CH-6 International Management – Management: Leading and Collaborating in a Competitive World : Chapter Notes

Chapter 6 International Management LEARNING OBJECTIVES 1 Discuss what integration of the global economy means for individual companies and their managers. 2 Describe how the world economy is becoming more integrated than ever before. 3 Define the strategies organizations use to compete in the global marketplace. 4 Compare the various entry modes organizations use to enter overseas markets. 5 Explain how companies can staff overseas operations. 6 Summarize the skills and knowledge managers need to manage globally. 7 Identify ways in which cultural differences across countries influence management. CHAPTER OUTLINE Managing in Today’s (Global) Economy International Challenges and Opportunities Outsourcing and Jobs The Geography of Business Western Europe Asia: China and India The Americas Africa and the Middle East Global Strategy Pressures for Global Integration Pressures for Local Responsiveness Choosing a Global Strategy Entry Mode Exporting Licensing Franchising Joint Ventures Wholly Owned Subsidiaries Managing Overseas Skills of the Global Manager Understanding Cultural Issues Ethical Issues in International Management CHAPTER RESOURCES Experiential Exercises 6.1 Global Integration - Local Responsiveness Worksheet 6.2 Cross-Cultural Anthropologist Cases A Global Launch for Net-Work Docs Social Enterprise Student Social Entrepreneurs Compete for $1 Million Lecturettes LECTURETTE 6.1: Untangling the Trade Deficit LECTURETTE 6.2: Stand Up and Fight KEY STUDENT QUESTIONS Students have very practical questions about international management - they want to know: 1. “What implications does globalization have for my job—what can I do to keep my job from being outsourced?” 2. “How does a manager know when to take a business global?” While every industry is different, you can offer students the following advice: • An article in Business Week outlines the skills that programmers need to find a job in the United States. It seems that technical skills aren’t enough anymore. To be successful, programmers also have to show that they can lead and manage teams, think strategically, and become software architects, not just the implementers of someone else’s vision. • Most managers today don’t really have the choice of whether or not to take a business global—as soon as they post their first corporate website, they are doing global marketing. What companies do have, however, is a choice about whether or not to target global markets over domestic ones. James F. Foley has written a book entitled The Global Entrepreneur, which discusses some of the reasons why companies decide to go global, including: o accessing markets beyond their domestic territory o avoiding a changing domestic environment, especially decreasing customer bases or when selling seasonal items o lowering costs o a strategic plan to increase global brand awareness, achieve worldwide distribution and manufacturing capacity and exploit extranational economies of scale and experience effects. CLASS ROADMAP POWERPOINTS Slide 1 International Management Slide 2 Chapter Introduction Quote Slide 3 Learning Objectives MANAGEMENT IN ACTION How Alibaba Is Becoming a Global Brand Alibaba may be barely known outside China, but today this Chinese e-commerce company is growing by leaps and bounds. To further fund the growth it seeks at home and abroad, Alibaba recently raised $25 billion from its IPO, listing itself in the United States. It employs about 45,000 people and posted revenues of over $5 billion in 2016, despite a marked slowing of the Chinese economy. Alibaba’s founder Jack Ma has promised to expand his company’s toehold in the United States. He stresses that his company will remain true to its stated principles, which put customers first, employees second, and shareholders third. “Our philosophy is that we want to be an ecosystem,” he says. “Our philosophy is to empower others to sell, empower others to service, making sure the other people are more powerful than us. I. MANAGING IN TODAY’S (GLOBAL) ECONOMY POWERPOINTS Slide 4 Managing in Today’s (Global) Economy Slide 5 Exhibit 6.1 Top 10 Global Firms Slide 6 The Role of Outsourcing Slide 7 Factors to Consider for Offshoring LO 1: Discuss what the integration of the global economy means for individual companies and their managers. A. International Challenges and Opportunities B. Outsourcing and jobs 1. Outsourcing occurs when an organization contracts with an outside provider to produce one or more of its goods or services 2. Offshoring is a specific type of outsourcing whereby companies move jobs to providers in another country, typically where wages are lower. 3. Managers should ask these questions when considering offshore business: a. What is the competitive advantage of the products they offer? b. Is the business in its early stages? c. Can production savings be achieved locally? d. Can the entire supply chain be improved? Example 6.1 Global Environment In June, 2007, the “Fast Company” magazine did a cover story on “China’s New Creative Class: How a Dynamic, Business-Savvy Generation is Poised to Redefine Product Design, Architecture, Fashion, and Entertainment.” Profiled inside were nine young Chinese people, all of whom are at the heart of China’s creative revolution—the founder of a gallery showcasing China’s new street culture, a member of the Creative Committee for the 2008 Olympics, the publisher of an art magazine, a furniture and ceramics maker, an actress, architects, a DJ, a graphic designer, and a fashion designer. If you read a little more closely, you begin to realize how truly global all these people are—the fashion designer studied in London, the architects have offices in Beijing, but are working on a huge project in Toronto, the DJ built his skills in Japan, the furniture designer is selling her works in Milan, the Olympic Committee member worked in New York before coming home to Beijing, and the actress, Ziyi Zhang, is an international star. China is no longer just a manufacturer for Wal-Mart—it is looking to use innovation and creativity to awe the world. II. THE GEOGRAPHY OF BUSINESS POWERPOINTS Slide 8 The Global Environment Slide 9 Key Issues of the Global Environment Slide 10 European Unification Slide 11 Asia Slide 12 The Americas Slide 13 Africa and the Middle East Slide 14 Social Enterprise LO 2: Describe how the world economy is becoming more integrated than ever before. A. Western Europe 1. European Union (EU) will allow goods, services, capital, and human resources to flow freely across national borders. 2. Unification will create a more competitive Europe. 3. The United States must remain vigilant to ensure that a Fortress Europe does not close itself to U.S. goods and services. B. Asia: China and India 1. Japan dominated world attention toward the end of the last century. 2. China has now surpassed Japan and Mexico, becoming America’s second largest trading partner. Example 6.2 Global economy consequences Naresh Goyal, the founder and chairman of Jet Airways, is ready for his airline to take off. Jet Airways is the largest private airline in India. Today, Jet Airways is expanding its service worldwide—from India to London, Brussels, New York, Toronto, Shanghai, and even Johannesburg. Part of the expansion is based on the fact that Indian expertise is in demand all over the world, and Indians who leave their home country for work in other countries still want to come back to visit family and friends. Additionally, part of the expansion is because Jet Airways is having a difficult time competing in its own domestic market, where several new low-cost carriers have pushed fares unacceptably low. C. The Americas 1. North American Free Trade Agreement (NAFTA) is an economic pact that combined the economies of the United States, Canada, and Mexico into the world’s largest trading bloc. 2. Industries that have benefited in the short run include capital-goods suppliers, manufacturers of consumer durables, grain producers and distributors, construction equipment manufacturers, the auto industry, as well as the financial industry. D. Africa and the Middle East 1. Middle East, Africa, and Latin America comprise a major share of the world’s natural resources and are among the fastest-growing economies. III. GLOBAL STRATEGY POWERPOINTS Slide 15 Exhibit 6.3 Organizational Models Slide 16 Choosing a Global Strategy LO 3: Define the strategies organizations use to compete in the global marketplace. A. Pressures for global integration 1. Universal needs create strong pressure for a global strategy. 2. Competitive pressures to reduce costs may force a company to globally integrate manufacturing. 3. Global strategic coordination is another factor that creates pressure for global integration. B. Pressures for local responsiveness emerge when: 1. Consumer tastes and preferences differ significantly. 2. There are differences in traditional practices 3. There are differences in distribution channels and sales practices. 4. Host country governments impose economic and political demands. C. Choosing a global strategy 1. The international model is designed to help companies exploit their existing core capabilities to expand into foreign markets. a. The advantage of this model is that it facilitates the transfer of skills and know-how from the parent company to subsidiaries around the globe. b. One disadvantage of the international model is that it does not provide maximum latitude for responding to local conditions. 2. The multinational model uses subsidiaries in each country in which the company does business, and provides a great deal of discretion to those subsidiaries to respond to local conditions. a. One advantage of allowing local responsiveness is that there is less need for coordination and direction from corporate headquarters. b. A major disadvantage of this model is higher manufacturing costs and duplication of effort. 3. The global model is designed to enable a company to market a standardized product in the global marketplace and to manufacture that product in a limited number of locations where the mix of costs and skills is most favorable. a. Companies that adopt the global model tend to become the low-cost players in any industry. b. On the downside, because a company pursuing a purely global approach tries to standardize its products and services, it may be less responsive to consumer tastes and demands in different countries. 4. The transnational model is an organization model characterized by centralization of certain functions in locations that best achieve cost economies; basing of other functions in the company’s national subsidiaries to facilitate greater local responsiveness and fostering of communication among subsidiaries to permit transfer of technological expertise and skills. a. A distinguishing characteristic is the fostering of communications among subsidiaries. b. Achieving such communications across subsidiaries requires elaborate formal mechanisms, such as transnational committees staffed by people from various subsidiaries who are responsible for monitoring coordination among subsidiaries. c. These organizations transfer managers among subsidiaries on a regular basis. d. Achieving coordination among subsidiaries requires that the head office play a proactive role in coordinating their activities. Example 6.3 Global strategy systems To compete in the global marketplace, GE uses a multinational system that consists of independent company subsidiaries in other countries and provides great discretion to those subsidiaries to respond to local conditions. For example, in India, GE has a stake in GE Capital International Services (GECIS.) GECIS is now an independent company, and GE owns less than half of it, which allows for even greater local flexibility. Other systems include international (extending current strength into other countries), global (centralized decision-making for a company’s foreign arms), and transnational organization models (basing functions of a company in the country that is most favorable). MANAGEMENT IN ACTION Progress Report Alibaba’ Global Strategy Company founder Jack Ma plans a major expansion in the United States, which he hopes will not only bring more U.S. shoppers to the site but also attract more American vendors, large and small. If Jack Ma succeeds in expanding his company’s presence in the United States, thousands and possibly millions of other vendors, including the kind of small operations that thrive in Amazon’s third-party marketplace, could follow them. The attraction of China’s huge and increasingly profitable market is substantial. Some estimates suggest the new Chinese middle class is 300 million strong, as large as the entire U.S. population. These shoppers are sophisticated and tech-savvy and are willing to pay for—the international brands that make up a fast-growing proportion of the site’s Western vendors. Jack Ma has indicated he wants to capitalize on the opportunity to serve U.S. small vendors and customers too. He announced plans to expand his company’s New York City headquarters by leasing several floors in a downtown office building, where he will also have an office. • In what ways do you think Alibaba’s Jack Ma is responding to the need for global integration? How does his strategy exemplify local responsiveness? While answers will vary, students may mention the incorporation of local vendors and the attempts to include desired brands. • Which global strategy (international, multinational, global, or transnational) do you think is most appropriate for Alibaba? Why? IV. ENTRY MODE While answers will vary, depending on the case feature the student-focused upon, students may settle on transnational as the websites can be easily customized for local markets from a central location. POWERPOINTS Slide 17 Comparison of Entry Modes Slide 18 Licensing / Franchising Slide 19 Joint Ventures and Subsidiaries LO 4: Compare the various entry modes organizations use to enter overseas markets A. Exporting 1. Advantages of exporting are: a. Provides scale economies by avoiding the costs of manufacturing in other countries. b. Is consistent with a pure global strategy. 2. Disadvantages of exporting are: a. Exporting from the company’s home base may be inappropriate if other countries offer lower-cost locations for manufacturing the product. b. High transportation costs can make it uneconomical, particularly in the case of bulk products. c. Host countries can impose tariff barriers. B. Licensing 1. An arrangement whereby a licensee in another country buys the rights to manufacture a company’s product in its own country for a negotiated fee. C. Franchising 1. It is used primarily by service companies. 2. The company sells limited rights to use its brand name to franchisees in return for a lump-sum payment and a share of the franchisees’ profits. Example 6.4 Difference between franchising and licensing Students often want to know more about the differences between franchising a business and licensing a business (or a business opportunity.) According to an article at Entrepreneur.com, there are four key areas of difference between the two: Common Name • Franchise: A franchisee’s business is identified by the franchisor’s trade-mark. • Business Opportunity: The licensee may not be identified by the company’s trademark. Support • Franchise: A franchisee receives training, marketing, and other support on a continual basis. • Business Opportunity: The licensee may receive very little, if any, in the way of support from the company—except for sources of products. Standards • Franchise: A franchisee typically offers products and services on an exclusive or semi-exclusive basis and has minimal standards of performance set by the franchisor. • Business Opportunity: The licensee can usually handle a variety of different lines of products and services—some of which may compete with each other. Fees • Franchise: Franchisees typically pay a continuing royalty based on the gross sales of their business. Business Opportunity: The licensee’s payments aren’t typically based on sales but on the purchase of products they make from the licensor. D. Joint ventures 1. Joint ventures benefit a company through: a. The local partner’s knowledge of the host country’s competitive conditions, culture, language, political systems, and business systems b. The sharing of development costs and/or risks with the local partner. c. Two possible disadvantages: i. In the case of licensing, a company runs the risk of losing control over its technology to its venture partner. ii. Because control is shared with the partner, the company may lose control over its subsidiaries. Example 6.5 Joint ventures CNH Case New Holland is a manufacturer and supplier of agricultural equipment. Owned by Fiat, the Italian automobile manufacturer, CNH is a conglomerate of some of the biggest names in the agricultural equipment business—International Harvester, New Holland Machine Company, and Case in the American market, Steyer in the Austrian market, and Braud in the French market. Today, CNH continues to create joint ventures with businesses all across the globe - with the Shanghai Tractor and Internal Combustion Engine Corporation (STEC), with the BNP Paribas Lease Group in France, with the Kobelco Construction Machinery Co., Ltd. in Italy—the list goes on and on. CNH has distributorships in 160 countries—it is truly a global business. E. Wholly owned subsidiaries 1. An independent company owned by the parent corporation. 2. The most costly method of serving an overseas market. V. WORKING OVERSEAS POWERPOINTS Slide 20 Managing across Borders Slide 21 Stressors and Coping Responses in the Developmental Stages of Expatriate Executives (part 1) Slide 22 Stressors and Coping Responses in the Developmental Stages… (part 2) Slide 23 Stressors and Coping Responses in the Developmental Stages… (part 3) Slide 24 Skills of the Global Manager Slide 25 Identifying International Executives (part 1) Slide 26 Identifying International Executives (part 2) Slide 27 How to Prevent Failed Global Assignments Slide 28 Understanding Cultural Issues Slide 29 Hofstede’s Cultural Dimensions Slide 30 Exhibit 6.8 Positions of 40 Countries on the Power Distance and Individualism Scales Slide 31 Different Perspectives Slide 32 Management in Action Slide 33 In Review LO 5: Explain how companies can approach the task of staffing overseas When establishing operations overseas, headquarter executives have a choice between sending:  Expatriates o cost o personal security o stress  Host-country nationals o availability o familiarity with language and culture o cost less  Third-country nationals o can soften political tensions o “compromise solution” between expatriate and host country nationals Example 6.6 Cultural differences High costs and difficulties associated with expatriation, together with the impact of cultural differences are leading some companies to develop local managers in the countries in which they operate. To accomplish this, Enrique Tarelli, Outplacement/Career Management Director for Sociologia de Empresa in Argentina, uses an immersion process aimed at acquiring a wide range of competencies, such as, knowledge, developing relationships with people all over the world, the ability to operate at the highest standards, and interacting with culturally different environments. LO 6: Summarize the skills and knowledge managers need to manage globally. A. Skills of the Global Manager 1. Failure rate is the number of expatriate managers of an overseas operation that come home early. Failure can be prevented by: a. structuring assignments clearly b. creating clear job objectives c. developing performance measurements based on objectives d. using effective, validated selection and screening criteria e. preparing expatriates and families for assignments f. creating a vehicle for ongoing communication g. using repatriation to facilitate reentry h. developing a mentor program that will help in case of trouble 2. Skills and knowledge include: a. flexibility b. emotional stability c. empathy for the culture d. communication skills e. resourcefulness f. initiative g. diplomatic skills Example 6.7 Multidimensional perspective When Texas Pacific Group, a private-equity firm was looking for a new manager to help oversee venture deals, they went global—to Vivek Paul, the vice chairman of Wipro Ltd., an Indian information-technology, and outsourcing company. Mr. Paul demonstrated multidimensional perspective by leading companies from different businesses and cultural adaptability by working with countries that are based in different countries. LO 7: Identify ways in which cultural differences across countries influence management. B. Understanding cultural issues 1. Culture shock is the disorientation and stress associated with being in a foreign environment. 2. Geert Hofstede’s dimensions of cultural differences: a. power distance b. individualism/collectivism c. uncertainty avoidance d. masculinity/femininity CONNECT Comprehensive Case: Hofstede’s Dimensions at Work SUMMARY Greet Hofstede developed four dimensions along which managers in multinational corporations can characterize cultural differences: power distance, individualism/collectivism, uncertainty avoidance, and masculinity/femininity. In many ways, cultural issues represent the most elusive aspect of international business. The exercise presents the case of Texas native Michael Weinberg. Since starting an insurance company in the United Arab Emirates, Michael has learned a lot about that country’s business culture. ACTIVITY A case is presented along with four open-ended questions intended to facilitate a deeper understanding of Hofstede’s four dimensions. CLASS DISCUSSION IDEAS Use the exercise to explore how Hofstede’s dimensions could be applied to other cultures. Or explore if the tools like Hofstede’s are legitimate or if they extend stereotypes. MULTIPLE GENERATIONS AT WORK Do Millennials Need International Work Experience? According to the results of a survey of working Millennials from six countries, the answer is yes. PricewaterhouseCoopers asked early career employees the following question: “Thinking of working outside your home country, do you agree/disagree that you need international experience to further your career?” A large majority of Millennial respondents from emerging economies, Brazil, China and India, view international experience as important for their career. In contrast, just over half of respondents from the United States and Germany, both developed economies, think international experience will benefit their careers. 3. An inpatriate is a foreign national brought in to work at the parent company 4. When working with foreign nationals, it is important to explain U.S. cultural norms with regard to: a. Holding meetings b. Work schedules c. E-mail d. Fast-trackers e. Feedback Example 6.8 – Working with foreign nationals Straddlers. Navigators. Learners. These are the terms the employees at Grupo Gallegos, an advertising agency in Long Beach, CA, use to describe different sorts of Hispanics in the United States. Who are they? The Learners are foreign-born, and they speak Spanish primarily. On average, they have 3 children, and 65% of them rent their homes. The Straddlers immigrated to the United States at a young age. Most of them are in blue-collar or semi-professional jobs, and while they are bilingual, they still speak mostly Spanish. Navigators speak primarily English, although they know some Spanish. 78% of them have at least some college, 60% of them own their own homes, and their average household income is $76,000 a year. What is interesting is how different the cultures of all of these groups can be, even though most people would simply lump them together under the title of “Hispanic.”. With Learners, most advertising agencies use what Gallegos refers to as “abuelita advertising” —commercials showing a mother and grandmother in the kitchen, both talking about how great a particular product is. But Gallegos recently reached out to Straddlers in a unique way. In an ad for Tecates Beer, a young man named Basilio puts up with people mispronouncing his name all day, but when he walks into a bar full of Latinos, they all say his name correctly as they raise their Tecate beers. C. Ethical issues in international management 1. Without an understanding of local customs, ethical standards, and applicable laws, expatriates are unprepared for international work. 2. Ch. 5 identified several steps companies can take to enforce ethical behavior. In a foreign context, these activities must be carried out with employees in any subsidiary, franchise, or other company operation. 3. Most people embrace five core values, regardless of religion or nationality: a. compassion b. fairness c. honesty d. responsibility e. respect for others MANAGEMENT IN ACTION Onward Controlling Alibaba’s Problem with Counterfeits Counterfeit goods that have long plagued Alibaba’s retail platforms. One of their sites, Taobao, was placed on a U.S. government watch list of “notorious markets” in 2012. Alibaba responded with efforts to combat fakes—hiring a staff of 2,000 and enlisting 5,000 volunteers to help identify counterfeit goods, setting aside 150 million yuan (almost $22 million) to buy and test suspected fakes, and designing algorithms that help spot fakes by monitoring hundreds of data such as price. The company also invested in a $2.4 million lobbying effort in Washington to seek removal from the list. While the removal effort initially paid off, in 2016 Taobao was again placed on the watch list, and the U.S. agency issued a warning about Alibaba’s other retail site, Tmall. Alibaba quickly responded with a new strategy, taking to Chinese courts to sue two vendors selling fake Swarovski watches on its site. It is the first such suit the company has filed. • What is Alibaba’s ethical responsibility for controlling the sale of counterfeit goods on its websites? While answers will vary, students may focus on the consumer right for accurate information. Students may also point to the intellectual property theft from the owners of the brands. Alibaba’s role in the selling of counterfeits can be debated. Some students will say they are just brokers, bringing buyers and sellers together, and the ethical lapses, if any, are the responsibility of the seller. Students may also argue that Alibaba, as host, facilitates the behavior and by allowing the seller’s ads, endorses the product. Some students may take a “buyer beware” attitude and say consumers should not be surprised by the counterfeits and may actually want them. • What cultural issues can you identify in this example? Students may point out that counterfeit goods are common and accepted in China. The emerging resistance to counterfeits in China may indicate a “westernization” of the growing middle class in China. CONNECT Click and Drag: Global Strategies (Keyboard navigable alternate version also available.) SUMMARY One of the critical tasks an international manager faces is to identify the best strategy for competing in a global marketplace. To approach this issue, managers can plot a company's position on an integration–responsiveness grid. The vertical axis on this grid measures pressures for global integration, and the horizontal axis measures pressures for local responsiveness. Based on this, there are four possible strategies or models an organization can adopt. ACTIVITY The exercise presents four companies to align with a global strategy. CLASS DISCUSSION IDEAS Extend the conversation beyond the prepared questions by offering other business areas to consider against the multinational, international, global and transnational approaches. CONNECT Video Case: Going Global with Disney Imagineering SUMMARY The global economy is becoming more integrated than ever before. To succeed in this industrial climate, managers need to study opportunities in existing markets as well as work to enhance the competitiveness of their firms. When considering global expansion, international managers must decide on the best means of entering an overseas market and how best to staff global operations. ACTIVITY This exercise presents a 10-minute video featuring Disney Imagineering. After providing background on Disney, the video presents how the company has fit its resort concepts into international markets. The exercise concludes with a series of multiple-choice questions. CLASS DISCUSSION IDEAS A class discussion could be prompted by offering another location for Disney resort expansion for the class to advise the Imagineers on. CONNECT Manager’s Hot Seat: Cultural Dimensions SUMMARY This 9-minute Hot Seat video features a meeting between Michael Sokolow and an international client Norio Tokunaka. Michael is unaware of how his behavior is counter to the cultural expectations of Norio, and he fails to close the business deal. The video is somewhat humorous as Michael seems to be oblivious to his behavior despite the obvious clues from Norio. ACTIVITY After viewing the video, students are directed to answer a series of multiple-choice questions. CLASS DISCUSSION IDEAS A class discussion following this video might help students see that managers need to understand the implications and possible problems that can arise when dealing with people from different cultures. Michael’s lack of ownership for the lost deal may also lead to a discussion of responsibility and the need for honest self-assessment. BOTTOM LINE Why might innovation be important for a U.S. company in a global market? Answers will vary. The previous section gave one hint, however, and that is the higher cost of labor in the United States relative to many parts of the world. A company operating in the United States may need to excel in technology, entrepreneurship, and innovation in order to compete with low-cost businesses elsewhere. What is one way in which a global strategy can help reduce costs? A company can enjoy economies of scale from making large quantities of standardized products for sale in many countries. It can locate production in a few facilities where its costs (including production and transportation) are optimal. Give an example of a product for which quality standards would apply globally. Answers will vary. Students should think of widely valued products. The text refers to IBM (computers), Xerox (office equipment), Kellogg (breakfast cereal), Coca-Cola (soft drinks), and others. What kind of product might experience rapid changes in local demand? Answers will vary. Logical choices would include products for which weather affects demand, as well as fashion-driven products such as clothing, which could quickly go in and out of style. Could this model apply to a jewelry company? If so, how? If not, why not? Students should give a reason for either answer. A jewelry company that specializes in high-end or handcrafted jewelry might not want to use this global model, even though it drives down costs because its customers don’t want a standardized product and don’t mind paying a premium. But a maker of costume jewelry or jewelry for children might embrace a global model. Does that mean the transnational model is always best? Why or why not? No. The transnational model is the best strategy if the company faces high pressures for both global integration and local responsiveness. In some cases, a company is more likely to succeed with a standardized product or with attention to the particular needs of each individual buyer. Can services be exported? Why or why not? The traditional answer has been that it is difficult or impossible to export services because they are delivered directly to the consumer by the person who produces them. However, with advances in technology, more companies are exporting services such as answering phones, writing software, handling a company’s accounts, or researching legal issues. The resulting information or data can readily be shared online. Why does quality control pose a risk in franchising? With franchises, much of the value is in the brand; customers expect the same level of quality whenever the patronize one of the company’s businesses. If they have a good experience, they will expect more of the same. But if they have a bad experience, they may avoid all of the company’s establishments in the future. How might training an expatriate manager differ from training a local manager? An expatriate manager is likely to need more training in cultural differences and business practices of the host country, including the needs and values of local customers. A local manager, especially in countries where the economy is less developed, may need more training in general management skills and in the company’s organizational culture and principles. SOCIAL ENTERPRISE Student Social Entrepreneurs Compete for $1 Million The Hult Prize Foundation is a student business competition and start-up accelerator that awards $1 million to social entrepreneurs from universities around the world. The competition identifies and provides seed funding to promising “start-up social enterprises that tackle grave issues faced by billions of people.” 1. Of the three recent award-winning start-ups mentioned above, which do you find most likely to succeed? Why? Student answers will vary depending on the social entrepreneurship concept they like the most. There should be a brief analysis on how this related to global management and the likelihood that the company will succeed in today’s market. 2. The Hult Prize has been awarded to new social enterprises from all over the world. Why do you think the competition has a global focus? Social entrepreneurship, like many other facets of business, has become a global endeavor. Companies cannot just make a difference in one nation as they need to make a difference in the entire world based on the interconnectivity of global issues. For example, a developed nation has certain resources that can help a poorer nation, and social entrepreneurs need to make these connections. LECTURETTES LECTURETTE 6.1: Untangling the Trade Deficit TRADE DEFICIT 1. There are many misunderstood economic statistics, but there is one that clearly stands out as the most confusing: the trade deficit. No other number is interpreted so differently by professional economists and the general public. It is thought that America’s trade deficit exists either because of the skullduggery and unfair trade practices of countries that shut out U.S. products or because American companies are failing to compete against their global competitors. In either case, the preferred solution is often to get tough in trade negotiations for the sake of protecting U.S. jobs. 2. The U.S. trade deficit rose from $56 billion in 1992 to $155 billion in 1997. The economic troubles in East Asia prompted predictions that producers in those countries would flood U.S. markets with imports while reducing their purchases of U.S. Exports, which could increase the 1998 trade deficit by another $50 billion or more. However, as of September 2011, the U.S. trade deficit stood at $43.1 billion. What occurred to close this gap? COMPONENTS OF THE TRADE DEFICIT 1. Part of the confusion about the trade deficit arises because the U.S. Department of Commerce reports several versions of the trade deficit, and the differences among them can be tens of billions of dollars. The biggest trade-deficit number, which was revised in June 1998 from $191 billion to $198 billion for 1997, is calculated by taking America’s exports of goods and subtracting America’s imports of goods. The fact that it is a deficit, rather than a surplus, means that imports of goods are $198 billion larger than exports. 2. In the modern economy, it is surely too limited to consider goods only. In 1997, only 36 percent of the U.S. gross domestic product (GDP) were goods, while 55 percent was services. (The rest is structures and changes in inventories.) Some services are obviously difficult to trade internationally: It’s not clear how one ships housecleaning or haircutting services overseas. But many services like finance, law, expert design, computer programming, and advertising can be and are traded internationally. While the U.S. economy runs trade deficits in goods, it runs substantial and growing surpluses in service trade. The goods and services deficit is clearly a better measure of the trade deficit than goods taken alone. There is no economic justification for arguing that goods like computers should be counted in the trade statistics, while services like computer programming should not be, or that goods like cars should be counted in the trade statistics, but the services of car advertising and providing loans to buy cars should not be. POPULAR MYTHS 1. Much popular thinking about the trade deficit is based on a few well-known facts about the United States and Japan. The Japanese economy is more closed to trade than the U.S. economy. In certain areas, Japanese firms have made considerable inroads into U.S. markets. Japan runs trade surpluses while the United States has a trade deficit. 2. If one is to believe that trade deficits occur because of how well U.S. firms match up to foreign competition, then one must believe that the competitiveness of U.S. firms collapsed from 1981 to 1987, surged back toward equality from 1987 to 1991, and has collapsed again since then. If one is to believe that trade deficits occur because of unfair trade practices, then one must believe the following: From 1981 to 1987, the rest of the world unfairly blocked U.S. exports; but, from 1987 to 1991, it allowed free trade, only to retreat to gross unfairness during the last six years. Again, there is literally no evidence that trade laws, whether here or abroad, have changed in the dramatic ways that would be needed to explain what has actually occurred. THE TRUE MEANING OF TRADE DEFICIT 1. We must return to the question of what a trade deficit really is. All the items on the surplus side of the current account balance—exports of goods and services, investment income received by U.S. investors who have capital abroad, and unilateral transfers to the United States—involve money flowing from elsewhere into this country. Conversely, all the items on the deficit side of the current account balance involve money flowing abroad. It would be insufficient, however, simply to stop here. Something else must be considered. Money flowing out of the United States is in U.S. dollars; money that is earned by U.S. exporters—say, when an American-built car is sold in Germany—is not originally received in U.S. dollars but, instead, in foreign currencies. A U.S. company that earns foreign currency by exporting abroad will seek to convert that money into U.S. dollars at the prevailing exchange rate, and then use those dollars to pay off its American-based costs. 2. The U.S. trade balance can be viewed as a matter of comparing the amount of U.S. imports of goods, services, investment income, and transfers—all paid in U.S. dollars—with the value of U.S. exports of these items—all paid in the form of various world currencies—at the world’s prevailing exchange rates. Again, the trade deficit means that imports are larger, by $155 billion in 1997. The existence of the $155 billion trade deficit in 1997 reveals that this many U.S. dollars were earned and not traded for foreign currencies by foreign companies and investors. They apparently remained in the form of U.S. dollars! CAPITAL FLOWS ARE KEY 1. In a world without foreign trade, a nation can only consume what it produces. But in a world with trade, a nation can borrow from abroad, use the money to consume more goods and services than it currently produces, and promise to repay later. A nation like the United States, which does this, is running a trade deficit and a number of the trade deficit measures both the extra goods purchased from abroad and the inflow of capital from abroad. Conversely, economies like Japan with trade surpluses are producing more than they consume. They are taking the amount that they earn from producing more than they consume and investing it abroad. 2. Thus a trade deficit means that a nation is receiving net investment from abroad. Equivalently, a trade deficit means that a nation is consuming more than it is producing. Again equivalently, a trade deficit means that a nation is investing more than its domestic savings. A trade surplus would reverse these statements. LECTURETTE 6.2: Stand Up and Fight It’s tough being an aggrieved consumer in Big Business-oriented Japan. Mitsubishi hid consumer complaints in a company locker rather than turning them over to the government. Shareholders are angry about Mitsubishi’s cover-up and poor quality control. The company is accused of poor crisis management and public relations skills. A new appreciation in Japan for the rights of consumers is the best things that could come out of the scandal. The philosophy of management should be a commitment to please their customers, to develop a competitive edge, and improve their market share in the long run. Management decisions must create customer satisfaction and strive toward the goals and strategies to be achieved and in the same vain meet stockholder demands. Profits are an important goal; however, the long run orientation to pursue profits is consistent with the Japanese philosophy of management. Japanese judiciary believes it must preserve the social-structure and this means protecting big companies, not the individual. In Japan, companies have little reason to fear litigation; they pay small heed to consumers’ complaints. Japan has double standards, and it is a place where companies can get away with actions that would never be tolerated in the United States or Europe. Management decisions are built upon social responsibility and organization politics is an inherent part of the Japanese culture. Japanese firms operate in the marketplace in a unique way so they can be competitive and meet industry-wide standards that are acceptable to employers within a given industry. Consumer complaints have also come from Bridgestone/Firestone, and the company president all but disappeared following allegations from faulty tires. The company has been mum, except for a news conference to announce the recall. This type of action could be damaging in the long run. This company must network and meet group performance standards that will be acceptable in the marketplace. There is a fine line between creating customer satisfaction and organization politics that exist among the firms within a given industry. Political overtures are an inherent part of the Japanese culture and have an impact on the philosophy of management and decisions that are made. Workers at a uranium reprocessing facility set off a nuclear reaction that caused two deaths and exposed 439 people to radiation. The company was under pressure to cut costs, and the government failed to conduct adequate inspections. This is a classic illustration of Japanese management and the networking between the government and firms within this industry. Milk sold by Snow Brand Milk Products Co., Japan’s largest dairy failed to notify the public of the problem for two days after 14,500 people fell ill after drinking the tainted milk. Health authorities declared Snow Brand products safe for consumption before establishing the cause of the poisoning. A reactive approach, compared to a proactive style of management, is often exercised in making decisions of a social responsibility philosophy of management. One of the reasons it is hard for Japanese consumers to get a hearing is that the Product Liability Law lacks muscle. Activist lawyers are lobbying for new measures to help the legal profession go after companies. The courts need a United States-style “discovery” system that would force defendants in product-liability cases to turn over relevant documents, which is not the case now. Japanese companies aren’t afraid of the law. In response, consumers are advocating tougher penalties for offenders. One of the most critical needs in Japan is for judicial reform. Japan suffers from a serious shortage of both lawyers and judges. The consumer has no one to turn to when problems arise with products. Consumers need to raise their voices if they expect to change the situation. Tougher inspectors and higher standards could help, but corporations must improve quality—and heed the complaints of the customers who keep them in business. There is a need to become socially responsive to meet the needs of stakeholders that are an inherent part of the Japanese culture. Instructor Manual for Management: Leading and Collaborating in a Competitive World Thomas S. Bateman, Scott A. Snell, Robert Konopaske 9781259927645, 9781259546945