers within the company."

While doing the personnel planning for each area and fixing the compensation packages for overseas Assignment. Sunlight realised the importance of human resource (HR) initiatives. The HR division headed by vice president Hoseph Negi, had been hobbled for years with industrial relations problems caused by the unionisation of the salesforce, " You have to move in step with the company's global strategy." Shukla had told his HR managers at a training session organised by Dwivedi who was spearheading the task of grooming global managers.

Four years down the line, Shukla felt that Sunlight was still finding its way around the task Sure, a system was in place. Depending on the requirements of each of the four areas, Sunlight had started recruiting between 25 and 30 MBAs every year from the country's leading management institutes. During the first six months, these young managers were given cross-functional training, including classroom and on-the-job inputs. The training was then followed by a placement dialogue to determine the manager -area fit. If a candidate were to land, for instance, on the Asia-Pacific desk at the head office, he would be assigned a small region, say, Singapore, and would be responsible for the entire gamut of brand-building for a period of one year in coordination with the regional vice-president. The success with which he would complete his task would decide his next job: the first full-time overseas posting. He could be appointed as the area head of, say, Vietnam, which was equivalent to an area sales manager in the home market. After a couple of years, he would return to base for a placement in brand management or finance. A couple of years later, the same manager could well be in charge of a region in a particular area. Over the past four years. Sunlight had developed 30 odd potential global managers in the company spanning various regions using this system.

But, considering that the grooming programme was only three years old, Shukla felt that it would take some time for the company's homespun managers to handle larger markets like China on their own. The real problem in this programme was in matching the manager to the market. Dwivedi suggested a triangular approach to get the right fit: define the business target for a market in an area. Look at the candidiate's past Performance in the market, And identify the key individual characteristics for that market. Dwivedi also identified another criterion: a good performance rating at home during the previous two years. Once selected for an overseas posting, the candidate would be given cross-cultural training: a course in foreign languages, interactive programmes with repatriated managers on the nature of the assignment and, often, personality development programmes on the nuances of country business etiquette.

Further, an overseas manager would be appraised on two factors: the degree to which he had met his business plan targets for the market, and the extent to which he had developed his team. After all, he had to cachet the posting within three years to make place for his replacement. Achievements were weighed quarterly and annually against sales targets set at the beginning of the year by the vice-president of the region. The appraisal would then be sent to the corporate headquarters in Bombay for review by the senior management committee. Shukla had often heard his senior managers talk appreciatively of the benefits of transrepatriation. "The first batch of returnees are more patient tolerant and manure than when they left home," said Manohar Vishwas, vice-president (finance),"and they handle people better."

But the litmus test for the company, Shukla felt would be in managing a foreign workforce --- across diverse cultures --- at the manufacturing facilities in six countries outside India. The Shenzhen unit, for instance had 220 employees, out of which only 10 were expatriate Indians. Further, the six-member top management team had only two Indians. Of course, the mix had been dictated by the country's laws and language considerations.

Some of the African markets had their own peculiarities. The entire team of medical representatives, for example, comprised fully-quilifies, professional doctors. Sharad Saxena, vice-president, Area 5, told Shukla: "As there is heavy unemployment in Africa doctors are attracted to field sales work for higher earnings." There were other problems too: as both Chinese and Russian had been brought up on a diet of socialism, they were not used to displaying initiative at the workplace. Dwivedi had suggested that regular training was one of the ways of transforming the workforce. So, Shukla hired a training group from Delhi's Institute of Human Resource Management

training to spend a month at Shenzhen. This was later incorporated as an annual exercise.

Observing that interpersonal conflicts were common in situation where with single-country background were working together, a new organisational structure was introduced. Here, Sunlight positioned local managers was introduced. Here, Sunlight positioned local managers between an Indian boss and subordinate. Similarly, some Indian managers were positioned between a local boss and subordinate. Says Avishek Acharya vice-president, Area 3: "There were some uncomfortable moments, but it led to a better integration or management principles, work practices, and ethics."

Obviously, reflected Shukla, Dwivedi was doing a great job. As he watched the setting sun, however, he found his thoughts turning to a more fundamental question. However immaculate his HR planning had been, had he made a mistake by not developing his strategies first? Was he mixing up his priorities by putting people management" ahead of issues like marketing, technology, and global trade? Even the HR strategy he had chosen worried Shukla. Should he have opted for more locals in each country? If expatriate managers failed more often than they succeeded in India wasn't the same true for other countries?

Questions:

1. Is Sunlight on the right track in going global without trying to consolidate its position further in the home market? 2. Can Sunlight realise its global vision with its current mix of strategies? However fine the company's HR planning had been, had Shukla made a mistake by not developing his strategies first? 3. Are there any gaps in Shukla's game plan to conquer the globe? 4. What are the learnings that you can derive from the "Sunlight" case so far as the internationalization of business is concerned?

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8) Please read the following case study carefully and answer the questions given at the end:

 

Electrolux

Electrolux is Sweden's largest manufacturer of electrical household appliances and was one of the world's pioneers in the marketing of vacuum cleaners. However, not all the products the Electrolux name are controlled by the Swedish firm. Electrolux vacuum cleaner sold and manufacturer in the United States, for example, have not been connected with the Swedish Firm since the U.S subsidiaries were sold in the 1960s. The Swedish Firm reentered the U.S. market in 1974 by purchasing National Union Electric, which manufacturers Eureka vacuum cleaners.

Electrolux pursued its early international expansion largely to gain economies of scale through additional sales. The Swedish market was simply too small to absorb fixed costs as much as the home markets for competitive firms from larger countries. When additional sales were not possible by exporting, Electrolux was still able to gain certain scale economies through the establishment of foreign production. Research and development expenditures and certain administrative costs could thus be spread out over the additional sales made possible by foreign operations. Additionally, Electrolux concentrated on standardized production to achieve further scale economies and rationalization of parts.

Until the late 1960s, Electrolux concentrated primarily on vacuum cleaners and the building of its own facilities in order to effect expansion. Throughout the 1970s, though, the firm expanded largely by acquiring existing firms whose product lines differed from those of Electrolux. The compelling force was to add appliances lines to complement those developed internally. Its recent profits ($220 million in 1983) have enabled Electrolux to go an acquisitions binge. Electrolux acquired two Swedish firms that made home appliances and washing machines. Electrolux management felt that it could use its existing foreign sales networks to increase the sales of those firms in 1973, Electrolux acquired another Swedish firm, Facit, which already had extensive foreign sales and facilities. Vacuum cleaner producers were acquired in the United States and in France; and to gain captive sales for vacuum cleaner. Electrolux acquired commercial cleaning service firms in Sweden and in the United States. A French Kitchen equipment producer, Arthur Martin, was bought, as was a Swiss home appliance firm. Therma, and a U.S. cooking equipment manufacturer, Tappan.

Except the Facit purchase, the above acquisitions all involved firms that produced complementary lines that would enable the new parent to gain certain scale economies, However, not all the products of acquired firms were related, and Electrolux sought to sell off unrelated businesses. In 1978 for example, a Swedish firm, Husgvarna, was bought because of its kitchen equipment lines. Electrolux was able to sell Husqvarna's motorcycle line but could not get a good price for the chain saw facility. Reconciled to being in the chain saw business. Electrolux then acquired chain saw manufacturers in Canada and Norway, thus becoming one of the world's largest chain saw producers. The above are merely the most significant. Electrolux acquisitions: the firm made approximately fifty acquisitions in the 1970s.

In 1980, Electrolux announced a takeover that was very different from those of the 1970s. It offered $175 million, the biggest Electrolux acquisition, for Granges Sweden's leading metal producer and fabrication Granges was itself a multinational firm (1979 sales of $ 1.2 billion) and made about 50 percent of its sales outside of Sweden. The managing Directors of the two firms indicated that the major advantage of the takeover would be the integration of Granges aluminum, copper plastic, and other materials into Electrolux production of appliances. Many analysts felt that the timing of Electrolux's bid was based on indications that Baijerinvest, a large Swedish conglomerate, wished to acquire a non--ferrous matels mining company. Other analysis felt that Elctrolux would be better off to continue international horizontal expansion as it had in the 1970s. The analysts pointed to large appliance makers such as AEG Telefunken of West Germany that were likely candidates for takeover because of recent poor performance.

Questions:

1. What are Electrlox's reasons for direct investment? 2. How has Electrolux's strategy changed over time? How has this affected its direct investment activities? 3. Which of Electrolux's foreign investments would be horizontal and which would be vertical? What are the advantages of each? 4. What do you see as the main advantages and possible problems of expanding internationally primarily through acquisitions as opposed to building one's own facilities? 5. Should Electrolux take over Granges?

 

 

 

 

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