UNIT IV PRODUCTION, MARKETING, FINANCIAL AND HUMAN RESOURCE MANAGEMENT OF GLOBAL GLOBAL PRODUCTION AND LOCATION
Global Production Networks and Location Strategies Global production networks can be structured into two categories; multi domestic and globally integrated structures:
Multidomestic. Concerns operations where each market is serviced independently. Can relate to simple products that are easy to replicate but difficult to transport over long distances. Production can be integrated globally, while the marketing is multidomestic, reflecting cultural and consumer preferences differences. The goal is therefore to better answer the needs of every market. There is also and independency in productivity, meaning that the efficiencies and productivities achieved in each market are unrelated to those taking place in other markets.
Globally integrated. System of production located in several countries and commonly involving complex products. Logistics activities are highly important as production and distribution capabilities need to be effectively reconciled. This implies an interdependency in productivity, as each component of the supply chain directly impacts the cost and the quality of the final product.
Four major location strategies for Global Production Networks can be identified:
Centralized global production. The entire production occurs within only one nation (or region) and is exported thereafter on the global market. This is particularly the case for activities that are difficult to relocate, such as goods linked to the location of resources, difficult to reproduce (e.g. luxury and craft) or depending on massive economies of scale. Regional production. Takes place within each region that manufactures a good with the size of the production system related to the size of the regional market. This system depends more on a regional accessibility than on economies of scale. It particularly applies to well known manufacturing technologies and/or to products having high distribution costs (e.g. soft drinks). Regional specialization. This global production network involves a spatial division of the production based on the theory of comparative advantages. Each region specializes on the production of a specific good and imports from other regions what it requires. Vertical transnational integration. This global production network is another variant of specialization. Different stages of the production occur at locations offering the best comparative advantages. Raw materials are extracted from locations where they are the most accessible, while assembly is performed in regions having low labor costs or high levels of expertise depending on the type of product or the stage in its manufacturing.
COST OF PRODUCTION Measuring the Costs of Production Costs are defined as those expenses faced by a business in the process of supplying goods and services to consumers. In the short run (where there are fixed and variable factors of production) we make a distinction between fixed and variable costs. Examples of each are given below.
Short Run Costs of Production TOTAL COSTS (TC) = TOTAL FIXED COST (TFC) + TOTAL VARIABLE COSTS (TVC) Fixed Costs Fixed costs relate to the fixed factors of production and do not vary directly with the level of output. (I.e. they are exogenous of the level of production in the short run). Good examples to use are rent of buildings, leasing of capital equipment, the annual uniform business rate charged by local authorities, the costs of full-time contracted salaried staff, interest rates on loans, the depreciation of fixed capital (due to age) and the costs of business insurance. Total fixed costs (TFC) remain constant as output increases. Average fixed cost (AFC) = Total Fixed Costs (TFC) / Output (Q) Average fixed costs will fall continuously with output because the total fixed costs are being spread over a higher level of production causing the average cost to fall. Examples of fixed costs Rent of buildings, leasing of plant and equipment, local business rates, the costs of salaried staff, interest rates on loans, depreciation of capital (due to age) and insurance premiums. Average fixed cost (AFC) = Total Fixed Costs (TFC) Output (Q)
An increase in fixed costs has no effect at all on the variable costs of production. This means that only the average total cost curve shifts. There is no change at all on the marginal cost curve leading to no change in the profit maximising price and output of a business. Average fixed costs will fall continuously with output because the total fixed costs are being spread over a higher level of production causing the average cost to fall Average fixed costs falls as output increases. A business can "spread their over head costs" by increasing output in the short run. Average fixed cost will never be zero if there are positive total fixed costs.
Variable Costs These are costs that vary directly with output since more variable units are required to increase output. Examples are the costs of essential raw materials and components, the wages of part-time staff or employees paid by the hour, the costs of electricity and gas and depreciation of capital inputs due to wear and tear. Total variable cost rises as output increases. Average variable cost (AVC) = Total Variable Costs (TVC) /Output (Q) AVC depends on the cost of employing variable factors compared to the average productivity of these factors (usually labour productivity). If additional units of labour can be hired at a constant cost there will be an inverse relationship between average product and average variable cost. Therefore, when average product is maximised, AVC will be minimised. MAKE-OR-BUY DECISION Definition The act of choosing between manufacturing a product in-house or purchasing it from an external supplier. In a make-or-buy decision, the two most important factors to consider are cost and availability of production capacity. An enterprise may decide to purchase the product rather than producing it, if is cheaper to buy than make or if it does not have sufficient production capacity to produce it in-house. Four Numbers You Should Know When you are supposed to make a make-or-buy decision, there are four numbers you need to be aware of. Your decision will be based on the values of these four numbers. Let's have a look at the numbers now. They are quite self-explanatory. 1. 2. 3. 4. The volume The fixed cost of making Per-unit direct cost when making Per-unit cost when buying
Now there are two formulas that use the above numbers. They are 'Cost to Buy' and 'Cost to Make'. The higher value looses and the decision maker can go ahead with the less costly solution. Cost to Buy (CTB) = Volume x Per-unit cost when buying Cost to Make (CTM) = Fixed costs + (Per-unit direct cost x volume)
Reasons for Making There are number of reasons a company would consider when it comes to making inhouse. Following are a few. 1. Cost concerns 2. Desire to expand the manufacturing focus 3. Need of direct control over the product 4. Intellectual property concerns 5. Quality control concerns 6. Supplier unreliability 7. Lack of competent suppliers 8. Volume too small to get a supplier attracted 9. Reduction of logistic costs (shipping etc.) 10. To maintain a backup source 11. Political and environment reasons 12. Organizational pride Reasons for Buying: Following are some of the reasons companies may consider when it comes to buying from a supplier. 1. 2. 3. 4. 5. 6. 7. Lack of technical experience Supplier's expertise on the technical areas and the domain Cost considerations Need of small volume Insufficient capacity to produce in house Brand preferences Strategic partnerships
The Process: The make or buy decision can be in many scales. If the decision is small in nature and has less impact on the business, then even one person can make the decision. The person can consider the pros and cons between making and buying and finally arrive at a decision. When it comes to larger and high impact decisions, usually organizations follow a standard method to arrive at a decision. This method can be divided into four main stages as below.
1. Preparation: a. Team creation and appointment of the team leader. b. Identifying the product requirements and analysis. c. Team briefing and aspect/area destitution. 2. Data Collection a. Collecting information on various aspects of make-or-buy decision. b. Workshops on weightings, ratings, and cost for both make-or-buy. 3. Data Analysis a. Analysis of data gathered. 4. Feedback a. Feedback on the decision made. GLOBAL SUPPLY CHAIN ISSUES Definition Supply chain management (SCM) is the management of a network of interconnected businesses involved in the provision of product and service packages
required by the end customers in a supply chain. Supply chain management spans all movement and storage of raw materials, work-in-process inventory, and finished goods from point of origin to point of consumption. GLOBALIZATION OF MARKETS Globalization Definition Globalization has to do with processes of international integration arising from increasing human connectivity and interchange of world views, products, ideas, and other aspects of culture. In particular, advances in transportation and telecommunications infrastructure, including the rise of the Internet, represent major driving factors in globalization and precipitate further interdependence of economic and cultural activities. The globalization of markets means that the expansion and access of businesses to all over the world to reach the needs of the customers internationally. Now due to the advancement of technology and IT revolution there is less problems of boundaries. The main reason is due to the advent of the internet that has facilitated to the customers and companies to interact at a common place by just sitting it home and it decreases the cost of product and other costs as well which is the benefit for the both parties. Now the companies are able to sell its product and services internationally. It is commonly believed that the taste of the consumers living in the different parts of the worlds are now emerging now MTV has become local channel, ordinary people wear levis Jeans and the access to the McDonald pizza is very easy. Now not only big multinationals but also small companies who were lack of resources can now reach the customers internationally. This all happened due to the globalization of markets. Many big markets have emerged into one single market due to the customer's needs and demands. So this gives benefits to the consumers and the producers as well. MARKETING STRATEGY Meaning Marketing strategy is a process that can allow an organization to concentrate its limited resources on the greatest opportunities to increase sales and achieve a sustainable competitive advantage.The picture on the right shows the process for developing and aligning marketing strategy.
These are the steps you should follow to create and execute a winning marketing strategy. 1. Understand Your Customer Develop a clear picture of your target customer using market research and analysis. Understand their pain points and the benefits of your solution. 2. Analyze the Market Some basic market research should allow you to find market data such as total available market, market growth (historical numbers and projections), market trends, etc. 3. Analyze the Competition Ask yourself what other choices your target customers have to solve their pain point. Research and assess the strengths and weaknesses of each. Take a look at this article for more info on competitive marketing strategy. 4. Research Distribution Channels What is the best way to deliver your product or service to your target customers? This will impact your sales strategy and your financials, as well as your marketing mix. 5. Define Your Marketing Mix Check out this article about defining your marketing mix: Product, Price, Place and Promotion. 6. Analyze the Financials Put together your marketing budget and evaluate projected marketing ROI, customer acquisition costs, etc. 7. Review and Revise Continuously evaluate the effectiveness of your marketing strategy, and revise or extend as needed.
CHALLENGES OIN PRODUCT DEVELOPMENT, PRICING, PRODUCTION Product Development Definition Product Development is a creation of, innovation of, enhancing the utility of or continuous improvement of earlier characteristics (like design, service, etc.) of an existing product or developing (manufacturing) an entirely new kind of product to satisfy (fulfill) the end-user's (consumer's) requirements. Meaning Product development is a specialized activity. It is done to improve the existing product or to introduce a new product in the market. It is also done to improve the earlier features or techniques or systems. However, generally, it means a new-product development. New-product development means to introduce a brand-new product in the market. It means to add a fresh product to the existing group of products. Normally, a company starts with one or two products. However, after some time it has few more products in its line (say from 15 to 20). This is possible only because of newproduct development. Examples Some common examples of product development are listed as follows: Product development of 1. 2. 3. 4. 5. Wheat flour into retail packets for household consumption, Cooking oil into retail pouches for household consumption, Land line phones into Cell phones for communication. Desktop computers into smaller Laptops for easy portability. Traditional library into an online library to facilitate faster searching and accessibility to e-books and other digital documents. 6. A simple airplane into a fighter jet aircraft to achieve a greater speed.
PRODUCT DEVELOPMENT CHALLENGES Global product companies or Independent Service Vendors (ISVs) are always under performance pressure as are any of us in our respective jobs. They strive for market expansion, new products with increased or improved product features and face the regular constraints of decreasing profitability, increased competition, a dearth of skills and rising costs with simultaneous pressure to upgrade and widen product offerings while using fewer resources. Product-development planning remains crucial to organizations' survival. Some key challenges (and thus, success factors) are as follows: Development Speed: Faster and faster is the mantra of product development. One way to fasten development speed is through digital design, analysis and collaboration tools to get products to market faster. Using collaboration software, file-sharing software and more, engineers can transform ideas into digitized virtual designs for testing and viewing a new product in three dimensions, in months rather than years. Platform Flexibility: Every product guru will acknowledge that a key success factor of a product in the market is its platform flexibility. This results from using modular product architecture to provide more product variety to customers. Computer aided design and engineering tools permit easy reuse of already-completed design files. All these files make product design much more efficient, cost effective and accelerated than ever before. Complexity Management: A product stands apart from an application in its complexity. It involves engineering complex systems through analysis of interaction networks. Research has resulted in network modeling methods to examine a network of interacting elements that are in complex systems being developed. The challenge of engineering complex systems with many components, sometimes called systems engineering, remains a key success factor. Customer Involvement: Involving customers when improving product features and the user experience is no secret, but it poses perhaps the biggest myriad of challenges to a product developer.
Some companies are using the order information about what features, components or configurations customers are ordering and are interested in, and they use that in real time, or as quickly as possible, to reconfigure the next generations of the product. Paying attention to these trends can help managers and design engineers plan their product design processes and achieve their goals with higher efficiency, lower cost and less time to market. Outsourcing and Offshoring: Finally, the biggest challenge that remains is optimizing in-house skills, supplier skills and capacity, international operations and new markets. Sometimes outsourcing saves considerable cost and sometimes a little cost, but more importantly, they're actually taking advantage of global product development networks, largely to access new markets in places and leverage global talent pools. Let us look at the outsourcing opportunities closely. Modern communication tools and the Internet have reduced the need for product development partners to be geographically close. Indeed, product development is increasingly being divided into parts, created in multiple centers around the globe, and brought back together for integration and testing. The ability to succeed at global project management is the key challenge in this model. As the challenges grow in the face of global inflation, strengthening currencies, slowing economies and dried up venture funds, so will be the opportunities to springboard ahead of competition by globalizing. Two immediate channels to bring in the advantages of globalization are building captive centers across the globe and outsourcing. Both have its pros and cons, but given the scale of expansion and flexibility, outsourcing is well acknowledged as the greatest opportunity in the globe for the entire product engineering ecosystem. The opportunities using outsourcing, leveraging local presence of partners, 24x7 development and support centers, multi-dimensional skills and matured processes and best practices are fairly known as follows: At this stage the founder(s) start pondering their next step. Must they exit? If so, how? Should they take the company public or should they sell the company to a larger player? Should they step back from the company and let professional management take over completely? The answers to these questions decide the path that sometimes leads them to the beginning of their journey once again, i.e.; to start another product company.
The emerging best practice for software development is to decouple product design and development (along with testing and support) elements in the value chain. The life cycle of product development is increasingly being divided into phases that require internal expertise (and value-adding), which is essentially in the product definition and design phases, whereas steps that are highly commoditized include development, testing and support. The division of responsibilities between IT personnel and outsourcing staff is a critical factor in the success of the project specifically and the outsourcing relationship generally. Moreover, outsourcing vendors have made tremendous advancements in the metrics for quality and investment that drive greater efficiency into the overall process. Offshore is usually regarded as a tool for labor arbitrage. However, it has its hidden benefits like higher quality and development discipline of the "right partners" which lead to greater efficiency and productivity levels that are sometimes superior to the in-house engineering organizations of ISVs. Moreover, during the coming years, outsourcing vendors will expand further into the value chain of product development. Additional expertise are emerging to dominate emerging technologies and develop deep vertical expertise. CHALLENGES IN PRICING Definition Method adopted by a firm to set its selling price. It usually depends on the firm's average costs, and on the customer's perceived value of the product in comparison to his or her perceived value of the competing products. Different pricing methods place varying degree of emphasis on selection, estimation, and evaluation of costs, comparative analysis, and market situation. CHANNEL MANAGEMENT Meaning The channel is the essential supply chain in Western Australia, by which technology manufacturers move products from the factory to end-users. It includes any business along this chain such as: distributors, wholesalers, integration partners, resellers, retailers and even call centres and training consultants. The technology channel moves it's products and services to market with the greatest efficiency through the power of strategic partnerships, to influence the customer to buy.
Definition The process by which a producer or supplier directs marketing activity by involving and motivating parties comprising its channel of distribution.
CHALLENGES IN CHANNEL MANAGEMENT In the IT industry, software publishing enterprises are the ideal market in need of channel services to boost sales revenues. Channel management solutions are necessary to facilitate the relationship between the software vendor and the channel partners. Channel managers are tasked with developing the partnership and streamlining the sales process by channels. In channel management these tasks are essential: • Handling relationships There are generally three parties involved in channel sales: the vendor, reseller or partner and the customer. The margins, credit limits, product price list, terms, etc, must be set. Proper pricing is crucial. It must not be set too high or too low and neither should the margins that affect the final price consumers pay for. Aside from pricing issue, the products have to match the resellers. High value products for example need to be assigned to VARs or Value Added Resellers who have previous experience in selling these kinds of products. Conflict management comes into play especially between partners. One of the most prevalent challengers in channel sales is too much competition. Sometimes even the vendor would pull the rug out from under a partner when it sees an opportunity to reap the profits for themselves. Stealing leads are frowned upon but not unheard of in the industry. • Product management and order approval When leads push through, then the vendor must have the capacity to deliver the product to the end users. Included in this task is the delivery of license key since the product is software applications. In international markets, like Asia or Europe, the prices on the software may differ to reflect the market. It is imperative that resellers be recruited from countries where the product is being sold because they would be more efficient in selling the product since they know the language and has presumably built their reputation locally.
• Payments processing There must be standard operating procedure for generating invoices and handling payments. One of the biggest hurdles in channel sales is on time payments from customers. It is important to reconcile the accounts or else it is a loss for both the vendor and the partner. • Report Generation These are unavoidable tedious paper work for channel managers that consume valuable time. They are required however, so companies can gain valuable insight to how they are progressing as far as channel sales goes. A Partner Relationship Management or PRM tool can provide solutions and help in with these tasks of channel management. PRM offer features that would make the job of channel management a lot easier: • Set partner levels or tiers Vendors with hundreds of different channel partners would be at a loss on how they can differentiate the low-performing resellers from the high-performing resellers. With a fully automated system, resellers' performance are transparent and based on the information, resellers can be awarded silver, gold or platinum status. • Training, support and marketing materials With a comprehensive PRM channel management solution, partners will have a valuable resource for product information, and marketing materials to use in generating sales. • Automated reports Manual tallying of sales is eliminated because the report is automatically generated. Channel managers and resellers will be allowed to focus on a more important task which is selling. Channel management conflicts are averted because with features like lead registration, partners will avoid competition with each other for the same business.
INVESTMENT DECISIONS Determination of where, when, how, and how much capital to spend and/or debt to acquire in the pursuit of making a profit. An investment decision is often reached between an investor and his/her investment advisors. Depending on the type of brokerage account an investor has, investment managers may or may not have tremendous leeway in making decisions without consulting the investor himself/herself. Factors contributing to an investment decision include, but are not limited to: capital on hand, projects or opportunities available, general market conditions, and a specific investment strategy. ECONOMIC RISK Major Economic Risks Facing The World The possibility that an economic downturn will negatively impact an investment. For example, launching a luxury product immediately before or during a recession carries a great deal of economic risk. Economic risk is closely related to political risk as government decisions impacting the economy may also affect an investment. For example, a central bank may raise interest rates or the legislature may raise taxes, and this may result in economic conditions impacting an investment. Strong worries over further asset bubbles, underinvestment in infrastructure, falling government finances, and the consequent danger to economies to sink into a major debt crisis are some of the top threats facing the world in 2010, the World Economic Forum said on Thursday. Global Risks 2010, WEF's annual report on the most significant and underlying global risks facing the global economy this year and beyond, argues that the events of the past year have revealed a fundamental need to change the thinking on global risks and how they are managed. With unprecedented levels of interconnectedness between all areas of risk, the report stresses that the need to combat governance gaps globally is greater than ever. The report says that this can only be addressed by an overhaul of current values and behaviours by decision-makers to improve coordination and supervision. The report also highlights risks where the levels of awareness and preparedness are currently very low; these include transnational crime and corruption, cybervulnerability and biodiversity loss.
Global Risks 2010 notes that the response to the impact of the financial crisis and ensuing downturn has been a greater willingness to cooperate on common strategies and develop more effective global governance to address global risks. Some of the risks facing the globe include: Fiscal crises In response to the financial crisis, many countries are at risk of overextending unsustainable levels of debt, which, in turn, will exert strong upwards pressures on real interest rates. In the final instance, unsustainable debt levels could lead to full-fledged sovereign debt crises. These crises also have social and political implications of high unemployment. Underinvestment in infrastructure Multiple studies across the world repeatedly highlighted that vast segments of our water, energy or transport infrastructure are structurally deficient or functionally obsolete, requiring considerable annual investments to avoid catastrophic failure. Underinvestment in infrastructure, both new and existing, and its consequences for growth, resource scarcity and climate change adaptation. A massive $35 trillion of infrastructure investment is required over the next 20 years, according to the World Bank. Chronic diseases As a consequence of profound socio-demographical transitions among large sections of the world population, changing physical and dietary habits, chronic diseases including cancer, diabetes, cardiovascular and chronic respiratory disease are continuing to spread rapidly throughout the developed and developing world, driving up health costs while reducing productivity and economic growth. Asset price collapse The fact that the risk of an asset price collapse remains the strongest risk on the landscape on the severity and likelihood axes illustrates the continuing uncertainty about the resilience of the global economy and the effectiveness of fiscal and monetary responses, governance and regulation.
Concerns abound about the decline in the dollar and low interest rates fuelling another bubble, this time liquidity rather than debt-driven. Experts are also worried about a lag in the impact of the recession in a number of areas. The level of corporate bankruptcies, particularly among small and medium size enterprises remains high. Credit card default rates, which are highly correlated with unemployment, are already at historic levels. The current unemployment rate of more than 10% in the US is considerably higher than the 6.5% unemployment rate that most credit card lending models assume. Finally, though residential house prices have fallen considerably in those markets considered to have been the most overheated, concerns persist about commercial real estate. China's growth falling to 6% or less China appears to have successfully navigated the financial crisis and global recession. However, much of the domestic impulses derive from high credit growth, which entails an increased risk of misallocation of capital and renewed bubbles in financial asset prices and real estate. These can always carry the risk of a sharp and potentially recessionary correction. A loss in China's growth momentum could adversely affect global capital and commodity markets. The Chinese government faces a number of challenges: the need to increase domestic demand to counter the loss in exports and the need to maintain a stable renminbi given China's vast accumulation of foreign reserves. The implications of a fall in China's growth would be particularly acute for its trading partners if it should happen before the global economy is on a more resilient path. Afghanistan Though geopolitical risks were not the focus of this year's report, among those tracked by the Global Risk Network, including Iran and Israel-Palestinian Territories, Afghanistan emerged highest on the Global Risks Landscape. It is also linked to nearly all the other geopolitical risks and several economic risks on the RIM. Moreover, Afghanistan's instability cannot be dissociated from rising concerns over the situation in Pakistan. The border between the two countries has become a hotspot.
The instability in the region is already a source of suffering for the local population. Their plight is compounded by the stress that rapid population growth and the impact of climate change are placing on resources, in particular water. Other risks include gaps in global governance, transnational crime and corruption; biodiversity loss; and cyber-vulnerability. Robert Greenhill, managing director and chief business officer at the World Economic Forum, said Global Risks 2010 underlines the challenges ahead: "The findings of the report confirm that we must face up to the challenges created by these unprecedented levels of interconnectedness between risks. The financial crisis and the ensuing recession have created a more vulnerable environment where unaddressed risks may become tomorrow's crises." "This is particularly acute for agriculture and food security," said Swiss Re's chief risk officer Raj Singh. "We need a vast increase in food production to feed the growing world population, and a billion people are already undernourished. Billions of dollars need to be spent on water provision, energy supply, transport and climate change adaptation measures. Governments must work together with the private sector to make it happen. Insurers can provide risk management tools that create greater financial stability for farmers and the agriculture industry." However, Sheana Tambourgi, editor of the report and Director and Head of the Global Risk Network at the World Economic Forum, warned, "The next few months will put the willingness among global decision-makers to cooperate on addressing global risks to the test. Simply reverting to 'business as usual' could have serious implications in the long term in several risk areas." POLITICAL RISK Meaning The risk that an investment's returns could suffer as a result of political changes or instability in a country. Instability affecting investment returns could stem from a change in government, legislative bodies, other foreign policy makers, or military control. Political risk is also known as "geopolitical risk", and becomes more of a factor as the time horizon of an investment gets longer. For example, a company may suffer from such loss in the case of expropriation or tightened foreign exchange repatriation rules, or from increased credit risk if the government changes policies to make it difficult for the company to pay creditors.
What is Political Risk? For investors, political risk can simply be defined as the risk of losing money due to changes that occur in a country’s government or regulatory environment. Acts of war, terrorism, and military coups are all extreme examples of political risk. Expropriation of assets by the government – or merely the threat – can also have a devastating effect on share prices. In early 2007, Venezuelan President Hugo Chavez abruptly announced plans to nationalize CANTV, the local phone company. CANTV’s shares plunged almost 50% before the details of Chavez’s plans emerged. Investors sold first and asked questions later. But political risk comes in many other forms. Other examples include: a new president or prime minister, a change in the country’s ruling party, or an important piece of new legislation. All of these changes can have a big impact on a country’s economic environment and investor perceptions about a country’s prospects. Managing Political Risk Unlike economic or financial variables, political risk is more difficult to quantify. While it is possible to calculate political risk “scores” or other quantitative-looking benchmarks, it’s important to remember that these are ultimately based on qualitative judgments. There’s no substitute for doing your own research and coming to your own conclusions. The Economist’s Country Briefings are a great place to start. These reports contain a wealth of background information a country’s government, politics, and economy. Some questions to keep in mind: Are there any important elections coming up soon? If so, who are the candidates/parties and what are their economic policies? The name of the game here isn't to avoid political risk completely. Even if you keep all of your investments in the U.S., you are still exposed to decisions in Washington DC. One of the keys to success in international investing is understanding political risk so you can make better decisions. As with other kinds of risk, the only tried and true method for mitigating political risk is diversification. Be sure to spread your international investments around in a variety of countries and regions so that you won't get hurt too badly even if your political risk calculations turn out to be off the mark.
SOURCES OF FUNDS A company might raise new funds from the following sources: The capital markets: i) new share issues, for example, by companies acquiring a stock market listing for the first time ii) rights issues Loan stock Retained earnings Bank borrowing Government sources Business expansion scheme funds Venture capital Franchising. Ordinary (equity) shares Ordinary shares are issued to the owners of a company. They have a nominal or 'face' value, typically of $1 or 50 cents. The market value of a quoted company's shares bears no relationship to their nominal value, except that when ordinary shares are issued for cash, the issue price must be equal to or be more than the nominal value of the shares. Deferred ordinary shares It is a form of ordinary shares, which are entitled to a dividend only after a certain date or if profits rise above a certain amount. Voting rights might also differ from those attached to other ordinary shares. Ordinary shareholders put funds into their company: a) by paying for a new issue of shares b) through retained profits. Simply retaining profits, instead of paying them out in the form of dividends, offers an important, simple low-cost source of finance, although this method may not provide enough funds, for example, if the firm is seeking to grow.
A new issue of shares might be made in a variety of different circumstances: a) The company might want to raise more cash. If it issues ordinary shares for cash, should the shares be issued pro rata to existing shareholders, so that control or ownership of the company is not affected? If, for example, a company with 200,000 ordinary shares in issue decides to issue 50,000 new shares to raise cash, should it offer the new shares to existing shareholders, or should it sell them to new shareholders instead? i) If a company sells the new shares to existing shareholders in proportion to their existing shareholding in the company, we have a rights issue. In the example above, the 50,000 shares would be issued as a one-in-four rights issue, by offering shareholders one new share for every four shares they currently hold. ii) If the number of new shares being issued is small compared to the number of shares already in issue, it might be decided instead to sell them to new shareholders, since ownership of the company would only be minimally affected. b) The company might want to issue shares partly to raise cash, but more importantly to float' its shares on a stick exchange. c) The company might issue new shares to the shareholders of another company, in order to take it over. New shares issues A company seeking to obtain additional equity funds may be: a) an unquoted company wishing to obtain a Stock Exchange quotation b) an unquoted company wishing to issue new shares, but without obtaining a Stock Exchange quotation c) a company which is already listed on the Stock Exchange wishing to issue additional new shares. The methods by which an unquoted company can obtain a quotation on the stock market are: a) an offer for sale b) a prospectus issue c) a placing d) an introduction.
Offers for sale: An offer for sale is a means of selling the shares of a company to the public. a) An unquoted company may issue shares, and then sell them on the Stock Exchange, to raise cash for the company. All the shares in the company, not just the new ones, would then become marketable. b) Shareholders in an unquoted company may sell some of their existing shares to the general public. When this occurs, the company is not raising any new funds, but just providing a wider market for its existing shares (all of which would become marketable), and giving existing shareholders the chance to cash in some or all of their investment in their company. When companies 'go public' for the first time, a 'large' issue will probably take the form of an offer for sale. A smaller issue is more likely to be a placing, since the amount to be raised can be obtained more cheaply if the issuing house or other sponsoring firm approaches selected institutional investors privately. Rights issues A rights issue provides a way of raising new share capital by means of an offer to existing shareholders, inviting them to subscribe cash for new shares in proportion to their existing holdings. For example, a rights issue on a one-for-four basis at 280c per share would mean that a company is inviting its existing shareholders to subscribe for one new share for every four shares they hold, at a price of 280c per new share. A company making a rights issue must set a price which is low enough to secure the acceptance of shareholders, who are being asked to provide extra funds, but not too low, so as to avoid excessive dilution of the earnings per share. Preference shares Preference shares have a fixed percentage dividend before any dividend is paid to the ordinary shareholders. As with ordinary shares a preference dividend can only be paid if sufficient distributable profits are available, although with 'cumulative' preference shares the right to an unpaid dividend is carried forward to later years. The arrears of dividend on cumulative preference shares must be paid before any dividend is paid to the ordinary shareholders.
From the company's point of view, preference shares are advantageous in that: • • • Dividends do not have to be paid in a year in which profits are poor, while this is not the case with interest payments on long term debt (loans or debentures). Since they do not carry voting rights, preference shares avoid diluting the control of existing shareholders while an issue of equity shares would not. Unless they are redeemable, issuing preference shares will lower the company's gearing. Redeemable preference shares are normally treated as debt when gearing is calculated. The issue of preference shares does not restrict the company's borrowing power, at least in the sense that preference share capital is not secured against assets in the business. The non-payment of dividend does not give the preference shareholders the right to appoint a receiver, a right which is normally given to debenture holders.
However, dividend payments on preference shares are not tax deductible in the way that interest payments on debt are. Furthermore, for preference shares to be attractive to investors, the level of payment needs to be higher than for interest on debt to compensate for the additional risks. For the investor, preference shares are less attractive than loan stock because: • • They cannot be secured on the company's assets The dividend yield traditionally offered on preference dividends has been much too low to provide an attractive investment compared with the interest yields on loan stock in view of the additional risk involved.
Loan stock Loan stock is long-term debt capital raised by a company for which interest is paid, usually half yearly and at a fixed rate. Holders of loan stock are therefore long-term creditors of the company. Loan stock has a nominal value, which is the debt owed by the company, and interest is paid at a stated "coupon yield" on this amount. For example, if a company issues 10% loan stocky the coupon yield will be 10% of the nominal value of the stock, so that $100 of stock will receive $10 interest each year. The rate quoted is the gross rate, before tax. Debentures are a form of loan stock, legally defined as the written acknowledgement of a debt incurred by a company, normally containing provisions about the payment of interest and the eventual repayment of capital.
Debentures with a floating rate of interest These are debentures for which the coupon rate of interest can be changed by the issuer, in accordance with changes in market rates of interest. They may be attractive to both lenders and borrowers when interest rates are volatile. Security Loan stock and debentures will often be secured. Security may take the form of either a fixed charge or a floating charge. a) Fixed charge: Security would be related to a specific asset or group of assets, typically land and buildings. The company would be unable to dispose of the asset without providing a substitute asset for security, or without the lender's consent. b) Floating charge: With a floating charge on certain assets of the company (for example, stocks and debtors), the lender's security in the event of a default payment is whatever assets of the appropriate class the company then owns (provided that another lender does not have a prior charge on the assets). The company would be able, however, to dispose of its assets as it chose until a default took place. In the event of a default, the lender would probably appoint a receiver to run the company rather than lay claim to a particular asset. The redemption of loan stock Loan stock and debentures are usually redeemable. They are issued for a term of ten years or more, and perhaps 25 to 30 years. At the end of this period, they will "mature" and become redeemable (at par or possibly at a value above par). Most redeemable stocks have an earliest and latest redemption date. For example, 18% Debenture Stock 2007/09 is redeemable, at any time between the earliest specified date (in 2007) and the latest date (in 2009). The issuing company can choose the date. The decision by a company when to redeem a debt will depend on: a) How much cash is available to the company to repay the debt b) The nominal rate of interest on the debt. If the debentures pay 18% nominal interest and the current rate of interest is lower, say 10%, the company may try to raise a new loan at 10% to redeem the debt which costs 18%. On the other hand, if
current interest rates are 20%, the company is unlikely to redeem the debt until the latest date possible, because the debentures would be a cheap source of funds. There is no guarantee that a company will be able to raise a new loan to pay off a maturing debt, and one item to look for in a company's balance sheet is the redemption date of current loans, to establish how much new finance is likely to be needed by the company, and when. Mortgages are a specific type of secured loan. Companies place the title deeds of freehold or long leasehold property as security with an insurance company or mortgage broker and receive cash on loan, usually repayable over a specified period. Most organizations owning property which is unencumbered by any charge should be able to obtain a mortgage up to two thirds of the value of the property. As far as companies are concerned, debt capital is a potentially attractive source of finance because interest charges reduce the profits chargeable to corporation tax. Retained earnings For any company, the amount of earnings retained within the business has a direct impact on the amount of dividends. Profit re-invested as retained earnings is profit that could have been paid as a dividend. The major reasons for using retained earnings to finance new investments, rather than to pay higher dividends and then raise new equity for the new investments, are as follows: a) The management of many companies believes that retained earnings are funds which do not cost anything, although this is not true. However, it is true that the use of retained earnings as a source of funds does not lead to a payment of cash. b) The dividend policy of the company is in practice determined by the directors. From their standpoint, retained earnings are an attractive source of finance because investment projects can be undertaken without involving either the shareholders or any outsiders. c) The use of retained earnings as opposed to new shares or debentures avoids issue costs. d) The use of retained earnings avoids the possibility of a change in control resulting from an issue of new shares. Another factor that may be of importance is the financial and taxation position of the company's shareholders. If, for example, because of taxation considerations, they would rather make a capital profit (which will only be taxed when shares are sold) than
receive current income, then finance through retained earnings would be preferred to other methods. A company must restrict its self-financing through retained profits because shareholders should be paid a reasonable dividend, in line with realistic expectations, even if the directors would rather keep the funds for re-investing. At the same time, a company that is looking for extra funds will not be expected by investors (such as banks) to pay generous dividends, nor over-generous salaries to owner-directors. Bank lending Borrowings from banks are an important source of finance to companies. Bank lending is still mainly short term, although medium-term lending is quite common these days. Short term lending may be in the form of: a) an overdraft, which a company should keep within a limit set by the bank. Interest is charged (at a variable rate) on the amount by which the company is overdrawn from day to day; b) a short-term loan, for up to three years. Medium-term loans are loans for a period of from three to ten years. The rate of interest charged on medium-term bank lending to large companies will be a set margin, with the size of the margin depending on the credit standing and riskiness of the borrower. A loan may have a fixed rate of interest or a variable interest rate, so that the rate of interest charged will be adjusted every three, six, nine or twelve months in line with recent movements in the Base Lending Rate. Lending to smaller companies will be at a margin above the bank's base rate and at either a variable or fixed rate of interest. Lending on overdraft is always at a variable rate. A loan at a variable rate of interest is sometimes referred to as a floating rate loan. Longer-term bank loans will sometimes be available, usually for the purchase of property, where the loan takes the form of a mortgage. Government assistance The government provides finance to companies in cash grants and other forms of direct assistance, as part of its policy of helping to develop the national economy, especially in high technology industries and in areas of high unemployment. For example, the Indigenous Business Development Corporation of Zimbabwe (IBDC) was set up by the government to assist small indigenous businesses in that country.
Venture capital Venture capital is money put into an enterprise which may all be lost if the enterprise fails. A businessman starting up a new business will invest venture capital of his own, but he will probably need extra funding from a source other than his own pocket. However, the term 'venture capital' is more specifically associated with putting money, usually in return for an equity stake, into a new business, a management buy-out or a major expansion scheme. The institution that puts in the money recognises the gamble inherent in the funding. There is a serious risk of losing the entire investment, and it might take a long time before any profits and returns materialise. But there is also the prospect of very high profits and a substantial return on the investment. A venture capitalist will require a high expected rate of return on investments, to compensate for the high risk. A venture capital organisation will not want to retain its investment in a business indefinitely, and when it considers putting money into a business venture, it will also consider its "exit", that is, how it will be able to pull out of the business eventually (after five to seven years, say) and realise its profits. Examples of venture capital organisations are: Merchant Bank of Central Africa Ltd and Anglo American Corporation Services Ltd. When a company's directors look for help from a venture capital institution, they must recognise that: • • • The institution will want an equity stake in the company. It will need convincing that the company can be successful. It may want to have a representative appointed to the company's board, to look after its interests.
The directors of the company must then contact venture capital organisations, to try and find one or more which would be willing to offer finance. A venture capital organisation will only give funds to a company that it believes can succeed, and before it will make any definite offer, it will want from the company management: a) a business plan b) details of how much finance is needed and how it will be used c) the most recent trading figures of the company, a balance sheet, a cash flow forecast and a profit forecast
d) details of the management team, with evidence of a wide range of management skills e) details of major shareholders f) details of the company's current banking arrangements and any other sources of finance g) any sales literature or publicity material that the company has issued. A high percentage of requests for venture capital are rejected on an initial screening, and only a small percentage of all requests survive both this screening and further investigation and result in actual investments. Franchising Franchising is a method of expanding business on less capital than would otherwise be needed. For suitable businesses, it is an alternative to raising extra capital for growth. Franchisors include Budget Rent-a-Car, Wimpy, Nando's Chicken and Chicken Inn. Under a franchising arrangement, a franchisee pays a franchisor for the right to operate a local business, under the franchisor's trade name. The franchisor must bear certain costs (possibly for architect's work, establishment costs, legal costs, marketing costs and the cost of other support services) and will charge the franchisee an initial franchise fee to cover set-up costs, relying on the subsequent regular payments by the franchisee for an operating profit. These regular payments will usually be a percentage of the franchisee's turnover. Although the franchisor will probably pay a large part of the initial investment cost of a franchisee's outlet, the franchisee will be expected to contribute a share of the investment himself. The franchisor may well help the franchisee to obtain loan capital to provide his-share of the investment cost. The advantages of franchises to the franchisor are as follows: • • The capital outlay needed to expand the business is reduced substantially. The image of the business is improved because the franchisees will be motivated to achieve good results and will have the authority to take whatever action they think fit to improve the results.
The advantage of a franchise to a franchisee is that he obtains ownership of a business for an agreed number of years (including stock and premises, although premises might be leased from the franchisor) together with the backing of a large organisation's marketing effort and experience. The franchisee is able to avoid some of the mistakes of
many small businesses, because the franchisor has already learned from its own past mistakes and developed a scheme that works. EXCHANGE RATE RISK AND MANAGEMENT Meaning The risk that a business' operations or an investment's value will be affected by changes in exchange rates. For example, if money must be converted into a different currency to make a certain investment, changes in the value of the currency relative to the American dollar will affect the total loss or gain on the investment when the money is converted back. This risk usually affects businesses, but it can also affect individual investors who make international investments. also called currency risk. Definition A form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged. The three main types of exchange rate risk that we consider in this paper are (Shapiro, 1996; Madura, 1989): 1.Transaction risk, which is basically cash flow risk and deals with the effect of exchange rate moves on transactional account exposure related to receivables (export contracts), payables (import contracts) or repatriation of dividends. An exchange rate change in the currency of denomination of any such contract will result in a direct transaction exchange rate risk to the firm; 2.Translation risk, which is basically balance sheet exchange rate risk and relates exchange rate moves to the valuation of a foreign subsidiary and, in turn, to the consolidation of a foreign subsidiary to the parent company’s balance sheet. Translation risk for a foreign subsidiary is usually measured by the exposure of net assets (assets less liabilities) to potential exchange rate moves. In consolidating financial statements, the translation could be done either at the end-of-the-period exchange rate or at the average exchange rate of the period, depending on the accounting regulations affecting the parent company. Thus, while income statements are usually translated at the average exchange rate over the period, balance sheet exposures of foreign subsidiaries are often translated at the prevailing current exchange rate at the time of consolidation; and
3. Economic risk, which reflects basically the risk to the firm’s present value of future operating cash flows from exchange rate movements. In essence, economic risk concerns the effect of exchange rate changes on revenues (domestic sales and exports) and operating expenses (cost of domestic inputs and imports). Economic risk is usually applied to the present value of future cash flow operations of a firm’s parent company and foreign subsidiaries. Identification of the various types of currency risk, along with their measurement, is essential to develop a strategy for managing currency risk. STRATEGIC ORIENTATION Meaning Strategic orientations "Strategic orientations" are principles intended to provide coherence, focus and direction to all of the activities undertaken by the Union. It is impossible to forecast the future completely in the rapidly changing telecommunication environment and to plan for every contingency. Strategic orientations therefore help to ensure consistency of purpose and action in the face of inevitable uncertainty. The following strategic orientations are proposed for the 1999-2003 strategic plan. They build on the experience of the 1995-1999 period, particularly the results of implementation of Resolution 15 (Kyoto, 1994) and Resolution 39 (Kyoto, 1994), and they seek to apply that experience to the anticipated requirements of the new environment analyzed in part II of this document, in addition to encouraging development of access to basic telecommunication and information services: improve customer service — by identifying the specific needs of the Union's membership and other customers, establishing priorities, and providing the highest quality of service possible with available resources; innovate — by continuing to develop new activities, products and services under the supervision of the Member States and Sector Members and in accordance with their agreed needs; strengthen the Union's financial foundations — by determining and applying appropriate funding mechanisms for ITU activities, products and services (e.g. assessed contribution based on free choice of contributory unit, voluntary contribution, partial or full cost recovery, revenue generation), together with transparent budgetary measures; enhance participation by Sector Members — by implementing the recommendations deriving from Resolution 15 (Kyoto, 1994) and Resolution 39 (Kyoto, 1994) as quickly
and fully as possible, and by actively marketing ITU membership to all entities and organizations with a potential interest in participating actively in the work of the Union; establish partnerships — by concluding a range of formal and informal cooperation agreements with other intergovernmental organizations and with other organizations at the national and regional levels, including non-governmental organizations (NGOs), in cases where such cooperation would further the purposes of the Union based upon the identification of specific subjects for cooperation; maintain solidarity — between the ITU's Member States and Sector Members in partnership in pursuit of the purposes of the Union; inform — by sharing and disseminating information related to the development of economically efficient public telecommunications; promote the principle and implementation of a competitive telecommunication environment — by encouraging flexible regulatory systems that provide for a variety of telecommunication services; produce Recommendations in timely response to market demand — by streamlining development and approval procedures by each Sector, as appropriate. SELECTING OF EXPATRIATE MANAGERS As with any senior management role, there are basic requirements that managers need for success. Executive roles based in overseas countries have an extra layer of risk to them because the expatriate must adapt himself to an entirely new work environment and lifestyle. The chance of failure is therefore higher than a usual assignment within the home country. A failed expatriate posting is one that either is unsatisfactory by senior management. Failure rates accepted to vary between 20% and 50%. Postings in lower risk while those in emerging countries, such considered higher risk. forced to end early or is deemed for such postings are generally so-called advanced countries are as those of Southeast Asia, are
Given the high costs involved in expatriate postings, it is foolish not to reduce risks as much as possible by selecting managers who have attributes that make their success as likely as possible.
Key Attributes of Successful Expatriates 1.Extroverted People who have outgoing personalities seem to adapt faster than desk-bound introverts. Extroverts are able to build necessary relationships with their new staff and key stakeholders quickly and with more ease. Shyness is not an advantage in a foreign country when you need to get results through other people in short order. 2.Adventurous People who are naturally interested in new experiences and meeting new people often adapt easier in offshore environments than those who do not. 3.CulturalSensitivity People who have experience with ethnic diversity tend to adapt better than those who are unfamiliar with international cultures. Look for candidates with an ethnically diverse background. Perhaps their parents were immigrants or they grew-up with or worked among an ethnically diverse environment. 4.Independent People who are self-reliant are generally better expatriates than those who are used to layers of administrative support. Working overseas can be a lonely and daunting experience. Cut off from established support networks, as well as family and friends, expatriate managers will need to be self-supporting to succeed. 5.CareerMotivated People who believe strongly that successful international experience is vital to their long-term career success will be more inspired to make it work. Given that senior management roles today are almost always international in scope, this should not be a difficult attribute to uncover. However, there are many people who are not motivated in this way and such people will have a lower chance of overseas management success. In summation, people most suitable for expatriate postings are outgoing, self-motivated managers with mindsets that are adventurous and internationally focused.
TRAINING AND DEVELOPMENT
Training Definition It is a learning process that involves the acquisition of knowledge, sharpening of skills, concepts, rules, or changing of attitudes and behaviours to enhance the performance of employees. Training is a process of learning a sequence of programmed behaviour. It improves the employee's performance on the current job and prepares them for an intended job. Development not only improves job performance but also brings about the growth of the personality. Individuals not only mature regarding their potential capacities but also become better individuals. Difference Training: 1.It's a short term process. 2.Refers to instruction in technical and mechanical problems 3.Targeted in most cases for non-managerial personnel 4.Specific job related purpose Development: 1.It is a long term educational process. 2.Refers to philosophical and theoretical educational concepts 3.Managerial personnel 4.General knowledge purpose Purpose Of Training: 1.To improve Productivity: Training leads to increased operational productivity and increased company profit. 2.To improve Quality: Better trained workers are less likely to make operational mistakes. 3.To improve Organizational Climate: Training leads to improved production and product quality which enhances financial incentives. This in turn increases the overall morale of the organization.
4.To increase Health and Safety: Proper training prevents industrial accidents. 5.Personal Growth: Training gives employees a wider awareness, an enlarged skill base and that leads to enhanced personal growth. Purpose of Development: Management development attempts to improve managerial performance by imparting 1.Knowledge 2.Changingattitudes 3.Increasingskills The major objective of development is managerial effectiveness through a planned and a deliberate process of learning. This provides for a planned growth of managers to meet the future organizational needs. Objectives The principal objective of training and development division is to make sure the availability of a skilled and willing workforce to an organization. In addition to that, there are four other objectives: Individual, Organizational, Functional, and Societal. Individual Objectives – help employees in achieving their personal goals, which in turn, enhances the individual contribution to an organization. Organizational Objectives – assist the organization with its primary objective by bringing individual effectiveness. Functional Objectives – maintain the department’s contribution at a level suitable to the organization’s needs. Societal Objectives – ensure that an organization is ethically and socially responsible to the needs and challenges of the society.
Meaning Compensation is the total amount of the monetary and non-monetary pay provided to an employee by an employer in return for work performed as required. Compensation is based on: Market research about the worth of similar jobs in the marketplace, Employee contributions and accomplishments, The availability of employees with like skills in the marketplace, The desire of the employer to attract and retain a particular employee for the value they are perceived to add to the employment relationship, and The profitability of the company or the funds available in a non-profit or public sector setting, and thus, the ability of an employer to pay market-rate compensation. Compensation also includes payments such as bonuses, profit sharing, overtime pay, recognition rewards and checks, and sales commission. Compensation can also include non-monetary perks such as a company-paid car, stock options in certain instances, company-paid housing, and other non-monetary, but taxable, income items. A formal compensation policy should: • Reflect the organisation’s strategic business objectives and culture •Articulate the objectives that an organisation wants to achieve via its compensation programs. • Be communicated to all employees • Provide the foundation for designing and implementing compensation and benefit programs. Compensation program objectives For the organisation • Attract and keep the desired quality and mix of employees. Motivate employees to continually improve their performance and achieve the organisation’s strategic business objectives. • Reinforce the organisation’s key values and the desired organisational culture.
• Drive and reinforce desired employee behaviour. • Ensure compensation is maintained at the desired competitive level. • Control compensation costs. • Ensure optimum value for each compensation dollar spent. • Comply with legal requirements. For the employee • Ensure equitable treatment. • Accurately measure and appropriately reward performance and contribution to the achievement of the organisation’s strategic business objectives. • Provide appropriate compensation changes based on performance, promotion, transfer or changing conditions. • Provide regular compensation and performance reviews.