international business management. types of businesses manufacturing merchandizing services business

International Business Management

Types of Businesses

• Manufacturing

• Merchandizing

• Services business.

Toyota Motors Cars, vansIntel Computer chipsNishat TextileNike Athletic shoesCoca-Cola BeveragesSony Stereos and television

Types of BusinessesManufacturing Business

Metro Cash & Carry General merchandiseD.Watson MedicineUnited Mobiles Mobile PhonesAmazon.com Internet books, music,

Types of BusinessesMerchandizing Business

PIA TransportationMarriott Hotels Hospitality and lodgingHBL Financial ServicesPTCL Telecommunication

PIA TransportationMarriott Hotels Hospitality and lodgingHBL Financial ServicesPTCL Telecommunication

Types of BusinessesServices Business

There are three types of business organizations

Proprietorship Partnership Corporation

A proprietorship is owned by one

individual.

Advantages• Ease in organizing• Low cost of organizing

Disadvantage• Limited source of

financial resources• Unlimited liability

A partnership is owned by two or more individuals.

Advantages• More financial resources than a proprietorship.• Additional management skills.

Disadvantage

• Unlimited liability.

A corporation is organized under state or federal statutes as a separate legal entity.

Advantage• The ability to obtain large amounts of

resources by issuing stocks.• Limited liability

Disadvantage

• Double taxation.

• Difficult process to establish

A business strategy is an integrated set of plans and actions designed to

enable the business to gain an advantage over its competitors, and in doing so, to maximize its profits.

Under a low-cost strategy, a business designs and produces products or

services of acceptable quality at a cost lower than that of its competitors.

Business StrategiesBusiness Strategies

Under a differential strategy, a business designs and produces products or services

that possess unique attributes or characteristics which customers are willing

to pay a premium price.

A business stakeholder is a person or entity having an interest in the economic

performance of the business.

• Owners• Banks• Customers• Government Agencies etc

Cost– Sacrifice made to achieve a particular purpose measured by the

resources given up.

Product cost– A cost assigned to goods that were either purchased or manufactured

for resale purpose

• Cost of goods sold– In the period of sale, the product costs are recognized as an

expense called cost of goods sold

Period cost– Costs are identified with the period of time in which they are incurred.

Objectives of the Lecture

Business Combinations Identify Main Goals of MNC and potential conflicts with

that goal Key theories that justify international Business Common methods to conduct international business

Goals of MNC

Commonly accepted goals of an MNC is to maximize shareholders wealth.

“ most common form of ownership of US. Based MNCs, and it enables financial managers throughout the MNC to have single goal of maximizing the value of the entire MNC instead of maximizing the value of any particular foreign subsidiary.”

What is MNC

A multinational corporation (MNC) or enterprise (MNE), is a corporation or an enterprise that manages production or delivers services in more than one country. It can also be referred to as an international corporation.

an MNC as a corporation that has its management headquarters in one country, known as the home country, and operates in several other countries, known as host countries.

Business Combinations

Business Combinations are events or transactions in which two or more business enterprises, or their net assets, are brought under common control in a single accounting entity. Other terms frequently applied to business combinations are merger and acquisitions

Classes of Business Combinations

Friendly takeover

– Mutually agreement on business combinations

Hostile takeover

– Typically resists the proposed business combinations

Defensive tactics against Hostile takeover

Pac-Man Defense

– A threat to undertake a hostile takeover of the prospective combinor

While knight

– A search for a candidate to be a combinor in a friendly takeover.

Scorched earth

– The Disposal, by sale of one or more profitable business segments.

Defensive tactics against Hostile takeover (con’t)

Shark repellent– An acquisition of substantial amounts of outstanding

common stock for treasury or for retirement, or the incurring of substantial long-term debt in exchange for outstanding common stock

Poison pill– An amendment of the articles of incorporation or by

laws to make it more difficult to obtain stockholders approval for a takeover.

Greenmail– An acquisition of common stock presently owned by

the prospective combinor at a price substantially in excess of the prospective combinor’s cost, with the stock thus acquired place in the treasury or retired.

Business combinations: Why and How?

Growth

– External method of achieving growth point out that is much more rapid than growth through internal means

– Obtaining new management strength or better use of existing management and achieving manufacturing or other operating economies

Types of Business Combinations

Horizontal combinations

– Involving enterprises in the same industry Vertical Combinations

– Between an enterprise and its customers or suppliers

Conglomerate Combinations

– Between enterprises in unrelated industries or markets

Methods for Arranging business combinations

Statutory Merger– The survivor dissolves and liquidates the other constituent

companies, receiving in exchange for its common stock investments the net assets of those companies.

Statutory Consolidation– A new corporate dissolves and liquidates the constituent

companies, receiving in exchange for its common stock investments the net assets of those companies.

Acquisition of Common Stock– Both companies still exist but a parent and subsidiary

relationship establish, receiving in exchange for its common stock investments the net assets of those companies.

Acquisition of Assets– The selling enterprise may continue its existence as a

separate entity or it may be dissolved and liquidated; it does not become an affiliate of the combinor

Parent company-subsidiary relationship

“ if the investor acquires a controlling interest in the investee, a parent-subsidiary relationship is established. The investee becomes a subsidiary of the acquiring parent company (investor) but remains a separate legal entity.

Traditionally, an investor’s direct or indirect ownership of more than 50% of an investee’s outstanding common stock has been required to evidence the controlling interest underlying a parent-subsidiary relationship.

Parent company-subsidiary relationship (con’t)

Wholly owned subsidiary company

– Purchased 100% outstanding common stock Partially owned subsidiary company

– Purchased more than 50% but less than 100% outstanding common stock

Financial Statements/Consolidated financial statments

Income Statement– Shows net results of business operations for a specific period of

time i.e. a week, month, semi-annual, Annual

Balance Sheet– Shows financial position of the company for a specific point in

time/date i.e. 31st December 2010, 30th June 2010 etc.

Cash Flow Statement– Shows inflow-outflow of funds for a specific period of time.

Statement of Changes in Owner’s Equity– Shows changes incurred in the total equity for a specific period

of time

Constraints interfering with the MNC’s Goal

Environmental Constraints– Building Codes, Disposal of production waste

materials and pollution control Regulatory Constraints

– Taxes, currency convertibility, earnings remittance, employee rights, and other policies that affect cash flows of a subsidiary established there

Ethical Constraints– There is not consensus on standard of business

conduct that applies to all countries. A business practice is perceived to be unethical in one country may be totally ethical in another.

Managing within the constraints

Using the world wide code whatever the cost companies have to bear just to enhance their credibility in the markets.

Goals of MNC What is MNC Business Combinations Classes of Business Combinations Defensive tactics against Hostile takeover Business combinations: Why and How? Types of Business Combinations Methods for Arranging business combinations Parent company-subsidiary relationship Financial Statements/Consolidated financial statements Constraints interfering with the MNC’s Goal Managing within the constraints

Theories of International Business

Theory of Comparative Advantage Imperfect Markets Product Cycle Theory

Theory of Comparative Advantage

When a country Specializes in some products, it my not produce other products, so trade between countries is essential.

– American, European Technology– Chinese cheap labor market

Imperfect Markets

Real world suffer from imperfect market conditions where factors of production are somewhat immobile. There are costs and often restrictions related to the transfer of labor and other resources used for production. There may also be restrictions on transferring funds and other resources among countries.

“ imperfect markets provide an incentive for firms to seek out foreign opportunities”.

Product Cycle Theory

Firms become established in the home market as a result of some perceived advantage over existing competitors, such as a need by the market for at least one more supplier of the product. Information about market and competition is more readily available at home.

Firms will export the products and ultimately produce the products in the foreign markets to reduce its cost i.e. transportation cost, labor cost etc.

Product Cycle Theory

Firms creates product to

accommodate local demand

Firms exports product to

accommodate foreign demand

Firms establishes foreign subsidiary to establish presence in foreign country and possibly to reduce

costs

Firms differentiates product from

competitors and / or expands

product line in foreign country

Firm’s foreign business

declines as its competitive

advantages are eliminated

International Business Methods

International Trade– Import and export of products

Licensing– It obligates a firm to provide its technology

(copyrights, patents, trademarks, or trade names) in exchange for fees or some other specified benefits

Franchising– It obligates a firm to provide a specialized sales

or service strategy, support assistance and possibly an initial investment in the franchise in exchange for periodic fees.

Joint Ventures– A joint venture is a venture that is jointly owned and

operated by two or more firms. Acquisitions of Existing operations

– Firms can also penetrate foreign markets by establishing new operations in foreign countries to produce and sell their products. Acquisitions allow firms to have full control over their foreign businesses and to quickly obtain a large portion of foreign market share

Establishing new foreign subsidiaries– Establishing new subsidiaries may be preferred to

foreign acquisitions because the operations can be tailored exactly to the firm’s needs.

International opportunities

Opportunities in Europe– Single European Act of 1987– Removal of the Berlin Wall 1989 (East and West

Germany)– Inception of the Euro in 1999– Expansion of the European Union in 2004

Opportunities in Asia– Removal of Investment restrictions in 1990– Impact of the Asian Crisis in 1997

Opportunities in Latin America– NAFTA in 1993 between US and Mexico– Removal of Investment Restrictions

Exposure to International Risk

Exposure to Exchange Rate Movements Exposure to Foreign Economies Exposure to Political Risk

MNCs Focused on International Trade

Payments received for Products US Customers

Payments Made for Supplies US Businesses

Payments received for Exports Foreign Importers

Payments made for Imports Foreign Exporters

MNCs Focused on International Trade and International Arrangements





Fees Received for Services provided Foreign Firms

Expenditures resulting from services provided Foreign Firms

MNCs Focused on International Trade, International Arrangements and Direct Foreign Investment





Fees Received for Services provided Foreign Firms

Expenditures resulting from services provided Foreign Firms

Funds Remitted Back to US parent Foreign Subsidiaries

Funds Invested in Foreign Subsidiaries Foreign Subsidiaries

Globalization

What Is Globalization?

The world is moving away from self-contained national economies toward an interdependent, integrated global economic systemGlobalization refers to the shift toward a more integrated and interdependent world economy

Globalization has two facets:

1) the globalization of markets

2) the globalization of production

The Globalization Of Markets

The globalization of markets refers to the merging of historically distinct and separate national markets into one huge global marketplaceIn many industries, it is no longer meaningful to talk about the “German market” or the “American market”Instead, there is only the global market

The Globalization Of Markets

Falling trade barriers make it easier to sell internationallyThe tastes and preferences of consumers are converging on some global normFirms help create the global market by offering the same basic products worldwide

The Globalization Of ProductionThe globalization of production refers to the sourcing of goods and services from locations around the globe to take advantage of national differences in the cost and quality of factors of production like land, labor, and capital

Companies compete more effectively by lowering their overall cost structure or improving the quality or functionality of their product offering.Boeing jet 777 airliner ( Japan, Singapore, Italy)IBM (Design in US)

( Case, Keyboard, Hard drive in Thailand)

(Display Screen, memory in S.Korea)

( Wirelesscard in Malaysia)

(Micro Processor in US)

The Emergence Of Global Institutions

Institutions are needed to:help manage, regulate, and police the global marketplace

promote the establishment of multinational treaties to govern the global business system


Institutions created over the past half century include:the General Agreement on Tariffs and Trade (GATT)the World Trade Organization (WTO)- (153 members by July 2008)the International Monetary Fund (IMF)- lender of the last resort - HO in Genevathe World Bank-HO Washington DC, USAthe United Nations (UN)-(1945)


The World Trade Organization (like its predecessor GATT) is primarily responsible for policing the world trading system and making sure that nation-states adhere to the rules laid down in trade treaties signed by WTO membersIn 2007, the 150 nations that accounted for 97% of world trade were WTO membersThe WTO promotes lower barriers to trade and investment


The International Monetary Fund and the World Bank

were created in 1944The IMF was established to maintain order in the international monetary systemThe World Bank was established to promote economic development


The United Nations was established in 1945 to:maintain international peace and securitydevelop friendly relations among nationscooperate in solving international problems and in promoting respect for human rights

Drivers Of Globalization

Two macro factors underlie the trend toward greater globalization:the decline in barriers to the free flow of goods, services, and capital that has occurred since the end of World War IItechnological change

Declining Trade And Investment Barriers

International trade occurs when a firm exports goods or services to consumers in another countryForeign direct investment (FDI) occurs when a firm invests resources in business activities outside its home countryAfter World War II, advanced countries made a commitment to lower barriers to trade and investmentSince 1950, average tariffs have fallen significantly and are now at about 4%Countries have also been opening markets to FDI


Table 1.1: Average Tariff Rates on Manufactured Products as Percent of Value


Lower barriers to trade and investment mean:that firms can view the world, rather than a single country, as their marketthat firms can base production in the optimal location for that activity

The Role Of Technological Change

Technological change has made the globalization of markets a reality

Important advances have occurred in:microprocessors and telecommunications (Optical fibre, wireless technology)

e.g. examples of phone calls in past and now in PK

comparing PK and UK telecommunication Cost.the Internet and World Wide Web

- 1990- less than 1 million

- 1995- 50 million users

- 2004- 945 million users

- 2007- 1.5 billion users ( 25th % of world population)


Its easy to get almost all information through internet.

The Web makes it easier for buyers and sellers to find each other e.g. ebay, buying shares of any company and many more.

transportation technology

- reducing the time needed

- PK is now closer to NY than it was to Iran in the Colonial times.

- Containerization and railroad cost has been reduced


Implications of technological change for the globalization of production include:lower transportation costs that enable firms to disperse production to economical, geographically separate locationslower information processing and communication costs that enable firms to create and manage globally dispersed production systems


Implications of technological change for the globalization of markets include:low cost global communications networks help create electronic global marketplacelow-cost transportation help create global marketsglobal communication networks and global media are creating a worldwide culture, and a global market for consumer products

The Changing Demographics Of The Global Economy

There has been a drastic change in the demographics of the world economy in the last 30 years

Four trends are important: the Changing World Output and World Trade Picturethe Changing Foreign Direct Investment Picturethe Changing Nature of the Multinational Enterprisethe Changing World Order

The Changing World Output And World Trade Picture

In 1960, the United States accounted for over 40% of world economic activityBy 2006, the United States accounted for less than 20% of world economic activityA similar trend occurred in other developed countriesThe share of world output accounted for by developing nations is rising and is expected to account for more than 60% of world economic activity by 2020 The World Bank has estimated that with the current prevailing situation, the Chinese economy could be larger than the US by 2020 while the economy of India will approach to that of Germany.

The Changing World Output And World Trade Picture

Table 1.2: The Changing Demographics of World GDP and Trade

The Changing Foreign Direct Investment Picture

In the 1960s, U.S. firms accounted for about two-thirds of worldwide FDI flowsToday, the United States accounts for less than one-fifth of worldwide FDI flowsOther developed countries have followed a similar patternIn contrast, the share of FDI accounted for by developing countries has risen from less than 2% in 1980 to almost 12% in 2005Developing countries, especially China, have also become popular destinations for FDI


Figure 1.2: Percentage Share of Total FDI Stock 1980-2005


Figure 1.3: FDI Inflows 1988-2006

The Changing Nature Of The Multinational Enterprise

A multinational enterprise (MNE) is any business that has productive activities in two or more countriesSince the 1960s,

- there has been a rise in non-U.S. multinationals,

- and a growth of mini-multinationals

According to UN data, 100 largest are still in the hands of developed economies Except three from developing economies

- Hutchison Whampoa from Hong Kong, China (16th)

- Singtel of Singapore (70th )

- CEMEX of Mexico (87th)

The Changing World Order

Many former Communist nations in Europe and Asia are now committed to democratic politics and free market economies and so, create new opportunities for international businessesChina and Latin America are also moving toward greater free market reforms

The Global Economy Of The Twenty-first Century

The world is moving toward a more global economic system, but globalization is not inevitableGlobalization also brings risks like the financial crisis that swept through South East Asia in the late 1990s. 2007 till running.

The Globalization Debate

Is the shift toward a more integrated and interdependent global economy a good thing?Supporters believe that increased trade and cross-border investment mean lower prices for goods and services, greater economic growth, higher consumer income, and more jobsCritics worry that globalization will cause job losses, environmental degradation, and the cultural imperialism of global media and MNEs

Anti-Globalization Protests

More than 40,000 anti-globalization protesters took to the street at the WTO meeting in Seattle in 1999Protesters now regularly show up at most major meetings of global institutions

Globalization, Jobs, And Income

Globalization critics argue that falling barriers to trade are destroying manufacturing jobs in advanced countriesSupporters of globalization contend that the benefits of this trend outweigh the costs—that countries will specialize in what they do most efficiently and trade for other goods—and all countries will benefit

Globalization, Labor Policies, And The Environment

Globalization critics argue that firms avoid costly efforts to adhere to labor and environmental regulations by moving production to countries where such regulations do not exist, or are not enforcedGlobalization supporters claim that tougher environmental and labor standards are associated with economic progress, so as countries get richer from free trade, they get tougher environmental and labor regulations

Globalization And National Sovereignty

Critics of globalization worry that today’s interdependent global economy is shifting economic power away from national governments toward supranational organizations like the WTO, the EU, and the UNSupporters of globalization contend that the power of these organizations is limited to what nation-states agree to grant, and that the power of the organizations lies in their ability to get countries to agree to follow certain actions

Globalization And The World’s Poor

Critics of globalization argue that the gap between rich nations and poor nations is getting widerSupporters of globalization claim that the best way for the poor nations to improve their situation is to reduce barriers to trade and investment and implement economic policies based on free market economies, and to receive debt forgiveness for debts incurred under totalitarian regimes

Managing In The Global Marketplace

An international business is any firm that engages in international trade or investment

Managing In The Global Marketplace

Managing an international business differs from managing a domestic business because: countries are differentthe range of problems confronted in an international business is wider and the problems more complex than those in a domestic businessfirms have to find ways to work within the limits imposed by government intervention in the international trade and investment systeminternational transactions involve converting money into different currencies

international business management. types of businesses manufacturing merchandizing services business

Documents

business designs

business stakeholder

business strategiesunder

business enterprises

establisha business

international corporation

entire mnc

differential strategy