Blockbook International Enterprise 1st Semester 20102011

Blockbook International Enterprise, 1st semester 2010-2011
Blockbook International
Enterprise
C-cluster IBMS
1st semester 2010-2011
1
CHAPTER 2: Organisation...............................................................5
2.1 Group meetings...................................................................................................5
2.2 Roles in the tutorial group....................................................................................7
2.3 Schedule of lessons............................................................................................8
2.4 Survey/planning of tasks and activities...........................................................9
CHAPTER 3: Assessment................................................................11
3.1 Your presence:..................................................................................................11
3.2 Your communication and social skills:...............................................................11
Remarks ..
…………………………………………………………………………
………….............................................................................................14
3.4 The -individual- midterm and final tests:............................................................15
CASE 1: International Readiness...................................................18
Planning an international raid with the FABs (flavoured alcoholic
beverages)...........................................................................................18
Case: the Soft Drinks Industry........................................................62
Industry overview.....................................................................................................63
Summary..................................................................................................................63
Introduction..............................................................................................................63
Market dynamics......................................................................................................63
Market size and growth...........................................................................................63
Key growth drivers and resistors.............................................................................64
Competitive landscape............................................................................................65
Top 10 companies based on sales..........................................................................65
Competitive positioning of the top 10 soft drink companies....................................66
Depth of top 10 companies' soft drinks portfolios....................................................67
Trends......................................................................................................................68
Rise of functional soft drinks....................................................................................68
Flavored water making inroads...............................................................................69
NPD in carbonated drinks........................................................................................69
The Coca-Cola Company.................................................................71
Summary..................................................................................................................71
Company overview..................................................................................................71
Recent financial performance..................................................................................72
Performance by business segment.........................................................................73
Growth strategies.....................................................................................................73
Product launches to drive business growth.............................................................73
Expanding in the emerging markets........................................................................74
Acquisitions and divestments..................................................................................74
SWOT analysis........................................................................................................76
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ABOUT OUTSOURCING........................................................................................82
TABLE II
THE ESSENTIALS OF OUTSOURCING.....................................84
OUTSOURCING AT TITAN.....................................................................................85
TABLE V
TITAN - KEY STATISTICS (in Rs million)..................................86
RECENT DEVELOPMENTS AT TITAN INDUSTRIES...........................................87
Questions for first discussion:..................................................................................97
110
Case: Electric Vehicles & Incoterms: All Charged Up?..............114
Questions for first discussion.........................................................118
Jain, S.C., Marketing Planning and Strategy, 6th edition,
Cincinnati, Ohio: South Western Publishing, 1999.....................119
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CHAPTER 1: Introduction
You are a student at Arnhem Business School, which is a school for higher
vocational education; this implies that you are learning a profession here! So,
apart from a lot of theoretical knowledge, you are supposed to be able to put
theory into practice. That is what business life demands of our students. And they
expect more: they expect you to be able to easily learn new things and put them
into practice. Unfortunately, that is one of the problems of the ‘old’ system of
education that we have in this country. Students are taught to learn things which
are offered to them by teachers, because the teachers think they know what is
important and what is not. However, because of this method students hardly learn
to choose what is important and what is not.
What a difference with everyday business life! There the theory is needed to solve
problems. And that is exactly what this course is all about! We are going to
provide you with information about companies, and after that you will be
presented some problems that this company encounters; in order to solve these
problems you will need theory; you will have to find out what you already know
and what you still need to find out; then, hopefully, you can solve the problem.
Voila problem-based learning! How more true to life can we get? We do not think
we can.
One effect of problem-based learning and of making this module true to life is that
several subjects are integrated into one module: economics, accounting and
finance, marketing, management information systems and law.
How this method of problem-based learning is organised in this course is to be

found in chapter 2; chapter 3 is then what we consider the least important chapter,
but which you may deem essential: assessment.
Then comes the real stuff: chapter 4 will then provide you the problems, which we
call tasks.
Chapter 5 of this blockbook will provide a list of books which are either essential
or recommended.
Tutors:
Mrs. S. van Hall (e-mail: Sonja.vanHall@han.nl)
Mr. J. Lanser (e-mail: Jan.Lanser@han.nl)
Mr. P. van der Meijden (email: Peter.vanderMeijden@han.nl)
Mr P. Steemers (e-mail: Peter.Steemers@han.nl)
Mr A. Teunissen (e-mail: Arno.Teunissen@han.nl)
Mr. R. Warmenhoven (e-mail: Rob.Warmenhoven@han.nl)
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CHAPTER 2: Organisation
This module -‘international enterprise’- is framed in the form of education called
problem-based learning (PBL). This implies that a specific problem, also called
task or case, is tackled by a relatively small group of about ten students and a
coach, the teacher/tutor.
The tasks or cases are presented to the students as a starting point of their learning
process (the tasks can be found in Chapter 4 of this blockbook). Most tasks
describe the experiences of companies that are internationally active and the
situations and problems they encounter. The aim of this module is for you to get a
better understanding of the situations these companies are confronted with and to
be able to solve the problems they face. To be able to do so you should at least
have a clear understanding of the theories related to these subjects. These theories
come from several fields of study, like marketing, economics, law, finance,
management information systems and intercultural management. Solving the
problem, i.e. executing the task, should not be seen as a goal in itself, but as a
means to acquire knowledge about subjects from several fields of study and to get
a better idea of what doing business internationally is all about.
Much of what you will learn in this module will be done by you in pairs. Apart
from that, there is one form of structured education: group meetings.
What should be noted, however, is that this module is part of the study unit
‘International Enterprise’. Besides the activities in this module you will be offered
several supporting classes in Accounting and Finance, International Law,
Management Information Systems and Marketing. In the supporting classes issues
will be dealt with that are related to the issues discussed in the PBL-part of this
study unit. For more detailed information about the planning and organization of
the total study unit ‘International Enterprise’ refer to section 2.4 of this chapter.
2.1 Group meetings
Your group and your tutor will meet once every week. These meetings will last
two hours and the purpose of these meetings is to share knowledge and ideas.
Every meeting consists of two parts: in the second part of every meeting a new
task will be discussed for the first time (first discussion). The aim of this first
discussion is to get a clear idea what the subject matter is about. For this you will
have to read the task thoroughly (most probably you will have to read it twice!)
and study literature related to the subject, before the start of the group meeting.
This should be sufficient to be able to discuss the task in a sensible way. At the
end of the first discussion all students should at least be able to answer the
questions posed at the end of the task. After this first discussion students will
work on a hand-in assignment (management briefing), which will be handed out
at the end of the group meeting. This assignment will have to be handed in one
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week later. During this week’s session the hand-in assignment will be discussed in
the group. This will be done during the first part of the group meeting (second
discussion). After the second discussion the students should have a thorough
understanding of the subjects discussed and relevant theories related to them.
So all tasks are discussed twice and in between meetings all students are supposed
to find and study relevant literature and work on the hand-in assignments. When
looking for relevant literature you should consult the literature/sources stated at
the end of the case! On top of that you can also consult the literature mentioned in
the literature list (see Chapter 5). When studying on the subjects you are expected
to make summaries of what you find; they will also serve you well when you
prepare for the exam. The tutor will check what literature you have made use of,
so it is necessary to keep record of this.
To make these meetings a success, there are some tips that might be useful for you
to adhere to:
1. be sure you have prepared; this means that during the first part of each
session -when the hand-in assignment is discussed- you are able to present your
findings to the group. For the second part of each session -when a new task is
discussed-, you have read the new task at home, you have looked up words/concepts
you did not know, you gathered relevant information and literature, studied the
literature and made notes of this; naturally you should also be able to indicate what
section/pages of what book(s) gave you the information.
arrive on time; we only have 90 minutes each week to look into the hand-in
assignments and to discuss the new task, so it is essential to start when we start.
2. if you have a question, ask; there are no such things as stupid questions.
3. participate actively; as you will find in Chapter 3, your behaviour, attitude,
motivation and participation need to be sufficient in order for you to pass this
module.
The tutor or a student will chair the meetings. Our meetings will NOT have a
secretary. Note that this way of working implies that you are responsible for your
own notes; if you think something is important, you will have to write it down!
Every week the chairman will be given feedback by the tutor.
Every week (starting from week 3) you will have to make a hand-in assignment
(management briefing). The following demands will have to be met here:
• the tasks are to be handed in in time. If you exceed the time limit, it results in an
insufficient mark for this assignment (= 0).
• they are to be handed in in a typed form.
• the front page is to state your names and id-codes, the name of your tutor and the
number of your tutorial group as well as the code of your class.
• The hand-in assignments are assignments to be done in pairs, which means that
you are to hand in your own pair assignment. In case of fraud you will be
expelled from the group and you will have to do the total module again in a
next semester. Pairs will be formed by the tutor and can change every week.
• The hand-ins have to be handed in no later than on Monday morning before
the next weekly meeting, before 12.00 hours in your tutor’s pigeon hole!
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2.2 Roles in the tutorial group
As a member of a tutorial group your task is to complete the assignments and problems in the
blockbook by working in a task-oriented way and by cooperating well. To make the tutorial
group function properly the following roles are distinguished:
1. Chairman
In the beginning this role is taken by the tutor. However, students will act as chairman
later. The chairman’s task is to enhance the group’s progress when discussing the task. He/she
should not only pay attention to contents and the approach of the tasks in the blockbook (the
learning process), but he/she should also guard the group process.
Tips for the chairman
Basically, every meeting within the course “International Business” has two items:
a. Second discussion on the basis of the results from working on the hand-in assignment.
b. First discussion of the new task which was to be prepared in the previous days by all
team members individually.
Being chairman, you have the responsibility that this week’s task is finished to everyone’s
satisfaction and that all team members agree on the outcomes of the discussion.
If you observe the following guidelines, you will be sure not to forget important items.
Prepare properly for both items on the agenda. If not, you will never be able to structure the
discussion!
During the discussion:

1. Make sure that there is a good introduction.
2. See to it that the discussion stays relevant; cut off all non-important matters.
3. Structure the discussion.
4. Make sure that everyone understands what is being discussed.
5. Summarise the discussion from time to time.
6. Make sure that everybody has a chance to contribute to the discussion.
7. Cut off monologues and beware of ‘yes - no’ discussions.
8. Make conclusions based on the contribution of all team members.
9. Make sure that there is consensus towards the conclusions.
10. At the end, summarise all conclusions.
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2. Team member
The success of the group sessions depends to a large extent on the group
members’ conduct. They are expected to have a positive and active attitude
when analysing practical situations and when consulting the literature. During
the group sessions they will take their own notes.
3. Tutor
The supervising teacher acts as tutor. His/her main task is to enhance the
students’ learning process and to stimulate the cooperation in the group. A
characteristic feature of the tutor is that he/she operates as a coach and
therefore stands on the sideline, both with regard to the learning process and
with regard to the group process. This position makes that the tutor will
generally have to keep explanations regarding the contents to a minimum and
will always try to incite the students to get a better understanding of the
learning matter on their own.
2.3 Schedule of lessons
In the scheme below you will find the schedule of lessons for this module. The
group sessions will take place on Tuesdays. For these sessions your presence is
compulsory (see Chapter 3: assessment). So you are expected at school every
Tuesday. The group sessions ‘only’ last 90 minutes. We assume that you will
spend -at least- the rest of these days on the self-study activities to be performed
for this module. In addition to this, we expect you to work on this module on other
days as well. After all, the total study unit ‘International Enterprise’ (including
both the PBL-part and the supporting classes) represents 15 credits, which is
equivalent to 420 hours of work/study.
Before the start of the module you have already been informed what tutorial group
you are part of. We are afraid no changes can be made in the composition of
groups.
Planning of group meetings (Tuesdays)
Time:
8.45 – 10.15 Group 1 Group 2 Group 3 Group 4
hours
10.30 – 12.00 Group 5 Group 6 Group 7 Group 8
hours
Tutor: Jan Arno Sonja van Hall/ Rob
Lanser Teunissen Peter van der Warmenhoven/
Meijden Peter Steemers
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2.4 Survey/planning of tasks and activities
In the table on the next page you will find an overview of the activities to be
executed during this module.
As has been stated earlier, your presence during the group sessions is obligatory.
Apart from the first session they will consist of two parts: in the last part of the
session new tasks will be introduced and discussed (first discussion) and in the
first part of each session tasks/hand-ins will be discussed and evaluated (second
discussion). Between the group sessions you are supposed to study and work on
the hand-ins independently. Most of the time spent on this module will be in this
self-study phase.
During the module you are to carry out 9 hand-in assignments (write 9
management briefings), which will be handed out to you by your tutor. In the
scheme below you will find when these tasks are to be handed in. They are to be
handed in with your tutor, in his/her pigeon hole on Monday mornings, before
12.00 hours! You yourself are responsible for handing in the hand-in task in time.
For the requirements related to these hand-in assignments see this and next
chapter. If these requirements are not met, the entire module will have to be done
again in a next semester (see Chapter 3: assessment). Not or not timely handing in
an assignment will automatically result in an insufficient mark for that assignment
(= 0).
Overview of activities in ‘International Enterprise’ (PBL-part)
TASKS
WEEKS SECOND DISCUSSION FIRST ACTIVITIES
DISCUSSION BESIDES
CLASSES
Introduction kick-off
week program
Period 1 Week 1 1
Period 1 Week 2 1 2 hand in task 1
Period 1 Week 6 5 evaluation hand in task 5
Period 2 Week 1 6 hand in task 5

Period 2 Week 5 9 evaluation hand in task 9
Period 2 Week 6 Task 10: Workshop ‘International business
case’ in cooperation with IBM
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As stated before the total study unit ‘International Enterprise’ not only consists of
the weekly PBL-meetings. During the total semester supporting classes are
offered as well. In the table on the next page you can find an overview of the
planning for the total study unit.
Overview of activities in study unit ‘International Enterprise’
Lecture 1 2 3 4 5 6 7 1 2 3 4 5 6
week
Module
IEN1A x x x x x x x x x x x x x
ACF3A x x x x x x x
ILW2E x x x x x x
MIN1B x x x x x
MKT3 x x x x x x
MKT4 x x x x x x
IEN1A: module ‘International Enterprise’ (weekly meetings, total semester)

ACF3A: Accounting & Finance (weekly classes during the first period)
ILW2E: International Law (weekly classes during the second period)
MIN1B: Management Information Systems (bi-weekly classes, total semester)
MKT3A: Marketing 3: International Marketing
MKT4A: Marketing 4: International Consumer Behaviour
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CHAPTER 3: Assessment
This chapter will explain what the system of assessment for this module looks
like. It may be worth mentioning that this system is entirely different from what is
used in the D-cluster (or in the foundation year). So we advise you to read the
information below accurately and make sure you are well acquainted with the
system of assessment for this module.
Since this module is not only aimed at increasing your knowledge and your being
able to use it, but also at increasing your communication and social skills,
assessment is based on 4 aspects. It is important to state that it is impossible to
pass a part of this module: either you pass the module, or you fail it.
You are assessed on:
3.1 Your presence:

You are to be present at all group meetings. If you cannot possibly attend a group
meeting because of illness or other unforeseeable circumstances, you are to
inform your tutor before the meeting. The tutor will need proof for your absence
and (s)he will decide whether the reason is good enough. Note that oversleeping,
having an appointment at the dentist’s, a once-in-a-life chance to go on holiday
with your loved one(s) are not good reasons and that the tutor will expel you from
the module. Try again in half a year. If you miss more than two meetings, even
with the approval of the tutor, you will have to start again in half a year.
3.2 Your communication and social skills:

Your project skills will be assessed on a continuous basis. Below you can find
what we pay attention to here.
Individual project skills
Being a team member

Oral fluency
Taking the lead (in meetings)
Problem recognition
Analysing
Attitude
Insufficient marks for any of these two criteria will result in your not being allowed to
do the final test. This makes that you will have to do the entire module again in a next
semester.
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3.3 Hand-in assignments/Management briefings:
How to write a management briefing:
Every now and than the management needs to be informed and inspired by individuals from
the management team or employees one echelon down.
As time usually is the bottle neck, the management doesn’t want extensive reports
with endless citations of textbook theory. Just mention the theory you are using, if you have
the impression the reader has no knowledge of theory, put it in a appendix.
The briefing itself should be concise and to the point.
Three to five pages should do the trick.
As you have a limited number of words, the things you write down must be relevant.
The structure usually is something like this.
• A short description of the current situation and a clear description of the core question
(problem, issue)
“Various attempts to win market share in South America have been less successful, but
resulted in a leadership position in Mexico and the Caribbean based on company owned
restaurants and first mover advantages. In other south American countries the competition
won important market share based on first mover advantages.
Because of these disappointing results funds were reallocated to promising Asian markets.
Realizing the South American potential, renewed strategies to win and maintain market share
and profitability are required.”
( example based on KFC’s attempt to enter the South American market)
Based on all the information available you start thinking from both ends now. What are the
options and what will be your final recommendation ? is one end, and the other is: The
evaluation of relevant information that rejects certain options and favours another option.
At this stage you can hardly go wrong, because it is your evaluation of events and situations,
and your recommendation. Different opinions are possible. But…. be sure that your
evaluation/analysis is consistent with your recommendation.
In the briefing you will have sections like:
• Analysis of available data

• Possible (strategic) options
• Evaluation of options based on analysis
• Recommendation
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An example of a grading form for a hand-in assignment is shown on the next page.
Just to give you an idea what kind of report structure we are looking for an on the
basis of what criteria we assess the reports/hand-ins.
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Grading Form IEN Hand-in Assignment 4: Business Ethics March 2010
Student name and group: .………………………………………………………………….

__________________________________________________________________
Item: Score: Max:
__________________________________________________________________
Structure of the report ……… 5
Remarks: ……………..………………………………………………………………………
__________________________________________________________________
Problem Definition (including background) ……… 10
Remarks: …………………………………………..…………………………………………
Analysis:
___________________________________________________________________
Focused on problem statement ……… 10
Remarks: …………………………………………..…………………………………………
Use (explicit/implicit) of moral theories and application ……… 30
Remarks ..……………………………………………………………………………………
………………………………………………………………………………………………..
Both pros and cons (balanced/non-biased) ……… 5
Remarks ……………………………………………………………………………………..
Additional relevant information presented ……… 10

Remarks: ……………………………………………………………………………………
__________________________________________________________________
Advice/recommendation
__________________________________________________________________
Based on the analysis ……… 10
Remarks: …………………………………………..…………………………………………
Detailed/convincing: ……… 15
Remarks: ……………………………………………………………………………………..
…………..……………………………………………………………………………………..
__________________________________________________________________
Layout & references ………. 5
__________________________________________________________________
Total Score / Grade ………. 100
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There will be 9 of these in total, which will all have to be handed in. These are
assignments to be done in pairs, which means that you are to hand in your own
pair assignment! Although it is recommended that you cooperate with fellow
students when working on these tasks, it is not allowed to hand in copies/identical
briefings. The briefing will have to be in your own words. This will be checked.
When students are caught handing in identical briefings this will be regarded as a
case of fraud. All students involved in this fraud will be expelled from the
module. The assignments will marked with a grade between 10 and 100. Not or
not timely handing in an assignment automatically leads to an insufficient mark
for this assignment (= 0).
All hand-in assignments will be graded. The average mark for the hand-in
assignments must be higher than 40 and accounts for 60% of your final
mark.
3.4 The -individual- midterm and final tests:

There is a midterm test planned at the end of the first period and a final test at the end of
the second period. In the midterm test all subjects offered during the first period in the
study unit ‘International Enterprise’ (both PBL-sessions and supporting classes) will be
tested. In the final test all subjects offered during the second period will be tested. For
both tests you will be given a mark between 0 and 100. The tests will have to be
scored 40 or higher. Both the marks for the midterm and the final test account for
20% of the final mark for the module ‘International Enterprise’. There is a possibility
for a resit at the end of the third period and the fourth period respectively (so if you fail one
or both of the tests (mark lower than 40) you will have to do the test again in the next
semester).
Content of written exams:

Midterm exam: 25% MIN, 25% MKT3 and 50% IEN
Final exam: 25% ILW, 25% MKT4 and 50% IEN
Students are allowed to make use of dictionaries during the midterm and final test
The weighted average of the marks for the hand-in assignments, the midterm test
and the final test needs to be 55 or higher.
Besides the above mentioned integrated assessments students will also be assessed
for some of the supporting modules: Accounting & Finance (written exam) and
International Law (during classes)
These so-called non-integrated assessments all have to be passed (minimum of

55/100)
ONLY WHEN ALL OF THE ABOVE MENTIONED REQUIREMENTS ARE

FULFILLED, THE STUDENT IS AWARDED THE 15 ECTS RELATED TO
THIS STUDY UNIT.
15
CHAPTER 4:
TASKS
16
TASK 1
International Readiness
17
CASE 1: International Readiness
Planning an international raid with the FABs (flavoured alcoholic beverages)

The term FAB (flavoured alcoholic beverage) describes a whole category of ‘new flavoured
drinks’, including spirits, sodas, ciders, ‘alcopops’ and ‘designer drinks’.
FABs offer great potential for innovation in the premium sector through new flavours, new
alcohol mixes and packaging designs. Image and marketing in the premium sector are closely
interlinked, and one will impact on the other. For example, Kahlua, a coffee-flavoured liqueur
from Allied Domecq, had an image as staid, after-dinner drinking for women in the 30 age
group. This was changed by a spell of integrated marketing featuring television, radio and
print advertising. The drink was positioned as a highly mixable and credible product and
following this a range of Kahlua-based premixed drinks named after actual cocktails, such as
B52 and White Russian, were released.
Although accounting for only 2 per cent of the global alcoholic drinks market, sales of FABs
have risen 60 per cent in the years from 1997 to 2001.
One of the players in the FAB industry is the UK-based firm, Beverage Brands.
Beverage Brands
Beverage Brands was founded by Joe Woods, Managing Director, in 1992 and has offices in
Torquay and Bristol. Beverage Brands had an annual turnover of £110 million in 2001 and
employed 40 full-time staff, mainly concerned with sales. Beverage Brands is part of the SHS
Group Ltd (www.shs-group.co.uk). The annual turnover for Group in the year ending 31
December 2001 was £180 million, indicating a strong, financially sound company.
Beverage Brands produces innovative premium soft and alcoholic (FAB) drinks. Boosted by
its own New Product Development, Finance, Production Control and Marketing Departments,
Beverage Brands has become the number three player in the premium packaged spirit market
in the United Kingdom (Source: A.C. Nielsen, November 2001). You can find a lot of extra
information on the company’s website www.beverage-brands.co.uk .
WKD brand
WKD was launched by Beverage Brands in March 1996 and is available in two flavours –
Original Alcoholic Iron Brew and Original Vodka Blue. The brand sells in excess of 2.25
million bottles per week in the United Kingdom, assuring its position as an innovative brand
for vibrant young people (primarily males). Currently it is No. 3 in the UK Premium
Packaged spirit brand (Source: AC Nielsen, Nov. 2001).
 ABV (Alcohol by volume) of 5.5 per cent per 330 ml bottle.

 The new 700 ml pack was launched in July 2001, aimed at in-home and party
consumption.
 Consumer site at www.wkd.co.uk
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Woody’s Cocktails
Launched in May 1998, Woody’s Cocktails are a quality range of well-known, premixed
cocktail blends. The product is largely aimed at women, and its features are as follows:
 ABV of 5.3 per cent per bottle;

 the perfect endorsement of any festive occasion;
 aimed at working females, 20–30 years old;
 particular strong brand in the off-licence sector and stocked by most major multiple
retailers;
 700 ml multiserve pack launched January 2001, for in-home consumption;
 new long-neck pack for on-trade customers.
Managing Director Joe Woods admits that up until now his company has mainly been
represented in the UK market. Maybe it is time to take a look at a new potential market? Joe
is also unsure of which brand to use for the internationalization process.
Total drinks market in the United Kingdom

The total spirits market is now worth £27 billion. With a third of the UK spirits sales, gin and
vodka together are now the largest sector by volume (33 per cent) in the United Kingdom. In
the off trade supermarkets, multiples, grocers and off licences dominate sales in volume
terms, where 70 per cent of gin and vodka are sold. The rest of the gin and vodka market is in
the on trade – pubs, clubs and licensed premises
On trade
The on trade is moving towards being more of an interactive experience, as the clientele
influence the image of the place, and vice versa. The newer city-centre ‘style bars’ are
sophisticated venues that attract affluent, image-conscious consumers – exactly the type of
on-trade establishment designer alcoholic drinks thrive on. Manufacturers are attempting to
capitalise on the exclusivity of location, which translates into exclusivity for the product,
making it a ‘must-have’.
The club scene is also important – allying a product with the nightclubbing market increases
brand exposure and means that the product acquires acceptance from the socially influential
nightclub audience. Both of these are integral to the development of designer alcoholic drinks.
‘Opinion leaders’ form the segment of the consumer base that is socially influential in terms
of fashions. Taking the product to places where opinion leaders congregate is an attempt to
secure acceptance of the product by these trend-setters. This consequently expands the appeal
of the product to consumers who are driven by more peer-led drinking. In the designer
alcoholic drinks market opinion leaders tend to be young professional adults who frequent
city-centre bars.
The trend for going to stylish bars and drinking expensive cocktails mixed at the bar is an
affirmation of wealth and style and it has experienced a resurgence due to rising disposable
incomes. ‘Cocktail culture’ has influenced flavour trends, especially in the premixed spirits
market. Premixed spirits can be seen as being bottled cocktails, using as they do a spirit base
19
and flavoured mixer, and this is the most notable influence of cocktail culture on flavour
trends.
New flavourings have tended to be drawn from trends in cocktail mixtures, for instance the
current trend for cranberry flavourings began as an on-trade development whereby vodka was
mixed with cranberry juice. Strong and vibrant colouring in drinks is another aspect of the
influence of cocktail culture on the FAB market.
The UK market for FABs

Although FABs’ fast growth has brought them much attention, they constitute only 5 per cent
of the total UK market by volume (in litres of pure alcohol). Following considerable capital
investment to bring these products to market, their success has led to increased employment
and a significant export business is now being built up.
The majority is consumed in the on trade with modern town bars and nightclubs being the
most popular venues for consuming these products. The FAB consumer is typically 18–30
years of age and would drink directly from the bottle. The use of energy drinks in
combination with alcohol has become a popular trend in nightclubs and bars.
The first signs of a new trend in alcoholic drinks were the so-called alcopops, alcoholic
versions of soft drinks normally associated with children. They first arrived in the United
Kingdom in the form of alcoholic lemonade, but are now being marketed across most of
Europe including Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Portugal,
Spain and Sweden.
The broader category FABs are perceived as trendy, desirable products and are particularly
popular among image-conscious consumers within the 18–30 age group. To a large extent, it
is through strong branding that the industry has managed the transition from alcopops, with its
connotation of under-age drinking, to the positive, premium image FABs currently enjoy.
The UK market for flavoured alcoholic beverages has grown significantly year on year since
its conception, disproving any evidence suggesting that it is simply a fad. As the market
expands, so do the number of variants available. New flavours/styles, including the
increasingly popular cranberry, appear on a regular basis in a bid to retain and stimulate
consumer interest. Although the majority of spirit bases comprise white rum and vodka,
tequila is not uncommon and dark spirit entries are anticipated shortly, mainly from the
United States. Key for brand owners is consumer loyalty: in the hope that today’s 18–34-year-
old drinkers will continue drinking these branded beverages in later life brand owners must
keep the consumers’ attention and interest.
Despite the astounding growth of this market, retailers in both the on and off trades are still
allocating insufficient space to the category, which remains highly display sensitive.
Merchandising is, therefore, particularly important, as is the ambience and music in the on
trade. There are likely to be more chillers, probably branded, introduced in both the on and off
trade. Packaging is also moving to accommodate changing lifestyles. As with beer,
multipacks and multiserve bottles are now on the supermarket shelves, resulting in unit retail
prices falling. Cans, PET bottles and pouches have all made their debut in the on trade, where
sometimes glass is forbidden.
20
Consumption of FABs is seen generally to decline steadily with age (particularly after the age
of 34) although the category is beginning to attract a wider audience. Consumer research,
however, shows that brands such as Bacardi Breezer are popular with consumers right up to
the age of 65! It is clear that there is scope to push the category further among consumers of
all ages and backgrounds. Although women continue to consume more than men, the
difference in consumption levels by gender is narrowing.
Designer drinks are mainly wine or spirit based but also include some ciders. They are
normally considerably stronger than alcopops but like them are sold in trendy bottles and
packaging and given names thought likely to appeal particularly to children and teenagers.
Both types of drinks have caused much controversy and have come under sustained attack not
only from alcohol control groups but also from politicians, educationalists, police, the media
and even some alcohol retailers for encouraging under-age drinking and alcohol abuse. For
example, in Scotland 4,000 members of the Licensed Traders’ Association (alcohol retailers)
refused to stock alcopops. In the United Kingdom the new drinks and those who produce
them have clearly tried the patience of even politicians not normally associated with ‘anti-
alcohol’ views.
Flavoured alcoholic beverages continue their drive, however mainstream, boosted by more
billboards and commercials.
Demand for FABs has grown sharply in the United Kingdom with spirit-based beverage
brands Bacardi Breezer and Smirnoff Ice being the key brands driving the market. A host of
smaller brands are jostling for position, with Red Square one of the more successful of the
new entrants.
Vodka forms the main base for FABs, especially in the United Kingdom. However, other
spirits are slowly entering the market to liven up competition: whisky and absinthe. On test in
Spain, and expected to be launched in the United Kingdom is J&B Twist, a Jim Beam
whiskey-based premium packaged spirit with 5.6 per cent ABV.
Packaging is also playing a role in premiumisation. Long-necked 275 ml glass bottles have
become the norm in packaging for premium drinks, particularly for premixed drinks and
bottled beer. Glass bottles in general are particularly synonymous with premium status. In this
case it is not the actual quality of the product that impacts on the consumer’s purchase
decision, as this is a largely an unknown entity; it is the perception that the product is
premium by because of the packaging.
The development of a ‘food culture’ has played a major part in changing consumer attitudes.
There is increased sophistication in eating habits, and people are more willing to experiment
with new food trends. This has impacted on the drinks market in the sense that consumers are
now more willing to try out newer drinks, or perhaps new ways of drinking more established
drinks. Exotic flavour combinations are more readily tested and accepted, as are
unconventional drink combinations. All of this is driving sales for flavoured premixed drinks
and cocktail-style drinks.
The ‘cult of the individual’ is a major aspect of culture and is a growing trend across all
markets. This term refers to the trend for individuality in consumption. For instance, rather
than drinking the same brand as one’s peers, consumers drink something that is particular to
their own consumption habits in order to assert their own character and individuality.
21
This trend is manifesting itself in both an assertion of individuality and a rejection of blanket
marketing. This is a strong driver for sales of designer alcoholic drinks, even though brands
have targeted opinion leaders in an attempt to capture more peer-led consumption. Ultimately,
the brands’ contribution to the consumers’ perception of their own individuality is key to the
success of designer alcoholic drinks, despite the inherent contradictions in this.
Consumers are becoming more adept at discerning which products are qualitatively better
than others. They are also becoming quicker to abandon those that do not appeal to them. This
is increasing the impetus on producers to create products that are obviously better than others
in a tangible way. Despite the importance of image, poor quality in the premium market is
less tolerated among consumers now.
Some FAB competitors

Recent 2003 growth figures in the flavoured alcoholic beverage (FAB) market in the UK
seems to indicate that the majority phase has been reached for the product category, according
to The FAB Report from Bacardi-Martini, which claims to be the leading producer of
premium-packaged spirits, the driving force in the FAB market. Bacardi Breezer is the
number one FAB brand according to the report, with sales of more than 10,000 cases in the on
trade every hour.
French Connection, the clothing chain famous for its controversial ad campaigns, is to
encourage dedicated followers of fashion to not only wear its brand, but to drink it as well.
The company launched the FCUK-branded, vodka-based alcoholic drinks which are sold in
bars, clubs and off-licences in November 2002. FCUK is a new flavoured alcoholic beverage
being launched by Matthew Clark Brands under licence from French Connection. The venture
brings together a drinks company with a broad portfolio and a deep understanding of the
marketplace with a brand that has an exceptional approval rating among core FAB consumers.
FCUK Spirit aims to cash in on 18–24-year-olds’ enthusiasm for the fashion brand. The 1
million people who buy FCUK T-shirts each year are the same people who drink premixed
drinks such as Vodka Source, Smirnoff Ice and Bacardi Breezer. Two flavours of FCUK
Spirit – lemon, and cranberry and grapefruit – will be launched first. Other flavours, as well
as a non-alcoholic variant, are in development.
French Connection has already extended its brand into condoms, make-up, toiletries and
accessories. But the launch into the highly competitive alcohol market is its most challenging
departure yet.
A recent report by Datamonitor said the unstoppable rise of alcoholic designer drinks is set to
continue as consumers become more interested in the label on the bottle than the taste of the
contents.
22
Questions for first discussion:
1. There are a lot of reasons why companies choose for internationalization. List these
motives and explain whether they are proactive or reactive motives.
2. What are in general the barriers for export initiation in a company?
3. Explain and comment on the “Uppsala Internationalization model”
4. What is in your opinion the most important decision that Beverage Brands had to take
or activity that they had to do before they started with internationalization?
5. If Beverage Brands was at the point of starting to internationalize, should they than
follow a red ocean or a blue ocean strategy? Explain!
Note:
When preparing for the first discussion you should have read the article ‘Before the first
export decision: Internationalisation readiness in the pre-export phase’ (to be found on the
next pages) as well
Sources to be used:
- Svend Hollensen, Global Marketing, a decision-oriented approach, 4th edition,
Prentice Hall, chapters 1, 2 and esp. 3
23
Before the first export decision: Internationalisation readiness in the

pre-export phase
Alvin Tan, Paul Brewer and Peter W. Liesch
Abstract
Although the internationalisation process of the firm has been well researched since the
1970s, the behaviour of firms prior to internationalisation has not received commensurate
research attention. This paper argues that a focus on firms’ pre-internationalisation activities
will not only offer an additional important perspective to the study of firm internationalisation
but it will also address a significant research gap in studies that are theoretically based on the
so-called stages models. During the pre-internationalisation phase, a firm is exposed to stimuli
factors that may trigger an impulse for foreign market expansion. Decision makers’
perceptions of stimuli, their attitudinal commitment towards internationalisation, the firms’
resources and capabilities, as well as the mediating effect of lateral rigidity comprise a
learning process that leads a firm towards readiness to initiate an internationalisation decision.
This paper advances the concept of internationalisation readiness and proposes a method for
developing an Internationalisation Readiness Index.
Keywords:
Internationalisation readiness; Pre-internationalisation; Internal stimuli; External stimuli;
Attitudinal commitment; Firm resources; Lateral rigidity
Article Outline
1. Introduction
2. The pre-internationalisation phase: a review of relevant constructs
2.1. Internal and external stimuli
2.2. Attitudinal/psychological commitment
2.3. Firm resources
2.4. Lateral rigidity
3. A pre-internationalisation model developed to complement the Uppsala framework
4. Measuring internationalisation readiness
5. Construction of an IRI
6. Implications
7. Conclusions
References
1. Introduction
Research into the internationalisation of firms has progressed since the 1970s, with the
process of internationalisation being one predominant area that has attracted considerable
early research interest (Bilkey & Tesar, 1977; Cavusgil, 1980; Johanson & Vahlne, 1977;
Johanson & Wiedersheim-Paul, 1975). However, it has been noted that this research area is
still in need of further development (Lamb & Liesch, 2002; Luostarinen & Welch, 1990) with
notably a lack of studies that focus on firm activities and development prior to the
commencement of international operations. The sequential nature of the internationalisation
process makes this a critical phase to examine as subsequent international development is
based on the foundations laid at pre-internationalisation (Wiedersheim-Paul, Welch, & Olson,
1975). Wiedersheim-Paul et al. (1975) first highlighted the importance of studying the firm's
24
pre-internationalisation behaviour and while they attempted to develop a pre-export model,

their study essentially became an exploratory review. Caughey and Chetty (1994) in their case
study research on New Zealand firms applied the Wiedersheim-Paul et al. (1975) embryonic
model but there has thus far been little other reported research that attempts to expand on this
early literature. Pre-internationalisation behaviour has also been described in the earlier stages
of the innovation model (Bilkey & Tesar, 1977) but subsequent studies have not expanded on
this theme. The significance of this research gap is intriguing, and despite various viewpoints
addressing the internationalisation of firms, it remains unclear as to how and why this process
originates.
Notwithstanding criticisms that the Uppsala model is too simplistic in having only a single
construct (experiential knowledge) to explain internationalisation (Blomstermo & Sharma,
2003) and for being overly deterministic (Reid, 1983; Turnbull, 1987), its significance to firm
internationalisation research cannot be denied, especially given the empirical support for the
model in studies that focus on the early stages of internationalisation (Melin, 1992). An
extension of the model to include the pre-internationalisation phase promises major benefits
for firms in understanding their capabilities and also for public policy agencies dedicated to
the encouragement of the internationalisation of firms in their constituencies. Recently, these
improvements have been called for by the original Uppsala researchers (Johanson & Vahlne,
2003). Additionally, this complements the earlier stages of the export development process
highlighted in the innovation model and supports the traditional behavioural perspective that
views internationalisation as a gradual learning process (Bilkey & Tesar (1977) W.J. Bilkey
and G. Tesar, The export behavior of smaller Wisconsin manufacturing firms, Journal of
International Business Studies 9 (1977) (Spring/Summer), pp. 93–98. Full Text via
CrossRefBilkey & Tesar, 1977; Johanson & Vahlne, 1977).
This paper argues the significance of adopting a pre-internationalisation perspective. Focusing

on exporting as the early foreign market entry mode, the first section of this paper presents an
overview of relevant constructs and proposes a pre-internationalisation phase model to
complement the Uppsala theoretical framework. The concept of internationalisation readiness
is introduced as the point of decision assessment that links a firm's pre-internationalisation
phase with its initial international commitment. In the following section, a method is proposed
for the development of an Internationalisation Readiness Index (IRI) and then the implications
of such an index are highlighted. The paper concludes by discussing the limitations of an IRI
and the possibilities of development of the index through further research.
2. The pre-internationalisation phase: a review of relevant constructs

Studies based on the behavioural perspective have made important contributions to the field
of organisation research generally. This framework underpinned by the early scholarly works
of Penrose (1959) and Cyert and March (1963) places emphasis on a firm's development
through learning, resource allocation and decision-making. Penrose's (1959) notion of
experiential knowledge is an essential feature of internationalisation research, especially the
traditional stages theories that include the Uppsala model and the innovation model that build
on an assumption that firms internationalise in stages through a process of incremental
decisions and commitment. The behavioural-based literature on firm internationalisation
highlights the role of gradual experiential learning in a firm's foreign commitment decisions
(Cavusgil, 1980; Luostarinen, 1980). The stages theories, most notably, describe increasing
foreign involvement as being the result of interplay between knowledge acquisition and
market commitment (Johanson & Vahlne, 1977; Johanson & Wiedersheim-Paul, 1975; Reid,
25
1981) where the lack of knowledge is perceived as a risk factor and this uncertainty is
“reduced through incremental decision-making and learning about foreign markets and
operations” (Johanson & Wiedersheim-Paul, 1975, p. 306).
The innovation model describes internationalisation as an evolution of a firm through distinct

learning stages of increasing foreign commitment, with the firm being initially disinterested
but becoming engaged as an ‘experimental’ exporter, developing over time into an ‘active’
exporter, and at a later stage into a ‘committed’ exporter (Cavusgil, 1980). The Uppsala
model highlights internationalisation as an incremental process with the firm passing through
a progressive development of transitions between state aspects (knowledge about foreign
markets and resource commitment) and change aspects (decisions to commit resources and
the performance of current business activities) via the accumulation of experiential
knowledge. Further underlying the Uppsala model is the claim that internationalisation is
affected by the compatibility between a firm's experiential knowledge and its resource
capabilities, as well as the perceived psychic distance of the potential foreign market
(Johanson & Vahlne, 2003). The greater the psychic distance (factors inhibiting the flow of
information from market to firm), the less likely that country will be selected as a target
market.
The theoretical frameworks in both of these traditional stages theories conjecture that foreign
market commitment is positively correlated with the accumulation of experiential knowledge.
However, one crucial issue that both models have not attempted to explain is: when does this
process begin? The cyclical state-to-change aspect transition in the Uppsala model, for
example, represents a firm's increasing foreign involvement but does not attempt to identify a
starting point for the process. As Welch (1977) argued, in order to understand how an
internationalisation orientation originated within the firm, we need to track back to examine
the decision-making process that is responsible for establishing international commitments.
This accentuates the need for exploring a firm's pre-internationalisation phase where this
learning process commences. The pre-internationalisation phase occurs prior to the
representation captured in the Uppsala framework and can be established as a state that all
firms experience before their initial commitment to a foreign market (refer to Fig. 1). This
phase is reflected in the innovation model as the earlier stages of the export development
process, where a non-exporting firm becomes aware of opportunities which stimulates an
interest and intention that leads the firm towards its initial involvement in exporting (Reid,
1981). The following constructs are identified in the literature as being important to the
commencement of a firm's internationalisation.
Fig. 1. Positioning the pre-internationalisation phase.
2.1. Internal and external stimuli

That internationalisation is a complex process of organisational learning through the
acquisition of appropriate knowledge is supported in the literature (Andersen, 1993; Lord &
26
Ranft, 2000), with the prerequisite to this learning process being a decision-maker's exposure
to and recognition of relevant information (Dretske, 1981). Central to a firm's
internationalisation decision is the role of stimuli factors which provide the information input
that drive a firm's international expansion by acting as the “motives, incentives, triggering
cues or attention evokers” (Leonidou, 1998, p. 43). Wiedersheim-Paul et al.'s (1975) pre-
export model highlighted stimuli factors as key export commencement determinants (Fig. 2)
and this has been extensively supported in studies (Aaby & Slater, 1989; Bilkey, 1978;
Caughey & Chetty, 1994; Evangelista, 1994). These stimuli are crucial for a firm's initial
involvement and subsequent development (Bilkey, 1978; Dichtl, Leibold, Koglmayr, &
Muller, 1984; Leonidou, 1995; Morgan & Katsikeas, 1997) triggering the learning process by
alerting the decision-maker to possible opportunities that are presented to the firm through an
international venture. Although exposure to stimuli factors is insufficient for a firm's
immediate internationalisation, it is nonetheless an essential condition for its future foreign
market engagement (Dichtl, Leibold, Koglmayr, & Muller, 1983).
Fig. 2. Simplified pre-export model (Wiedersheim-Paul et all, 1975).
The importance of internal stimuli to export has been widely discussed, and often, these
stimuli are generated from experiences in doing business domestically. Vernon (1966) long
ago observed that the nature of a product in terms of its uniqueness has an impact on whether
the product is exported. Potential opportunities presented by the characteristics of a firm and
its management (Bilkey & Tesar, 1977; Oviatt & McDougall, 1994; Welch, 1977;
Wiedersheim-Paul et al., 1975), the presence of interested managers with the appropriate firm
and market experience (Cavusgil, 1984; Johanson & Vahlne, 1977) and network memberships
(Håkansson, 1982) can also stimulate a firm to consider internationalisation. Other influential
internal stimuli include the desire by decision-makers to achieve corporate goals, proactive
risk control to deal with stagnation and decline, and higher competitiveness in the
marketplace (Leonidou, 1998; Valos & Baker, 1996).
External demand and its impact on scale economies and relative factor costs have been
highlighted as important external stimuli by Vernon (1966) and Vernon and Wells (1986).
External stimuli can also be introduced through government support or competitive pressures
in the domestic market (Leonidou, 1998). Other external stimuli include the receipt of
unsolicited orders or inquiries, contacts from foreign customers during/after trade fairs
(Bilkey & Tesar, 1977; Cavusgil, 1980) and information gained through domestic and foreign
partners (Johanson & Mattsson, 1988; Sharma & Johanson, 1987). The recent literature on
born global firms argues that the imperative for internationalisation has become intense due to
27
the stimulating impact of globalisation forces, higher levels of competition, widespread

liberalisation of trade and advances in technology (Chetty & Campbell-Hunt, 2004;
McDougall & Oviatt, 2000). Globalisation forces act as an external stimulus by creating
opportunities through the promotion of cultural homogeneity and social change (Ohmae,
1994) and by lowering the hurdle to internationalisation through transaction lubricating
processes (Liesch and Knight, 1999).
According to Wiedersheim-Paul et al. (1975), whether decision-makers perceive relevant

stimuli or not will influence a firm's initial foreign market commitment. The exposure to
stimuli and the influence on decision-makers can be seen as an organisational learning
process involving the internalisation of appropriate perceived information, complementing the
Uppsala model's argument that an ongoing learning process leads to a growth in experiential
knowledge and incremental foreign commitment (Andersen, 1993; Johanson & Vahlne, 1977;
Lord & Ranft, 2000). Liesch and Knight (1999, p. 385) have argued that a “common thread in
(internationalisation theories) is the importance of acquiring beneficial information and
knowledge to support foreign expansion”. The categorisation of internal and external stimuli
in Leonidou (1998) provides a useful reference point for this study, and is summarised in
Table 1.
Table 1: Internal and external stimuli categorised (Leonidou, 1998)
Internal stimuli Proactive Achievement of economies of scale

Special managerial interest/urge/aspirations
Products with unique qualities
Possession of a special competitive advantage
Potential for extra sales/profits
Need to achieve corporate growth
Reactive Offsetting sales of a seasonal product

Utilisation of idle operating capacity
Stagnation/decline in domestic sales/profits
Reducing dependence on/risk of domestic business
External stimuli Proactive Encouragement by external agents/organizations

Identification of attractive foreign opportunities
Exclusive information on foreign markets
Government export assistance/incentives
Contacts after participating in trade fairs/missions
Reactive Initiation of exports by domestic competitors

Competitive pressures in the domestic market
Favourable foreign exchange rates
Saturation/shrinkage of domestic market
Receipt of unsolicited orders from abroad
Other miscellaneous stimuli
28
Both internal and external stimuli provide the key information input to firms on which
decisions to expand internationally can be made (Caughey & Chetty, 1994; Olson &
Wiedersheim-Paul, 1978). Through exposure to stimuli, an impulse is triggered, and whether
a subsequent decision to internationalise is made or not depends on whether the appropriate
information presented by the impulse can be internalised by the firm into useable knowledge
for an internationalisation decision (Knight & Liesch, 2002). Knowledge can be effectively
utilised once a firm is aware that it is in possession of the knowledge, can make sense of it,
and apply it freely for the firm's benefit (Lim & Klobas, 2000). When sufficient information
pertinent to internationalisation has been acquired and translated into usable knowledge, and
resources for internationalisation are assembled, a firm becomes internationalisation ready
(Knight & Liesch, 2002).
2.2. Attitudinal/psychological commitment

The Uppsala model identifies commitment as important both within a state aspect and also a
change aspect (Johanson & Vahlne, 1977), and while commitment has often been viewed in
relation to resources, this definition of commitment is limited and does not address the multi-
dimensional nature of this construct (Lamb & Liesch, 2002). Commitment also denotes a
psychological and attitudinal stake associated with motivation and involvement (Gundlach,
Achrol, & Mentzer, 1995; Mowday, Porter, & Steers, 1982). Nieminen and Tornross (1997)
described this as commitment on an individual level that relates to a decision-maker's
dedication to accept change and new methods, which is differentiated from commitment on an
organisational level that relates to a firm's investment of resources. Other research has
established attitude as an essential influence towards a firm's internationalisation (Calof &
Beamish, 1995).
When a firm is exposed to the stimuli of information, the impulse triggered may or may not
lead to further involvement but may instill in the decision-maker some form of attitudinal or
psychological commitment such that it compels attention to be shifted towards foreign
opportunities (Aharoni, 1966). Reid (1981) highlighted this as an occurrence in the firm's
early decision-making stage after the decision-maker becomes aware of possible problems or
opportunities faced by the firm that require it to initiate a strategy for involvement in a foreign
market. At this stage, the decision-maker exhibits behavioural attributes such as expectation,
belief and attitude towards internationalisation and foreign potential markets (McGuinness,
1978). Psychological and attitudinal commitments create interest and encourage the decision-
maker to seek further information or to evaluate alternatives regarding future firm strategies.
Resource commitment is initiated only when the decision-maker feels that the firm has the
propensity to venture into a foreign market. Following the Uppsala model, a change aspect
occurs through a desire to commit resources by the decision-maker on the basis of perception
of problems and opportunities in a market abroad (Blomstermo & Sharma, 2003).
2.3. Firm resources

The Wiedersheim-Paul et al. (1975) framework suggests that a firm's readiness to commit to a
foreign market is also affected by its resource attributes. The behavioural perspective
identifies a firm's resource attributes as an essential link in its learning process, with emphasis
placed on the role of the decision-maker and firm characteristics in explaining experience and
knowledge accumulation. This emphasis on a firm's resources is complementary to the
Uppsala model's state aspects where market commitment and market knowledge are
29
highlighted as the major elements. It is also consistent with the resource-based view that
highlights a firm's bundle of resources as being essential to its long-term sustainable
competitive advantage (Andersen & Kheam, 1998; Wernerfelt, 1984) and the proposition that
internationalisation is a strategic approach of consistent development and allocation of
resources (Melin, 1992). The strategic management literature defines resources in a broad
range, highlighting both tangible and intangible aspects related to a firm's financial, human-
related, physical, as well as technological attributes (Hitt, Ireland, & Hoskisson, 1999). From
a pre-internationalisation perspective, resources are firm-specific factors on the basis of which
market commitment is initiated (Olson & Wiedersheim-Paul, 1978; Wiedersheim-Paul et al.,
1975).
Hence, the decision-maker's ability to make an internationalisation decision is influenced by

the nature of the firm's intangible and tangible resources relating to its attitudinal and
orientation attributes (Aaby & Slater, 1989; Axinn, 1988; Bilkey, 1978; Louter, Ouwerkerk,
& Bakker, 1991), human-related aspects such as skills (Axinn, 1988; Hardy, 1987; Louter et
al., 1991) and knowledge (Bilkey, 1978; Christensen, da Rocha, & Gertner, 1987), product
nature and quality (Khalili, 1991; Louter et al., 1991), research and development (Reid,
1991), financial resources (Bilkey, 1978), and technology level (Aaby & Slater, 1989;
Rodríguez & Rodríguez, 2005). A firm's resources strength presents a strong influence on the
decision-maker's foreign commitment decision.
2.4. Lateral rigidity

An organisation can be viewed as a system whereby information is processed and decisions
are rendered (Cyert & March, 1963). The antecedent to decision-making in a firm relies upon
its understanding of how information is secured, communicated and used in the process.
Although a learning process is inherent in all firms, an essential issue to consider here is that
not all firms that have been subjected to information through stimuli factors ultimately make
use of the information presented in an effective manner to commence internationalisation.
Studies have shown stimuli alone to be insufficient as a guarantee for a firm's engagement
with a foreign market (Dichtl et al., 1984; Olson & Wiedersheim-Paul, 1978). A mediating
force seems to be present between the process of stimuli exposure and information
internalisation where a firm's resource factors either accept or reject the perceived impulses.
Luostarinen (1979) described this force as a form of lateral rigidity, a typical feature at every
stage of a decision-making process, which is the result of a firm's behavioural characteristics
that cause inelasticity in its decision-making behaviour. Lateral rigidity refers to a limited
perception of stimuli factors, a biased search that results in limited information, or a
confinement of choices due to uncertainty and risk avoidance (Luostarinen, 1979). Lateral
rigidity assists in a better understanding of the unpredictable actions firm take in their
internationalisation decisions. The inclusion of lateral rigidity provides a more complete
explanation as to why a firm that has been in receipt of information may or may not make use
of such information, why the internationalisation process does not necessarily go smoothly,
and why an exposure to stimuli impulses may not be a sufficient condition for the firm to
become engaged in an international commitment.
3. A pre-internationalisation model developed to complement the Uppsala framework

As reviewed above, the literature has sufficiently established the pre-internationalisation
phase as a learning stage experienced by all firms’ prior to internationalisation. A firm's
exposure to internal and external stimuli starts the learning process by triggering an impulse.
Whether information created by this impulse can be internalised by the firm will be dependent
30
upon how it is being perceived by the decision-maker in view of the firm's bundle of
resources, the decision-maker's attitudinal and psychological commitment, as well as the
effect of lateral rigidity. Information that is internalised by the firm becomes part of its
knowledge resource. This accumulation of experiential knowledge will in turn present an
impact on the recursive cycle of stimuli exposure and commitment, raising the firm's level of
internationalisation readiness.
Internationalisation readiness is a concept that describes a firm's potential transition from a

purely domestic firm into an international firm. This concept represents a firm's readiness to
undertake export activities overseas. The point of analysis for readiness is based on the
learning process in the pre-internationalisation phase that includes an information input
(through stimuli factors) that induces motivation and action (through attitudinal and
psychological commitment), which is influenced by the firm's resources (firm and decision-
maker attributes) and mediated by preventive factors (lateral rigidity). When the firm initiates
its first export decision, it exits the pre-internationalisation phase and enters the
internationalisation process as described by the Uppsala Model as a state to change aspect
transition. If it decides not to export, it remains within the pre-internationalisation phase
where the learning process continues. This is illustrated through the conceptual pre-
internationalisation model of Fig. 3. It should be noted that the concept of internationalisation
readiness is relevant for all firms, traditional and born global, for example. In this respect,
born global firms that internationalise very quickly do not differ from traditional firms that
take a gradual approach to internationalisation as they similarly experience the features of a
learning process through their pre-internationalisation phase. The substantive difference is
that for these born global firms, a readiness level is achieved at a much faster pace than
traditional firms and their learning process is much shorter because of the truncated time they
take to internationalise after inception.
Fig. 3. A reframed Uppsala-based pre-internationalisation model.
4. Measuring internationalisation readiness

Internationalisation readiness describes a firm's preparedness and propensity to commence
internationalisation. As highlighted in the previous section, this is determined by the firm's
development and learning in its pre-internationalisation phase. Of interest is an approach to
measure the internationalisation readiness latent construct. Studies utilising multi-item
measures have generated significant interest and advancement in guidelines for measure
development and methodological soundness (Bruner & Hensel (1993) and Bruner & Hensel
31
(1996)). The nature of causality between a latent construct and observed indicators is an
essential point of initial assessment (Bollen & Lennox, 1991; MacCallum & Browne, 1993).
First, the observed indicators can be viewed as being dependent on a latent construct,
exhibiting a ‘reflective’ relationship, or alternatively, observed indicators can act as a
composite explanation for a latent construct, highlighting a ‘formative’ relationship
(Diamantopoulos & Winklhofer, 2001).
Whether or not a reflective or formative relationship exists between observed indicators and a
latent construct will determine if a scale-type measure or an index-type measure is appropriate
(Netemeyer, Bearden, & Sharma, 2003). A scale is used for reflective relationships where the
observed indicators are considered to be the effect of an underlying latent construct (Loehlin,
1998), whereas the relationship is formative rather than reflective when an index is developed
to measure how the observed indicators determine the level of a latent construct by generating
a composite score (DeVillis, 2003). For the present application it has been noted that the
observed indicators (internal and external stimuli, attitudinal/psychological commitment,
lateral rigidity and firm resources) have a causal rather than reflective relationship on the
latent construct (internationalisation readiness). The literature, as reviewed in the previous
section, has not established a reflective relationship between the indicators and the concept of
internationalisation readiness. The latent construct, internationalisation readiness, does not
describe the properties of each individual observed indicator. On the contrary, a formative
relationship can be identified as the latent construct is caused by a combined influence from
the observed indicators, which corresponds to a formative relationship.
5. Construction of an IRI
The first step in the development of an IRI will require judgment be made on the formative
indicators that explain the internationalisation readiness latent construct. To ensure that these
indicators present a valid measure of the latent construct, the guidelines proposed by
Diamantopoulos and Winklhofer (2001) need to be observed. According to these authors,
guidelines for constructing indexes based on formative indicators are rare, but four issues
have been identified through a review of literature that are considered crucial to successful
index construction: content specification, indicator specification, indicator collinearity and
external validity. Content and indicator specifications are important due to the abstract and
ambiguous nature of latent constructs in formative models (Bagozzi & Heatherton, 1994) as
well as the need to address the full scope of such constructs (Jarvis, Mackenzie, & Podsakoff,
2003), the failure of which may result in the deficiency of a measure due to the omission of
part of the formative model (Churchill, 1979).
The content specification and indicator specification criteria can be established through an
extensive literature review supported by case study research. The indicator collinearity
condition implies that multicollinearity among the variables will have to be examined to
ensure that all are within the appropriate cut-off threshold for inclusion in the index
(Diamantopoulos & Winklhofer, 2001). Unlike the case of reflective models, evaluating the
adequacy of measures in formative models through internal consistency reliability has been
judged inappropriate (Bollen & Lennox, 1991). For formative indicators, external validity
should be determined by paying attention to nomological or criterion-related validity (Jarvis
et al., 2003), possibly through a correlation with relevant variables that are external to the
index (Diamantopoulos & Winklhofer, 2001).
32
Having a strong theoretical framework that provides a clear definition of the latent construct
is important in identifying relevant indicators to include in the index. This paper has so far
established through literature review that the latent construct (internationalisation readiness)
can be explained through a combination of causal indicators grouped under four dimensions
(stimuli factors, attitudinal/psychological commitment, lateral rigidity and firm resources). To
ensure content and indicator validity, supporting case studies should be conducted with a
sample of firms. Participants in the case studies can be asked questions that relate to their
firms’ experiences during the early stage of internationalisation. Data gathered through these
case studies can then be analysed to ensure that the theoretical framework is sufficiently
robust and the formative indicators are appropriately identified and defined. After establishing
the theoretical framework and defining the causal indicators, the next stage in the
development of the IRI will require the collection of quantitative data. This can be done
through a questionnaire survey where sample firms are required to respond to questions that
relate to the key dimensions, stimuli, attitudinal/psychological commitment, lateral rigidity
and firm resources. Also required at this stage is the setting of scaling procedures for each
indicator. Scaling procedures need to take into account the information required from each
indicator as well as how each indicator impacts on the overall index.
As each causal indicator within the theoretical model measures a different dimension and is
calculated in different measurement units, a normalisation procedure is required prior to data
aggregation to avoid problems that may arise due to mixing different measurement units
(Freudenberg, 2003). Normalisation will adjust any differences between the dimensions into
the same range of 0–1. However, problems associated with the re-scaling method should be
noted. These are, the possible widening of a range of indicators lying within a small interval
that leads to an increased effect on the composite indicator, and the possible distortion of the
normalised indicator due to extreme values or outliers (Nardo et al., 2005). An inspection of
data prior to normalising individual indicators will identify cases of small interval and
extreme outliers. If the re-scaling method is inappropriate, a standardisation (z-scores) method
can be used that normalises individual indicators to a mean of 0 and a standard deviation of 1
using the formula:
Normalised value = actual value - mean value / standard deviation
Before a composite value can be derived from the IRI, weights need to be assigned in
accordance with the significance of each indicator. The weighting system used in the UNDP
Human Development Index and the Globalisation Index, for example, have been widely
critiqued in the literature, the HDI for being simplistic in using the same weights for all
dimensions (Palazzi & Lauri, 1998), and the Globalisation Index for being arbitrary
(Lockwood, 2001). A good weighting system should complement the underlying theoretical
framework and take into account the relative importance of each indicator to the latent
construct. The common problems in assigning weights is the presumption that all indicators
have equal importance, which is usually not the case, and the failure to note correlations
between indicators such that certain aspects become double-weighted (Freudenberg, 2003).
As a guideline, statistical correlations between indicators should be tested. For example, when
the correlation between two indicators is high, lower weights should be assigned, as it is
likely that common factors are being shared (Nardo et al., 2005). Weightings can also be
determined statistically through the use of factor analysis with factor loadings showing the
importance of the variables according to the factor dimensions which measure correlation
33
between a latent construct and individual indicators (Zikmund, 2003). Factor loadings can be
used as weights for individual indicators within the IRI.
6. Implications
The pre-internationalisation perspective adopted here contributes to existing knowledge by
providing a new element to research in firm internationalisation. Internationalisation has
become an important strategy for firms, which at the most basic level, involves the use of
external market-based modes of exchange such as exporting. The preference for an external
market-based mode of entry among firms in recent decades has been highlighted in the
literature (Dhanaraj & Beamish, 2003; Liesch & Knight, 2001). The concept of
internationalisation readiness offers firms the ability to better understand their level of
preparedness for an international commitment. In Australia for example, this research is
highly relevant as one major cause for concern is the evidence shown in studies that the
performance of Australian exporters has been generally poor and has not matched the average
export development in the global market (Arcus, 1992; McKinsey & Co, 1993; Valos &
Baker, 1996). The IRI has major public policy implications for the Australian government, for
example, in assisting local firms in making their first export decision through a more thorough
understanding of the conceptualisation of internationalisation readiness. Of course, reliance
on a single tool such as this index to make an important decision such as the
internationalisation one would be unwise. This index should be used as an indicator
encouraging further analysis in accordance with the direction indicated by the components of
Fig. 4 below.
Fig. 4. Export decision matrix.
Fig. 4 presents an export decision matrix encompassing the dimensions ‘level of

internationalisation readiness’ and ‘level of resource commitment to export’. The export
decision is influenced not only by a firm's internationalisation readiness but also by its
willingness to commit resources to a foreign market. The matrix highlights four different
types of firms that could be categorised through the pre-internationalisation phase. This leads
us to propose that:
34
P1: A firm that starts exporting after achieving a high level of internationalisation
readiness (firm type A) is more likely to have long-term success compared to a firm
that starts exporting to a foreign market when its level of internationalisation
readiness is still relatively low (firm type C).
We also propose that:
P2: Firms (firm type B) might not internationalise despite having achieved
internationalisation readiness.
The proposed IRI will allow firms to be identified as type B (already achieved
internationalisation readiness but have yet to commence export operations) and hence to be
given greater attention as potential exporters. Type C firms, on the other hand, should
exercise extreme caution in respect to their export intentions. Type A firms should be satisfied
they are well placed to succeed in the export strategy, and type D firms should recognise that
the benefits of internationalisation may not be within their reach.
7. Conclusions
The Internationalisation Readiness Index proposed in this paper does present one clear danger
in that its usefulness may be undermined by the temptation to use it as a normative tool for
decision making in respect of firm internationalisation. The index is intended to improve
understanding of the internationalisation process, in particular, the pre-internationalisation
phase, and to point to possible strengths and weaknesses of firms preparing for that step. It is
not proposed that the index represents an opportunity for managers to make a judgment on
whether they should proceed to internationalise based solely on the index score for their firm.
Such an approach would deny one of the central tenets of accepted firm internationalisation
theory, that firms are heterogeneous and constantly changing, re-configuring the relationships
between internal stimuli, external stimuli, attitudinal commitment, firm resources and lateral
rigidity. An internationalisation readiness score one day may be superseded the next. The
index does, however, provide a guide for a better understanding of where firms stand in their
pre-internationalisation phase and where improvements in their capabilities might lie.
Whilst an outline for the proposed internationalisation readiness index construction has been
provided, much work would still be required to develop a usable index. In particular,
decisions relating to weightings for the index constructs are problematic. An attempt to
determine such weightings could be made through a survey of exporting and non-exporting
firms and a subsequent factor analysis. The index would also need to be tested after
construction to ensure it was adding value to our existing knowledge of the stages models of
firm internationalisation. The propositions offered in this paper could also be tested through
such a survey.
This paper identifies important theoretical considerations by expanding on a much-neglected

area in behavioural firm internationalisation research. The pre-internationalisation framework
introduced in this study aims to improve on the traditional stages models by highlighting the
point of internationalisation readiness that occurs before the commencement of the
internationalisation process. Within the pre-internationalisation phase, firms experience a
learning process that is influential towards an initial internationalisation decision. The
proposed internationalisation readiness index is a behavioural measure that sets out to
quantify a firm's readiness for an export commencement decision and has much to offer
35
practically as a public policy tool to be used by public agencies charged with export and
internationalisation promotion.
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40
TASK 2
International Market Selection

(IMS)
41
Case: The internationalization of Lindex; in search of new

markets
Lindex is a Swedish fashion chain which offers a range of lingerie, woman’s wear, children’s
wear and cosmetics. It was formed in 1954 in Alingsås, Sweden, by Ingemar Boman and
Bengt Rosell as a lingerie store called Fynd. Soon after, Fynd bought Lindex in Gothenburg
and the acquisition gave the company its new name. As the profits rose the company
expanded and opened up new stores all over Sweden. In the late 60’s the turnover was valued
25 million and the first store was opened in Norway. The company continued to expand in
Sweden and Norway and in the early 80’s Lindex was bought by ICA Eol. In the late 80’s the
company acquired Gulins and started to sell menswear. There were at this time 227 Lindex
stores with a turnover of 2.2 billion Swedish crowns.
In the 90’s there were a lot of changes within the company. Lindex was acquired by Industri
Kapital. The company sold Gulins and was listed on the Stockholm stock exchange A-list. In
addition, Lindex stores were established in Germany, the company started selling cosmetics in
certain stores and the FIX brand was acquired. The company also started Lindex Club (a
customer club with the objective of creating closer relationships with loyal customers and to
reward them). (www.lindex.com)
In the past couple of years Lindex head office has been moved from Alingsås to Gothenburg,
Lindex has turned 50 years and Göran Bille has become the new Chief Executive Officer
(CEO). Today the company runs over 365 stores in Scandinavia, the Baltic States, Russia,
central Europe and the Middle East. The number of employees is approximately 5000.
(Datamonitor, Company Profile Lindex AB)
Lindex business concept is to offer women and their children inspiring and priceworthy
fashion that all women can afford, with the right quality and fit. Another concept of Lindex is
to be the lingerie expert and to offer a high degree of availability to the customers by running
wholly owned stores located close to them. The company’s vision is to inspire women to look
and feel great and the objective is to keep focusing on increased sales, as well as expansion
and growth.
In the past years Lindex has increased its sales remarkably. By concentrating on the collection,
reducing its costs, keep focusing on the collection and introducing a new marketing strategy, the
company has succeeded to raise its profits. Earlier Lindex had been too focused on casual clothes;
now they complete it with more trendy clothes. A successful cooperation with the Swedish,
famous model, Emma Wiklund (former Sjöberg), has without doubt helped the company to attract
new customers. Except from the German market, which the company has had difficulties with
ever since they entered it more than 10 years ago, the company has done very well on all the
markets it operates in.
To continue growing, Lindex plans to expand to new markets.
42
Interview with Hans Jepson, foreign expansion manager at

Lindex
Basic information about the company and its foreign business activities
Lindex stands for approximately 8-9% of the total fashion retail market, according to Jepson.
They are the market leaders in lingerie, which means that they have the greatest market share in
lingerie. In comparison to H&M (one of their greatest competitors), which only owns 7% market
share in lingerie, Lindex stands for 25% of the lingerie market. Furthermore, they have 18%
market share in children’s ware, while H&M stands for 17% of it. “On the other hand, H&M
have an advantage in woman’s ware. They stand for 9% of the market, while we stand for 7% of
it”. (Interview with Hans Jepson) Lindex offers the same products and services in all the markets
that the company is active on, except from cosmetics which they do not sell abroad yet. This is
mainly because foreign customers demand other cosmetic brands than those Lindex sells in
Sweden. Whenever the company will start selling cosmetics abroad they will have to introduce
different brands on different markets.
Lindex started internationalizing more than 40 years ago when they entered the Norwegian market
and thirteen years after that they entered Finland. Jepson believes they have done well on both
these markets in contrast to the German market, which they entered about ten years ago. Since
2004 Lindex has been present in Estonia and a few year later they entered the Latvian market. As
shown, they are right now focusing a lot on expansion and growth. Since Lindex has done so well
in Estonia and Latvia (they reached profit just after six months) they will keep expanding in the
Baltic countries. One country will work as a bridge to the other. From Latvia they continued
expanding to Lithuania.
Overall so far, Jepson seems happy with the company’s expansion, except from their expansion to
Germany. “Today, it is easy for me to say that we should have waited and not rushed into
Germany, but back then we thought entering it was the right next move to make”. They did not
want to enter Denmark, since it is a part of Scandinavia and Lindex wanted to take it a step further
and go outside Scandinavia. Furthermore, they believed that Germany was a much more attractive
country to establish stores in than Denmark and also that by entering Germany it would be easier
to transit to the rest of Europe.
Why did Lindex internationalize?

The reason as to why Lindex expanded the business abroad was because they wanted to grow
bigger. By going abroad the company also had the possibility to decrease its operational cost (for
example labour costs). Since labour costs differ a lot between different countries, companies can
gain on an expansion by entering a country with lower labour costs. However, a foreign expansion
has some disadvantages too. Jepson bring up what he believes is the greatest disadvantage.
“Companies going international take a risk, cultural risks as well as risks of splitting up the
company. By expanding too much too fast the chances are big that the company will lose focus on
its core competence/competences”. There are three main factors (potential, window and concept)
that Lindex talks a lot about when identifying which markets to enter. They look for potential on
the market, whether there is a window and also if Lindex’ concept fits the market. They also do
some research; they have for instance been in touch with the Swedish Trade Council, which has
helped them a lot with information about the different countries. Jepson considers it is a great
institution to contact if the company wants to expand abroad.
The possibility factor is believed to be the most important factor that a company has to take into
consideration in the screening process for potential markets. That is, to see whether there are any
possibilities to earn money on a specific market; if there is a demand. Other important factors are
43
location (whether the company can manage to negotiate a good deal and get hold of a good
location to establish stores in) and company concept (if the company has a concept that will work
on the foreign market). The political, economic and sociocultural forces have not been that
important to Lindex. Since the company has only expanded to nearby countries so far, these
forces have not affected them that much. In the future, if they choose to enter Russia or the
Middle East, where the politics, economics and culture differ from Sweden and other European
countries, these forces are believed to be taken more into consideration.
Jepson believes that the German establishment has been a great problem for Lindex in the
internationalization process. They have experienced and learned a lot from it. Some of the
mistakes that they made when entering Germany were for instance that they established too many
stores in a short matter of time. They started out with 33 stores, but as sales turned out to be real
slow they had to close down 10 of their German stores. Moreover, they opened big stores with
two floors, which were not necessary. The only outcome of that were extremely high local rents.
They have also learnt that the Germans are very conservative; the majority of the people like to do
their shopping from domestic stores, and it has been very hard to win their trust (obtain loyal
customers). Sales have gone very slow in Germany and are still a bit of a problem for the
company. However, Lindex is slowly reaching out to the German customers.
How come Lindex entered the foreign markets with wholly owned stores?
According to Jepson Lindex has a strong concept and the financial strength that is required for
wholly owned establishments. Swedish world-known retailers as IKEA and H&M have worked as
ideal examples for them. They could have used another entry mode strategy, for instance
franchising, when internationalizing the business, but because of what has just been
mentioned it has not been relevant for them yet. However, Jepson believes that franchising might
be relevant in the future if they decide to enter more far-away markets.
Jepson believes in some ways that the foreign expansion has differed from the domestic
expansion. Since governmental regulations vary between different countries, they have had to
consider those when entering a country. Technical issues, as for instance fire safety, have also
taken longer time to solve abroad than on the domestic market. Except from Germany, he is
happy with the chosen order of the foreign expansion. If they had entered Austria or perhaps the
Czech Republic before they entered Germany, they could have learnt a few things that they could
have taken advantage of when they later entered Germany, for instance not to establish so many
stores in the beginning, but to start with a few to see how it works.
What role has local competition had in Lindex’ market choices and how
come they chose to enter nearby markets and not more far-flung markets?
Lindex has faced intense competition in Germany, but in Baltic on the other hand, the competition
has been quite low. Jepson feels that it is unfortunate that the local competition has not affected
their market choices as much as it should have, “our German market choice is a good example of
that”, he says. He believes that they should have done much more research on the German market
before they chose to enter it.
Lindex chose to enter nearby markets and not more far-flung markets. Since it is easier and
cheaper to go from one country to another neighbouring country, Jepson believes entering nearby
markets is much more advantageous when expanding abroad. If Lindex had established stores in
different countries far away from each other, they would have had to open more local offices,
which in turn mean additional costs for the company. Their current expansion strategy allows
them for instance to use the same office in Finland both for the Finnish market as well as for the
44
Estonian and the Latvian market. Once Lindex has established a lot of stores in a country they
prefer to open a local office there.
The markets that Lindex has chosen to expand to have in a broader perspective quite similar
purchasing behaviours, lifestyles and market structures as Sweden. Jepson believes that if the
company would expand to a country in southern Europe, for example Spain, product
modifications would be necessary. The Spanish people have much smaller sizes in clothes than
people in north Europe have, thus Lindex would have to offer clothes with smaller sizes
especially for the Spanish customers. Furthermore, since Spanish people are very fashionable
(almost trendy), Lindex will not be able to offer them what they demand. According to Jepson
they are constantly improving their collections, but they are not offering super trendy clothes.
How will the Swedish retail industry develop in the next few years?
In the future many foreign actors that are already present in Sweden are expected to expand and
open up new stores in Sweden and at the same time many new actors will enter the Swedish
market (the German New Yorker and Kid Interiör, a Danish home furnishing company in line
with Hemtex, are given as examples). However, since the Swedish market is small one can still
feel some resistance from many foreign actors to expand to Sweden. More domestic retailers are
expected to expand globally than those that are expanding today. Lately a lot of Swedish retailers
have internationalized (Polarn O. Pyret and JC are given as examples) and Jepson definitely
believes that this trend will continue in the future.
Jepson does not believe that more fashion retailers will start their foreign business activities in
distant countries in the future than those that expand to distant countries today. “It is hard to
manage a company that have stores established on the other side of the globe; it requires a lot of
effort (time and capital) and the company will lose focus on its core competence”.
45
Companies can decide to go/expand abroad for several reasons. Export motives can be
classified as reactive or proactive.
1. Explain the difference between reactive and proactive motives and come up with some
concrete examples.
2. What is the difference between international market selection and entry mode
selection?
3. Come up with one or more systematic approach(es) (and/or a model(s)) for

international market selection, based on the literature you studied.
4. Do you think the international market selection process for big companies is different
from how small and medium-sized enterprises select new markets?
5. State some internal and external factors that are relevant for Lindex when selecting
new markets to enter.
Sources to be used:
Theory on International Market Selection (compulsory reading before first discussion!!):
- Svend Hollensen, Global Marketing, a decision-oriented approach, 4th edition,

Prentice Hall, especially chapter 8
- P. Brewer, ‘International market selection: developing a model from Australian case
studies’, International Business Review 10 (2001), pages 155-174 (to be found on
Scholar and also available through HAN studiecentra)
Additional sources for hand-in assignment/management briefing:
- www.lindex.com
- Datamonitor databases: online databases/Marketline; country profiles, industry
profiles and company profile Lindex AB
(accessible through HAN studiecentra, accessible both at school and at home)
46
TASK 3
Business Ethics &

Corporate Governance
47
Case: The Social Responsibility of Business is to Increase its Profits

by Milton Friedman
The New York Times Magazine, September 13, 1970. Copyright @ 1970 by The
New York Times Company.
When I hear businessmen speak eloquently about the "social responsibilities of business in a
free-enterprise system," I am reminded of the wonderful line about the Frenchman who
discovered at the age of 70 that he had been speaking prose all his life. The businessmen
believe that they are defending free enterprise when they declaim that business is not
concerned "merely" with profit but also with promoting desirable "social" ends; that business
has a "social conscience" and takes seriously its responsibilities for providing employment,
eliminating discrimination, avoiding pollution and whatever else may be the catchwords of
the contemporary crop of reformers. In fact they are –or would be if they or anyone else took
them seriously– preaching pure and unadulterated socialism. Businessmen who talk this way
are unwitting puppets of the intellectual forces that have been undermining the basis of a free
society these past decades.
The discussions of the "social responsibilities of business" are notable for their analytical
looseness and lack of rigor. What does it mean to say that "business" has responsibilities?
Only people can have responsibilities. A corporation is an artificial person and in this sense
may have artificial responsibilities, but "business" as a whole cannot be said to have
responsibilities, even in this vague sense. The first step toward clarity in examining the
doctrine of the social responsibility of business is to ask precisely what it implies for whom.
Presumably, the individuals who are to be responsible are businessmen, which means
individual proprietors or corporate executives. Most of the discussion of social responsibility
is directed at corporations, so in what follows I shall mostly neglect the individual proprietors
and speak of corporate executives.
In a free-enterprise, private-property system, a corporate executive is an employee of the

owners of the business. He has direct responsibility to his employers. That responsibility is to
conduct the business in accordance with their desires, which generally will be to make as
much money as possible while conforming to the basic rules of the society, both those
embodied in law and those embodied in ethical custom. Of course, in some cases his
employers may have a different objective. A group of persons might establish a corporation
for an eleemosynary purpose –for example, a hospital or a school. The manager of such a
corporation will not have money profit as his objective but the rendering of certain services.
In either case, the key point is that, in his capacity as a corporate executive, the manager is the
agent of the individuals who own the corporation or establish the eleemosynary institution,
and his primary responsibility is to them.
Needless to say, this does not mean that it is easy to judge how well he is performing his task.
But at least the criterion of performance is straightforward, and the persons among whom a
voluntary contractual arrangement exists are clearly defined.
Of course, the corporate executive is also a person in his own right. As a person, he may have
many other responsibilities that he recognizes or assumes voluntarily –to his family, his
48
conscience, his feelings of charity, his church, his clubs, his city, his country. He may feel
impelled by these responsibilities to devote part of his income to causes he regards as worthy,
to refuse to work for particular corporations, even to leave his job, for example, to join his
country's armed forces. If we wish, we may refer to some of these responsibilities as "social
responsibilities." But in these respects he is acting as a principal, not an agent; he is spending
his own money or time or energy, not the money of his employers or the time or energy he
has contracted to devote to their purposes. If these are "social responsibilities," they are the
social responsibilities of individuals, not of business.
What does it mean to say that the corporate executive has a "social responsibility" in his
capacity as businessman? If this statement is not pure rhetoric, it must mean that he is to act in
some way that is not in the interest of his employers. For example, that he is to refrain from
increasing the price of the product in order to contribute to the social objective of preventing
inflation, even though a price increase would be in the best interests of the corporation. Or
that he is to make expenditures on reducing pollution beyond the amount that is in the best
interests of the corporation or that is required by law in order to contribute to the social
objective of improving the environment. Or that, at the expense of corporate profits, he is to
hire "hardcore" unemployed instead of better qualified available workmen to contribute to the
social objective of reducing poverty.
In each of these cases, the corporate executive would be spending someone else's money for a
general social interest. Insofar as his actions in accord with his "social responsibility" reduce
returns to stockholders, he is spending their money. Insofar as his actions raise the price to
customers, he is spending the customers' money. Insofar as his actions lower the wages of
some employees, he is spending their money.
The stockholders or the customers or the employees could separately spend their own money
on the particular action if they wished to do so. The executive is exercising a distinct "social
responsibility," rather than serving as an agent of the stockholders or the customers or the
employees, only if he spends the money in a different way than they would have spent it.
But if he does this, he is in effect imposing taxes, on the one hand, and deciding how the tax
proceeds shall be spent, on the other.
This process raises political questions on two levels: principle and consequences. On the level
of political principle, the imposition of taxes and the expenditure of tax proceeds are gov-
ernmental functions. We have established elaborate constitutional, parliamentary and judicial
provisions to control these functions, to assure that taxes are imposed so far as possible in ac-
cordance with the preferences and desires of the public –after all, "taxation without
representation" was one of the battle cries of the American Revolution. We have a system of
checks and balances to separate the legislative function of imposing taxes and enacting
expenditures from the executive function of collecting taxes and administering expenditure
programs and from the judicial function of mediating disputes and interpreting the law.
Here the businessman –self-selected or appointed directly or indirectly by stockholders– is to

be simultaneously legislator, executive and, jurist. He is to decide whom to tax by how much
and for what purpose, and he is to spend the proceeds –all this guided only by general
exhortations from on high to restrain inflation, improve the environment, fight poverty and so
on and on.
49
The whole justification for permitting the corporate executive to be selected by the
stockholders is that the executive is an agent serving the interests of his principal. This
justification disappears when the corporate executive imposes taxes and spends the proceeds
for "social" purposes. He becomes in effect a public employee, a civil servant, even though he
remains in name an employee of a private enterprise. On grounds of political principle, it is
intolerable that such civil servants –insofar as their actions in the name of social responsibility
are real and not just window-dressing– should be selected as they are now. If they are to be
civil servants, then they must be elected through a political process. If they are to impose
taxes and make expenditures to foster "social" objectives, then political machinery must be set
up to make the assessment of taxes and to determine through a political process the objectives
to be served.
This is the basic reason why the doctrine of "social responsibility" involves the acceptance of
the socialist view that political mechanisms, not market mechanisms, are the appropriate way
to determine the allocation of scarce resources to alternative uses.
On the grounds of consequences, can the corporate executive in fact discharge his alleged
"social responsibilities?" On the other hand, suppose he could get away with spending the
stockholders' or customers' or employees' money. How is he to know how to spend it? He is
told that he must contribute to fighting inflation. How is he to know what action of his will
contribute to that end? He is presumably an expert in running his company –in producing a
product or selling it or financing it. But nothing about his selection makes him an expert on
inflation. Will his holding down the price of his product reduce inflationary pressure? Or, by
leaving more spending power in the hands of his customers, simply divert it elsewhere? Or,
by forcing him to produce less because of the lower price, will it simply contribute to
shortages? Even if he could answer these questions, how much cost is he justified in imposing
on his stockholders, customers and employees for this social purpose? What is his appropriate
share and what is the appropriate share of others?
And, whether he wants to or not, can he get away with spending his stockholders', customers'
or employees' money? Will not the stockholders fire him? (Either the present ones or those
who take over when his actions in the name of social responsibility have reduced the
corporation's profits and the price of its stock.) His customers and his employees can desert
him for other producers and employers less scrupulous in exercising their social
responsibilities.
This facet of "social responsibility" doctrine is brought into sharp relief when the doctrine is
used to justify wage restraint by trade unions. The conflict of interest is naked and clear when
union officials are asked to subordinate the interest of their members to some more general
purpose. If the union officials try to enforce wage restraint, the consequence is likely to be
wildcat strikes, rank-and-file revolts and the emergence of strong competitors for their jobs.
We thus have the ironic phenomenon that union leaders –at least in the U.S.– have objected to
Government interference with the market far more consistently and courageously than have
business leaders.
The difficulty of exercising "social responsibility" illustrates, of course, the great virtue of
private competitive enterprise –it forces people to be responsible for their own actions and
makes it difficult for them to "exploit" other people for either selfish or unselfish purposes.
They can do good –but only at their own expense.
50
Many a reader who has followed the argument this far may be tempted to remonstrate that it
is all well and good to speak of Government's having the responsibility to impose taxes and
determine expenditures for such "social" purposes as controlling pollution or training the
hard-core unemployed, but that the problems are too urgent to wait on the slow course of
political processes, that the exercise of social responsibility by businessmen is a quicker and
surer way to solve pressing current problems.
Aside from the question of fact –I share Adam Smith's skepticism about the benefits that can
be expected from "those who affected to trade for the public good"– this argument must be
rejected on grounds of principle. What it amounts to is an assertion that those who favor the
taxes and expenditures in question have failed to persuade a majority of their fellow citizens
to be of like mind and that they are seeking to attain by undemocratic procedures what they
cannot attain by democratic procedures. In a free society, it is hard for "evil" people to do
"evil," especially since one man's good is another's evil.
I have, for simplicity, concentrated on the special case of the corporate executive, except only
for the brief digression on trade unions. But precisely the same argument applies to the newer
phenomenon of calling upon stockholders to require corporations to exercise social
responsibility (the recent G.M crusade for example). In most of these cases, what is in effect
involved is some stockholders trying to get other stockholders (or customers or employees) to
contribute against their will to "social" causes favored by the activists. Insofar as they
succeed, they are again imposing taxes and spending the proceeds.
The situation of the individual proprietor is somewhat different. If he acts to reduce the
returns of his enterprise in order to exercise his "social responsibility," he is spending his own
money, not someone else's. If he wishes to spend his money on such purposes, that is his
right, and I cannot see that there is any objection to his doing so. In the process, he, too, may
impose costs on employees and customers. However, because he is far less likely than a large
corporation or union to have monopolistic power, any such side effects will tend to be minor.
Of course, in practice the doctrine of social responsibility is frequently a cloak for actions that
are justified on other grounds rather than a reason for those actions.
To illustrate, it may well be in the long run interest of a corporation that is a major employer
in a small community to devote resources to providing amenities to that community or to
improving its government. That may make it easier to attract desirable employees, it may
reduce the wage bill or lessen losses from pilferage and sabotage or have other worthwhile
effects. Or it may be that, given the laws about the deductibility of corporate charitable
contributions, the stockholders can contribute more to charities they favor by having the
corporation make the gift than by doing it themselves, since they can in that way contribute an
amount that would otherwise have been paid as corporate taxes.
In each of these –and many similar– cases, there is a strong temptation to rationalize these
actions as an exercise of "social responsibility." In the present climate of opinion, with its
wide spread aversion to "capitalism," "profits," the "soulless corporation" and so on, this is
one way for a corporation to generate goodwill as a by-product of expenditures that are
entirely justified in its own self-interest.
It would be inconsistent of me to call on corporate executives to refrain from this hypocritical

window-dressing because it harms the foundations of a free society. That would be to call on
51
them to exercise a "social responsibility"! If our institutions, and the attitudes of the public
make it in their self-interest to cloak their actions in this way, I cannot summon much
indignation to denounce them. At the same time, I can express admiration for those individual
proprietors or owners of closely held corporations or stockholders of more broadly held
corporations who disdain such tactics as approaching fraud.
Whether blameworthy or not, the use of the cloak of social responsibility, and the nonsense
spoken in its name by influential and prestigious businessmen, does clearly harm the
foundations of a free society. I have been impressed time and again by the schizophrenic
character of many businessmen. They are capable of being extremely farsighted and
clearheaded in matters that are internal to their businesses. They are incredibly shortsighted
and muddleheaded in matters that are outside their businesses but affect the possible survival
of business in general. This shortsightedness is strikingly exemplified in the calls from many
businessmen for wage and price guidelines or controls or income policies. There is nothing
that could do more in a brief period to destroy a market system and replace it by a centrally
controlled system than effective governmental control of prices and wages.
The shortsightedness is also exemplified in speeches by businessmen on social responsibility.

This may gain them kudos in the short run. But it helps to strengthen the already too prevalent
view that the pursuit of profits is wicked and immoral and must be curbed and controlled by
external forces. Once this view is adopted, the external forces that curb the market will not be
the social consciences, however highly developed, of the pontificating executives; it will be
the iron fist of Government bureaucrats. Here, as with price and wage controls, businessmen
seem to me to reveal a suicidal impulse.
The political principle that underlies the market mechanism is unanimity. In an ideal free
market resting on private property, no individual can coerce any other, all cooperation is
voluntary, all parties to such cooperation benefit or they need not participate. There are no
values, no "social" responsibilities in any sense other than the shared values and
responsibilities of individuals. Society is a collection of individuals and of the various groups
they voluntarily form.
The political principle that underlies the political mechanism is conformity. The individual
must serve a more general social interest –whether that be determined by a church or a
dictator or a majority. The individual may have a vote and say in what is to be done, but if he
is overruled, he must conform. It is appropriate for some to require others to contribute to a
general social purpose whether they wish to or not.
Unfortunately, unanimity is not always feasible. There are some respects in which conformity
appears unavoidable, so I do not see how one can avoid the use of the political mechanism
altogether.
But the doctrine of "social responsibility" taken seriously would extend the scope of the
political mechanism to every human activity. It does not differ in philosophy from the most
explicitly collectivist doctrine. It differs only by professing to believe that collectivist ends
can be attained without collectivist means. That is why, in my book Capitalism and Freedom,
I have called it a "fundamentally subversive doctrine" in a free society, and have said that in
such a society, "there is one and only one social responsibility of business –to use its
resources and engage in activities designed to increase its profits so long as it stays within the
52
rules of the game, which is to say, engages in open and free competition without deception or
fraud."
53
1. What makes Google’s dilemma in China an ethical issue?
2. How do you think Milton Friedman would react on this dilemma? And do you agree
with him? Share arguments!
3. Approach this issue from a

- Consequentialist perspective
- Deontological perspective
- Virtue perspective
4. Which non-ethical aspects are involved?
5. Which parties are involved?
Note:
When preparing for the first discussion you should have read/studied the article on the next
pages (‘Why business ethics’) and the articles ‘Google in China’ and ‘Deciding what’s right’
that can be found on Scholar!
54
Why Business Ethics?
John Hooker, Carnegie Mellon University, April 2003
Everyone agrees that business managers must understand finance and marketing. But is
it necessary for them to study ethics?
Managers who answer in the negative generally base their thinking on one of three
rationales. They may simply say that they have no reason to be ethical. They see why they
should make a profit, and most agree they should do so legally. But why should they be
concerned about ethics, as long as they are making money and staying out of jail?
Other managers recognize that they should be ethical but identify their ethical duty with
making a legal profit for the firm. They see no need to be ethical in any further sense, and
therefore no need for any background beyond business and law.
A third group of managers grant that ethical duty goes further than what is required by
law. But they still insist that there is no point in studying ethics. Character is formed in
childhood, not while reading a college text or sitting in class.
These arguments are confused and mistaken on several levels. To see why, it is best to
start with the question raised by the first one: why should business people be ethical?
Why Should One Be Ethical?
There is already something odd about this question. It is like asking, “Why are bachelors
unmarried?” They are unmarried by definition. If they were married, they would not be
bachelors. It is the same with ethics. To say that one should do something is another way of
saying it is ethical. If it is not ethical, then one should not do it.
Perhaps when business people ask why they should be ethical, they have a different
question in mind: what is the motivation for being good? Is their something in it for them?
It is perfectly all right to ask if there is a reward for being good, but this has nothing to do
with whether one should be good. It makes no sense to try convince people that they should be
good by pointing to the rewards that may follow. One should be good because “good” is, by
definition, that which one should be.
As for motivation, good behavior often brings a reward, but not every time. Think about
it. If it were always in one’s interest to be good, there would be no need for ethics. We could
simply act selfishly and forget about obligation. People invented ethics precisely because it does
not always coincide with self interest.
Doing Well by Doing Good
Although ethics is not the same as self interest, business executives often want to be
assured that it is the same. They want to make certain that “one can do well by doing good,”
meaning that one can succeed in business by being ethical.
There is no denying that one can often do well by doing good. An ethical company is
more likely to build a good reputation, which is more likely to bring financial rewards over the
long term. But good behavior cannot be grounded in tangible reward alone. People who are
interested only in reward will behave ethically when it suits their purpose, but they will go astray
whenever the incentives change.
55
There is a deeper confusion here, too. To look to ethics for motivation is to

misunderstand what ethics is all about. It is like studying finance to find a reason to make money.
Finance does not teach one to want to be rich. It teaches one how to be rich, assuming one wants
to be rich. So it is with ethics. Ethics teaches one how to be good, assuming one wants to be
good.
It is important to know that one can normally do well by doing good. Otherwise ethical
people could go into business only with a high risk of failure. Business ethics, however,
addresses the opposite question: how can one do good by doing well? It begins with the premise
that managers want to do something good with their lives and investigates how to accomplish this
through business. In other words, it treats profit and business success as means to a greater end:
making the world a little better.
The Duty to Make Money
Granting that a business person’s ultimate objective is to make the world better, how is
this best achieved? A common view is that it is achieved by making as much money as possible.
The best thing business people can do for society is to be good business people, which is to say,
to maximize the company’s profit. They should therefore stick to finance, marketing and
operations management rather than waste time with ethics.
Economist Milton Friedman articulates this view in an essay that is quite popular with
business students, “The Social Responsibility of Business Is to Increase its Profits.” According
to Friedman, corporate officers have no obligation to support such social causes as hiring the
hard-core unemployed to reduce poverty, or reducing pollution beyond that mandated by law.
Their sole task is to maximize profit for the company, subject to the limits of law and “rules of
the game” that ensure “open and free competition without deception or fraud.”
Friedman advances two main arguments for this position. First, corporate executives and
directors are not qualified to do anything other than maximize profit. Business people are expert
at making money, not at making social policy. They lack the perspective and training to address
complex social problems, which should be left to governments and social service agencies.
Second, and more fundamentally, corporate officers have no right to do anything other
than maximize profit. If they invest company funds to train the chronically unemployed or
reduce emissions below legal limits, they in effect levy a “tax” on the company’s owners,
employees and customers in order to accomplish a social purpose. But they have no right to
spend other people’s money on social welfare projects. At best, only elected representatives of
the people have such authority. Sole proprietors can spend the company’s money any way they
want, since it is their money, but fiduciaries and hired managers have no such privilege. If they
contribute corporate money to arts or community development, it must be with an eye to
increasing profit, perhaps by attracting better employees or improving the company’s image. If
they want to contribute to other social causes, they are free to join civic organizations and donate
as much of their own money as they please.
It would be nice if the world were so simple. What happens, for example, when laws
permit anti-social behavior? Should businesses not restrain themselves voluntarily, even if it
imposes a cost on company stakeholders? Friedman’s reply is that they must not, again on the
libertarian principles just described. But suppose a hurricane hits a town and cuts off routes to the
outside world. There is a desperate need for portable electric generators, and the only local seller
takes the opportunity to charge an exorbitant price. (Something like this happened when
Hurricane Andrew hit southern Florida.) Since this sort of price gouging is legal, the store
manager has no right, on Friedman’s view, to “tax” the owners by charging less than the market
will bear. He does, however, have a right to ask the buyer to pay more, since the purchase
decision is voluntary in a free market.
56
This little example reveals two fallacies of Friedman’s position. One is the idea that
company officers somehow usurp authority when they act ethically at the expense of owners. To
refute this idea, let us agree that it is wrong for an individual to exploit hurricane victims by
demanding a high price. (If we cannot agree on this, we can change the example.) Friedman
admits that it is perfectly all right for a sole proprietor to sacrifice potential profit in order to be a
decent human being. But suppose the owner has turned the business over to professional
managers. Does ethical obligation to victims suddenly vanish? Is it permissible for the owner to
exploit victims of disaster through agents, when it would be wrong to do it personally? Of course
not. The owner cannot escape obligations simply by hiring someone to run the business. One
might as well argue that an organized crime boss can avoid responsibility for murder by hiring a
hit man to do the deed. Agents who act ethically at company expense therefore do not usurp the
authority of owners. On the contrary, they carry out duties that the owners are bound to observe,
whether they run the business themselves or through agents.
This is not to say that managers should use company funds to support any cause that
strikes the owners’ fancy, such as the Irish Republican Army or the Sierra Club. The reason is
that the owners have no obligation as business people to support these causes. They may have
such an obligation as human beings, but it is not part of business ethics. Since owners hire
managers specifically to run a business, they transfer only their business-related obligations, such
as the obligation not to exploit disaster victims by price gouging. Managers must of course know
how to recognize what sorts of obligations are imposed specifically by business ethics. This is
precisely why they should study business ethics as well as finance, marketing and operations!
The second major fallacy in Friedman’s position is his misapplication of libertarian
principles. He states that spending the owners’ money in the service of ethics is coercion and
therefore wrong, while operating in a free market to increase their wealth compromises no one’s
freedom and is therefore permissible. The electric generators provide a clear counterexample.
Although no one compels hurricane victims to purchase generators, price gouging is coercive. It
forces the victims to choose between paying ridiculous prices and letting a warehouse full of food
spoil. It takes money from them no less surely than lower prices take money from the owners.
The point is even sharper when a company decimates a community by moving a plant
abroad. No one forced these people to work for the company in the first place. Yet the company
limits their choices by putting them out of work, particularly the older ones, more than it limits
stockholders’ choices by reducing their dividends. To limit choices is to reduce freedom.
It is clear that maximizing profit can “tax” the broader community no less than ethical
choices can “tax” the owners. The business executive has a special obligation to owners, but it is
not grounded in libertarian principles. It is based simply on the fact that the executive acts on
behalf of the owners.
The inadequacy of Friedman’s philosophy is particularly evident in international

business, where there are fewer legal restrictions. A famous case study describes how the Nestlé
Corporation marketed its infant formula in parts of Africa by hiring nurses in local clinics to
recommend formula over breast feeding. The nurses convinced mothers that using formula was
sophisticated and Western, while breast feeding was primitive and third-worldish. Unfortunately
clean water was often unavailable to mix with the powdered formula, and babies often became ill.
The company continued its marketing efforts despite worldwide protests and relented only after
years of massive consumer boycotts of its products. On Friedman’s theory, the company’s
intransigence was perfectly justified. Its directors had no right to withdraw a profitable and legal
product, even though it caused innocent babies to suffer, until boycotts changed the financial
equation. Similar examples abound, such as pollution in Nigerian oil fields, worker exploitation
in Southeast Asia sweat shops, and bribery around the world.
There is clearly an important element of truth in Friedman’s position. Business people

are not only at their best when making a profit, but in doing so they make an enormous positive
contribution. Although Friedman says little about this in his essay, businesses provide a vast
array of products and services that make life far better for millions worldwide. They can
57
accomplish this largely through the expertise of managers who can run an efficient operation in a
competitive environment. The primary ethical duty of managers is to apply their business skills
and keep up the good work. At the same time, however, they must pay attention to whether their
business in fact has this kind of positive effect. They are not experts in social policy, and it is
often unobvious how far their social obligations extend. But this is one reason we have business
ethics.
The Rules of the Game
The task of business ethics, then, is to identify the duties that business people have as
business people. What are these duties? One can begin with the most basic ones mentioned by
Friedman: the duty to obey the law and the “rules of the game,” which provide for “open and free
competition without deception or fraud.”
Yet even these basic obligations are disputed. Albert Carr’s very popular essay, “Is
Business Bluffing Ethical?” argues that deception, for example, is a legitimate part of business.
Business, he says, is like a poker game. There are rules, but within the rules it is permissible to
bluff in order to mislead others. In fact one must do so or lose the game. The ethical rules of
everyday life therefore do not apply to business.
Using examples from the 1960s era in which he wrote the paper, Carr defends:
“food processors” that use “deceptive packaging of numerous products”;
“automobile companies” that “for years have neglected the safety of car-owning
families,” as described in Ralph Nader’s famous book Unsafe at Any Speed;
“utility companies” that “elude regulating government bodies to extract unduly
large payments from users of electricity.”
“As long as they comply with the letter of the law,” he says, “they are within their rights to
operate their businesses as they see fit.”
Carr tells of a sales executive who made a political contribution he did not believe in, to
keep an important client happy. When the executive told his wife about it, she was disappointed
with her husband and insisted he should have stood up for his principles. The executive
explained to her how he must humor clients to keep his job. She understood the dilemma but
concluded that “something is wrong with business.” Carr analyzes the incident as follows:
This wife saw the problem in terms of moral obligation as conceived in private life; her husband
saw it as a matter of game strategy. As a player in a weak position, he felt that he could not afford
to indulge an ethical sentiment that might have cost his seat at the [poker] table.
Carr not only expects the executive to make such choices but cautions him not to agonize over
them. “If an executive allows himself to be torn between a decision based on business
considerations and one based on his private ethical code, he exposes himself to a grave
psychological strain.”
Carr, like Friedman, has a point. Bluffing is expected in many business contexts, no less
than in poker. No one expects negotiators to put all their cards on the table, or advertisers to tell
the whole truth about their product. What the poker analogy actually tells us, however, is that
“deception” is not really deception when everyone expects it as part of the game. Nobody is
deceived when advertisers say their product is the best on the market; everyone says that. So Carr
does not actually defend deception. Hiding a card up one’s sleeve, on the other hand, is truly
deception because it breaks the rules of poker and no one is expecting it. Carr agrees that this sort
of behavior, which he calls “malicious deception,” is wrong.
One problem with Carr’s poker analogy is that he overextends it. In a poker game
everyone knows the rules, but business situations can be very ambiguous. If a food processor
58
places false labels on packaging, it is highly unclear that consumers are “in on the game” and
expect this sort of thing. If Mom and Dad take the kids to school in the family car, it is hard to
argue that they “expect” the car to be unsafe, as was the Ford Pinto with its famous exploding gas
tank. Such practices are now illegal precisely because they genuinely deceived customers,
sometimes with deadly results.
The example of the political contribution, as well as several others in his article, suggest
that Carr is making an even stronger claim. He seems to argue that the business game justifies a
whole range of activities beyond bluffing, such as perversion of the political process. The
difficulty with this argument is that it proves too much. It implies that executives can do anything
they want if it is part of a business game in which people play by the rules. But suppose the game
is a shakedown racket, and everyone in town understands the rules: one must pay protection
money or get roughed up by company thugs. This does not make it all right to participate in the
racket, even if it is legal, which it is not. In fact, it is illegal precisely because it is the wrong kind
of game to play.
The unavoidable fact is that some business games are good and some are bad. The right
kind of competition, for example, can allow everyone to come out ahead, while the wrong kind
can be destructive. When one plays the wrong game, then indeed “something is wrong with
business.” How does one know which game to play? There is a field that deals with this issue,
and it is called ethics.
Carr compounds his error when he advises executives not to agonize over business
decisions. He is right to say that they must not let personal sentiment cloud their judgment,
particularly when it comes to such unpleasant duties as laying off employees or shutting down a
plant. They certainly should not be paralyzed by indecision and doubt. But they must
nonetheless struggle with the alternatives. Hard decisions are part of life. Sometimes the game
of business requires one to compromise oneself in order to make a larger contribution. Perhaps
the sales executive can promote an exciting new product only by putting up with little indignities
like kowtowing to his clients. But he should never compromise his values without soul
searching, which is to say, without carefully reviewing the ethical situation. Carr’s assertion to
the contrary is profoundly unwise.
Why Study Ethics?
Even granting that business ethics is important, many seem to believe that there is no
point in studying the subject. Ethics is something you feel, not something you think. Finance,
marketing, operations, and even business law lend themselves to intellectual treatment, but ethics
does not.
The idea that ethics has no intellectual content is odd indeed, considering that some of the
most famous intellectuals in world history have given it a central place in their thought
(Confucius, Plato, Aristotle, Maimonides, Thomas Aquinas, etc.). Ethics is in fact a highly
developed field that demands close reasoning. The Western tradition in particular has given rise
to sophisticated deontological, teleological and consequentialist theories of right and wrong. No
one theory explains everything satisfactorily, but the same is true, after all, in the natural sciences.
Even when they grant that ethics has intellectual content, people often say that studying
the field will not change behavior. Character is formed in early childhood, not during a
professor’s lecture.
If the suggestion here is that college-level study does not change behavior, we should
shut down the entire business school, not only the ethics course. Presumably the claim, then, is
that studying finance and marketing can influence one’s conduct, but studying ethics cannot.
This is again a curious view, since ethics is the one field that deals explicitly with conduct.
Where is the evidence for this view? The early origins of character do not prevent finance and
59
marketing courses from influencing behavior. Why cannot ethics courses also have an effect?
Ethics courses have a number of features that seem likely to influence behavior. They
provide a language and conceptual framework with which one can talk and think about ethical
issues. Their emphasis on case studies helps to make one aware of the potential consequences of
one’s actions. They present ethical that theories help define what a valid ethical argument looks
like. They teach one to make distinctions and avoid fallacies that are so common when people
make decisions. They give one an opportunity to think through, at one’s leisure, complex ethical
issues that are likely to arise later, when there is no time to think. They introduce one to such
specialized areas as product liability, employment, intellectual property, environmental
protection, and cross-cultural management. They give one practice at articulating an ethical
position, which can help resist pressure to compromise.
None of this convinces one to be good, but it is useful to those who want to be good. It
may also improve business conduct in general. How many of the recent business scandals would
have occurred if subordinates had possessed the skills, vocabulary and conceptual equipment to
raise an ethical issue with their coworkers?
Ethics not only should be studied alongside management, but the two fields are closely
related. Business management is all about making the right decisions. Ethics is all about making
the right decisions. So what is the difference between the two? Management is concerned with
how decisions affect the company, while ethics is concerned about how decisions affect
everything. Management operates in the specialized context of the firm, while ethics operates in
the general context of the world. Management is therefore part of ethics. A business manager
cannot make the right decisions without understanding management in particular as well as ethics
in general. Business ethics is management carried out in the real world. This is why business
managers should study ethics.
60
TASK 4
SWOT-analysis and strategy

formulation
61
Case: the Soft Drinks Industry

Consumer drivers and format and flavor trends
This report profiles the leading players in the global soft drinks industry. In this report, the soft
drinks industry is categorized as follows: Bottled water: sparkling flavored, sparkling unflavored, still
flavored and still unflavored; Carbonates: cola diet, cola standard, fruit flavored carbonates, mixers
and other carbonates; Concentrates: liquid concentrates and powder concentrates; Functional
drinks: energy drinks, nutraceutical drinks, sports drinks; Juices: 100% fruit juice (from concentrate),
100% fruit juice (not from concentrate), fruit drink (0-29% juice), nectar (30%-99% juice) and
vegetable juice; RTD tea and coffee: RTD tea and RTD coffee; Smoothies: dairy and fruit-based. This
report analyzes the global soft drinks industry in terms of market size (estimated based on on-trade
sales), key drivers and resistors, trends and competitive positioning of top 10 players in the global soft
drinks market. It includes profiles of the top 10 companies in the industry and includes a brief
summary of other major players. The current ranking evaluates soft drink companies based on their
performance using the following intelligence metrics: Each company’s financial performance in the
global soft drinks market; Each company’s growth strategies and major acquisitions and divestments
in this market; Business-related strengths and weaknesses of the top 10 soft drink companies, and
insights into the opportunities and threats facing them.
Published: February 2010
62
Industry overview
Summary
• Business Insights forecasts that the global soft drinks market will grow at a CAGR of
3.4% during 2009–13 to reach a total value of approximately $550bn in 2013.
• The Coca-Cola Company dominates the global soft drinks industry with sales of
$31,944m in 2008, followed by PepsiCo ($15,609m) and Nestlé ($10,633m).
• All of the top 10 companies have either ventured into or expanded their presence in
the functional drinks category to capitalize on the rising demand for these products.
•The health benefits of ready-to-drink (RTD) tea has driven growth in the market,
which grew at a CAGR of 7.9% during 2003–08, outpacing the overall soft drinks
market.
• Major soft drink companies are developing brand variants to their carbonated drinks
to reposition them as healthy products, as sales volumes of traditional carbonated drinks
decline due to rising health concerns.
Introduction
The soft drinks segment includes bottled water, carbonates, concentrates, functional
beverages, juices, ready-to-drink (RTD) tea and coffee and smoothies. This chapter presents
an overview of the global soft drinks industry, providing details of the market size and
information on key players. In addition, it provides an insight into the evolving trends in the
market and analyzes the competitive landscape of the industry based on financial
performance.
Market dynamics
Market size and growth

The global soft drinks market value was $468bn in 2008 (including on-trade sales), an
increase of 3.4% over 2007. The global soft drinks market is forecast to grow at a CAGR of
3.4% during 2009–13 to reach $550bn in 2013. Increasing demand for healthy beverages in
developed markets as well as rising disposable incomes in emerging economies has fuelled
demand for soft drinks.
However, rises in the prices of energy, commodities such as plastic used in packaging and
raw materials such as sugar have adversely affected the operating margins of the soft drinks
companies globally. In addition, the recession and down trading may lead to an increase in
consumer preference for private label non-alcoholic beverages, which will, to some extent,
dent the market size of branded soft drinks.
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Table 2.1: Global soft drinks market size ($bn), 2009–13
200 201 201 201 201 CAGR

9 0 1 2 3
2009–13 (%)
Global market size ($bn) 481 498 516 532 550
Growth rate (%) 3.5 3.6 3.1 3.2 3.4
Source: Business Insights
Figure 2.1: Global soft drinks market size ($bn), 2009–13
Key growth drivers and resistors

The aging population and rising health concerns will affect the consumption of conventional
carbonated drinks globally. These factors will also lead to a shift towards healthy and
functional beverages, which will continue to drive the soft drinks industry in the long term.
Factors driving and resisting the growth of the global soft drinks market are outlined in the
figure below.
64
Figure 2.2: Soft drinks industry drivers and resistors
Competitive landscape
Top 10 companies based on sales

The Coca-Cola Company dominates the global soft drinks industry with sales of $31,944m in
2008, followed by PepsiCo ($15,609m) and Nestlé ($10,633m). A robust product portfolio
comprising 13 billion-dollar brands and geographical diversity has contributed to its strong
hold and dominance in the sector.
65
Table 2.2: Top 10 soft drinks companies based on sales ($m), 2008
Ranking Company 2008 CAGR 2006–08 (%)

1 The Coca-Cola 31,94 15.2
Company 4
2 PepsiCo 15,60 14.0
9
3 Nestlé 10,63 8.7
3
4 Suntory 6,479 N.A.
5 DPS 5,710 10.2
6 Red Bull 4,889 21.4
7 Danone 4,229 -7.6
8 Kirin 4,123 4.0
9 Asahi 3,072 12.3
10 Ito En 2,833 10.6
N.A. = not available.
Source: Company information
Competitive positioning of the top 10 soft drink companies

Among the top 10 companies, Red Bull recorded the highest CAGR of 21.4% during 2006–
08, primarily due to increase in its energy drink sales volume. Danone underperformed the
other players in the top 10 list, recording a decline in CAGR of 7.6% during 2006–08 due to a
decrease in the sales volume of bottled water in mature markets such as the UK and France,
among others.
66
Figure 2.3: Global soft drinks market size ($bn), 2009–2013
Depth of top 10 companies' soft drinks portfolios

The majority of the soft drink companies have a presence in most of the industry's categories.
Among the top 10, PepsiCo is the most diversified, with presence in every category either
directly or indirectly by virtue of alliances with other consumer companies. For instance, it
operates in the RTD beverage arena in a joint venture with Unilever and Starbucks. The
demand for healthy and fortified alternatives of conventional soft drinks has had considerable
impact on global beverage companies as all of them forayed into this category. Among the top
10 global soft drinks companies, Red Bull is the least diversified company with presence in
only two categories: namely carbonates and functional drinks (energy and sports drinks).
67
Figure 2.4: Depth of top 10 companies' soft drinks portfolios
Trends
Rise of functional soft drinks

Increased demand for healthier soft drinks in the developed markets due to ageing population
and rising health awareness is supporting the rise of functional beverages. Companies are
increasingly investing in R&D for health drinks that help in weight management and improve
the immune and digestive systems.
Energy drinks
Energy drinks outpaced the growth of conventional carbonated beverages, registering a
CAGR of 12.8% during 2003–08, almost three times that of the carbonated drinks category.
The significant growth potential of this segment has attracted the attention of diversified large
68
players, including The Coca-Cola Company and PepsiCo, and it is no longer the domain of
pure-play companies such as Red Bull and Monster Energy.
Good examples of product launches in this category include Danone’s launch of an energy
drink named Volvic Revive, which contains guarana extracts, targeted at consumers in the age
group 18–35 years in the US in 2007. PepsiCo launched another version of its energy drink
SoBe with the brand name SoBe Adrenaline Rush containing ingredients such as taurine and
vitamins B&C, which are associated with improved physical and mental performance in 2008.
In the same year, The Coca-Cola Company launched a new variant of the energy drink
Powerade under the brand name Powerade Zero with added vitamins.
New product launches aside, energy drinks companies are expanding their distribution
agreements to extend their retail presence in new and potential markets. Hansen Natural, the
parent company of Monster Energy, increased its reach to six Western European countries,
Canada and select US markets in 2008. In 2009, PepsiCo acquired the distribution rights for
the Rockstar Energy Drink's products in most of the states in the US and Canada.
RTD tea
Health issues with conventional soft drinks underpin the growth of RTD tea, which grew at a
CAGR of 7.9% during 2003–08, outpacing the overall soft drinks market. The perceived
health benefits of tea consumption have helped to drive this growth. Furthermore, the
development of fortified and sugar-free variants of RTD tea have enabled companies to
position tea among healthy soft drinks alternatives. For example, Go Fast Sports and
Beverage introduced GFTea in 2009 with energy enhancing natural ingredients such as
guarana, taurine and ribose. In 2008, Nestlé launched Nestea Vitao in the RTD tea category in
Canada, fortified with vitamins that the company claims could reduce the likelihood of
cardiac arrest. In the long term, fruit-flavored teas enriched with antioxidants and other
functional products will drive consumption in this category, particularly in developed
markets. In Japan, Kirin’s functional drink in the RTD tea category, I-tea with antioxidant
astaxanthin, is a good example of this.
Flavored water making inroads

Demand for healthier and more natural alternatives has primarily driven growth in added
value waters. This category, which includes enhanced, functional and flavored waters,
outperformed the other soft drink categories, with a CAGR of more than 19% during 2003–
08. Among the diverse variety of choice available in the market is The Coca-Cola Company's
(Glacéau) Smartwater, which contains electrolytes that allow it to sate thirst faster than
regular water. Other launches in this category include The Coca-Cola Company's vitamin-
enhanced water Dasani Plus, introduced in 2007 in three flavors: kiwi strawberry,
pomegranate blackberry and orange tangerine. Another example is Danone's sugar-free
flavored water called Ser Vita Nutrientes. The company positioned the product as a zero-
calorie beverage to target women in particular.
Nestlé, The Coca-Cola Company and Danone have consolidated their market share in the
bottled water market through the acquisition of companies largely focused on the bottled
water category. The Coca-Cola Company extended its presence in enhanced waters with the
acquisition of the Glacéau brand of enhanced waters in 2007.
NPD in carbonated drinks

A number of the leading soft drinks companies are developing brand variants to their
carbonated drinks to reposition them as healthy products, as sales volumes of traditional
carbonated drinks decline due to rising health concerns. In order to arrest the decline and
foster the growth of carbonates, players such as The Coca-Cola Company and PepsiCo
69
introduced products targeting health-conscious consumers. The Coca-Cola Company

launched a new milk-based carbonated drink (enhanced with calcium and vitamins), Vio in
second half of 2009; in addition to the launch of a low-calorie Truvia-based carbonated drink,
Sprite Green in the US in 2008. Coco-Cola also removed artificial flavors, preservatives or
sweeteners in Vio. PepsiCo is also investing in developing nutritional carbonated beverages
such as Pepsi Natural, Pepsi Throwback and Mountain Dew Throwback; it replaced natural
sugar in these products with high-fructose corn syrup. In addition, Kao Corporation (Japan)
introduced a healthy variant of its brand, Healthya, named Healthya Sparkling containing high
tea catechin content in 2009.
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The Coca-Cola Company

Summary
• The Coca-Cola Company dominated the soft drinks market with sales of $31,944m in
2008, an increase of 10.7% over 2007.
• The Coca-Cola Company is focused on strengthening its beverages portfolio through

new product launches, primarily focusing on still drinks.
• The company's strong operating cash flows and healthy balance sheet provide the
flexibility needed to take strategic action such as investing in its brands, marketing
activities, people capabilities and innovation.
• Increasing health concerns and negative publicity surrounding the consumption of

sugar-sweetened beverages may adversely affect sales of the company's conventional
soft drinks.
Table 3.3: The Coca-Cola Company snapshot
Headquartered: Georgia, United States

Incorporated: 1919
Consolidated revenues $31,944m
(2008):
Segmental revenues (2008): $31,944m
Employees (2008): 92,400
Company overview
The Coca-Cola Company is a manufacturer of more than 3,000 beverages, including
carbonated, diet and light beverages, waters, juices, enhanced waters, teas, coffees, and
energy and sports drinks. These soft drinks sold under brand names such as The Coca-Cola
Company, Cherry Coke, Diet Coke, Thums Up, Kinley, Eight O'Clock, Fanta, Sprite, Pibb
Xtra and Fresca, among others. The company owns or licenses about 500 brands. The
products are sold to bottling and canning companies, fountain wholesalers and retailers.
In 2010, The Coca-Cola Company announced its plans to acquire Russian juice maker, Nidan
from a UK based investment fund, Lion Capital. This is a strategic move made by The Coca-
Cola Company to establish it as a dominant player, ahead of its major competitor PepsiCo, in
the Russian juice market. However, the deal is subject to approval from the Russian
authorities.
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Recent financial performance

The Coca-Cola Company reported consolidated revenues of $31,944m for the fiscal year
ended December 2008, an increase of 10.7% over 2007. The Coca-Cola Company's revenues
grew at a CAGR of 10.1% during 2004–08. The increase in the company’s revenues in 2008
was due to:
• An increase of concentrate sales volumes;
• An increase in average price of soft drinks;
• A favorable product mix;
• Currency fluctuations.
Table 3.4: The Coca-Cola Company financial performance ($m), 2004–08
2004 2005 2006 2007 2008 CAGR

2004–08 (%)
Turnover 21,74 23,10 24,08 28,85 31,94
2 4 8 7 4
Growth rate 6.3 4.3 19.8 10.7 10.1
(%)
Recent fiscal end is December 2008.
Figure 3.5: The Coca-Cola Company financial performance ($m), 2004–08
72
Performance by business segment

The Coca-Cola Company operates as a single business unit, manufacturing carbonated and
still beverages.
Growth strategies
Product launches to drive business growth

The Coca-Cola Company is expanding its carbonated and still beverages portfolio, focusing
largely on health-conscious consumers. In the carbonated beverages category, it launched a
new variant of Sprite under the brand name Sprite Green in the US during 2008. The low-
calorie carbonated drink contains the natural sweetener Truvia, a stevia-based sugar
substitute.
Table 3.5: The Coca-Cola Company still beverage product launches, 2007–09
Date Product Beverage category

Dec- Odwalla Reduced-Calorie Natural juice drinks with Truvia and vitamins C and E.
08 Quenchers
Nov- Gold Peak Tea Chilled version of RTD tea launched in two
08
flavors: Gold Peak sweetened and lemon.
Jun- Full Throttle Creamy coffee and energy blend launched in mocha,
08 vanilla and caramel flavors.
May- Simply Orange Mixed fruit juices with flavors of mango and pineapple.
08
Apr- Illy Caffe, Illy Cappuccino RTD coffee products

08 and Illy Latte Macchiato
Aug- Simply Apple and Simply New line of Simply fruit juices in apple and grapefruit
07 Grapefruit flavors.
73
Jun- Dasani Plus Vitamin-enhanced water in fruits flavors such as kiwi,

07 strawberry, pomegranate, blackberry, orange and
tangerine.
Apr- Minute Maid Multi-Vitamin New variants of Minute Maid orange juice with added
07 and Minute Maid Active nutrients and functional ingredients.
In the still soft drinks segment, it has continued to launch products in categories such as
juices, ready-to-drink (RTD) beverages and enhanced waters that feature new flavors and
ingredients, as listed in Table 3.5.
Expanding in the emerging markets

The Coca-Cola Company's is increasing its geographical footprint by investing in distribution
and other infrastructure in emerging markets such as India and China. In 2009, it announced
plans to invest $250m (increasing the current investment by 20%) in India during 2010–13 to
create additional infrastructure. This includes adding more bottling lines, new trucks and cold
equipment throughout all of its brands in the country. In addition, the company intends to
double its investment in China during 2010–13. It already invested $90m in R&D to expand
its product lines. It also founded two new bottling facilities in central and western China with
its bottling partner COFCO, The Coca-Cola Company Beverages. The investments will cater
to the rising demand in northwestern China. It also planned a combined investment of about
$2bn during 2010–13 in Turkey, Vietnam and Russia, directed towards creating new R&D
and infrastructure facilities.
Acquisitions and divestments

The Coca-Cola Company predominantly acquired companies in the still beverages segment
during 2007–09 to capitalize on the shift from conventional carbonates to non-carbonated
beverages. It also acquired companies to exploit the potential of emerging markets such as
Brazil and Mexico in Latin America.
In addition, it acquired 18 German bottling and distribution operations through its German
bottling operation The Coca-Cola Company Erfrischungsgetraenke in 2007. These
acquisitions will increase its control over its bottling and distribution operations.
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Table 3.6: The Coca-Cola Company's acquisitions, 2007–09
Date Target Rationale

company/brand
Nov- Jugos del Valle, Consolidated market share in the arena of non- carbonated beverages
07 Mexico in Mexico and Latin America.
Jun- Energy Brands Expanded its non-carbonated product line to capitalize on the shift
07 (Glaceau), the US towards water and energy drinks in North America.
Mar- Leao Junior, Brazil Broadened its product portfolio in Brazil beyond the conventional
07 carbonated soft drinks with the acquisition of 60 products, mostly
tea-based beverages from Leao Junior.
Feb- FUZE Beverage, the Enhanced its non-carbonated soft drink portfolio with the acquisition
07 US of FUZE's beverage brands such as Vitalize, Refresh, Tea and
Slenderize.
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SWOT analysis
Figure 3.6: The Coca-Cola Company SWOT analysis
76
1. What is usually the purpose of a SWOT analysis?
2. In general, what is a company strength about?
3. What is the difference between absolute and relative strengths and weaknesses?
4. What is the difference between opportunities and strategies?
5. Comment on each entry in the given SWOT analysis of Coca Cola.

- Are they correctly stated
- Are they derived from the analyses
Sources to be used:
Books:
- Solomon e.a., Marketing , real people, real choices, Pearson education, 2009
- P. Kotler e.a, Marketing management, Pearson education, 2009
Articles:
- Heinz Weihrich the Tows Matrix (can be found on scholar)
77
TASK 5
Make or buy: outsourcing
78
Make or buy: Titan - The Outsourcing Journey
“Once Titan puts its valuable name on the watch it does not matter to the customer whether
we have manufactured it, or assembled it, or fully outsourced it.”
- Jacob Kurien, Vice-President (Marketing), Titan, in 1999.
INTRODUCTION
In late 1999, the top management of Titan Industries Ltd. (Titan), India's leading watch, clock
and jewelry manufacturer, was surprised when several senior executives threatened to resign.
The threats reportedly came after a long period of employee unrest in the organization.
Even as the company worked towards explaining its strategies clearly to the employees,
analysts could not help remark that Titan was already sourcing a large part of cases and
movements, key watch components, from within and outside India. Moreover, the company
had always been sourcing a variety of raw materials such as stainless steels, tool steels,
engineering plastics, tools, consumables, components and specialty movements for its watch
manufacturing operations through vendors spread across 20 countries, mainly in Asia and
Europe.
The company's management seemed to have realized that global sourcing of certain
components made better business sense. Media reports even quoted watch industry officials
claiming that companies like Titan had ‘no option but to move away from manufacturing and
towards trading in the long run.'This was not a very surprising move as it seemed but natural
for the company to look for cost effective sourcing options at a time when manufacturing
seemed rather costly.
Titan's decision was influenced by a host of factors that made the company realize the
potential benefits of outsourcing as a tool for holding on to its position in the Indian watches
market. The liberalization of the Indian economy and the subsequent removal of quantitative
restrictions on watch imports in the late 1990s, forced Titan to focus more on marketing
efforts rather than manufacturing to retain its competitive edge in the future.
BACKGROUND NOTE
Titan was promoted as Titan Watches Ltd. jointly by Questar Investments Limited (a Tata
group company), Tata Sons, Tata Press and the Tamilnadu Industrial Development
Corporation Limited (TIDCO). The company was incorporated in July 1984 in Chennai,
India, in technical collaboration with one of the world's largest manufacturers of watch
movements, France Ebauches, a French company.
Unlike Hindustan Machine Tools (HMT), the leading manufacturer of mechanical watches at
that time, Titan Watches decided to concentrate on manufacturing quartz watches. The
company established its first manufacturing facility in Hosur, Tamil Nadu in 1987.
79
The state-of-the-art manufacturing facility, set up with technical know-how from Europe and
Japan, had an installed capacity of 3.5 million watches per annum. In 1988, the company
established a component manufacturing facility and in 1990, it started a case manufacturing
plant, both located close to the Hosur plant. In 1992, the company integrated backwards to
manufacture step motors.
During the same period, it began manufacturing electronic circuit blocks, used in its watch
movements. The Rs 2.7 billion watch and clock manufacturing facilities were spread over a
built-up area of 42,000 square metres. The company also set up a watch assembly unit with a
capacity of 5 lakh1 watches in Dehradun, Uttaranchal.
Box: How Titan Revolutionized the Indian Watch Industry

Back in the early eighties, the Tata Group had identified the watch category as a potential consumer
market for the Tatas to enter. Xerxes Desai, a Tata veteran and the then MD of Tata Press, was
chosen to lead that venture.
Xerxes Desai's vision was to dramatically change the industry (which was dominated by the public
sector) and cunsumer perception (a watch was nothing more than a time-keeping device), and make
Titan a fashion accessory. He knew that that was the only way that this new brand would explode the
market and wrest control from the dominant HMT. So he and his team went about breaking all the
rules in the category:
Mechanical technology was the norm - Quartz had not really taken off in India. Titan would go against
that and build its line based on quartz. Accuracy would become a selling-plank.
Styling was basic - This was a constraint imposed by the technology as well the outlook of the
manufacturers. Titan decided to make style a table-stake.
Choice was limited - You had 200 models to pick from, that was it. Titan decided to inundate
consumers with a wide choice in style, functions and price. The initial range was 350 models.
Shops were dark, dingy and uninteresting - There was no importance given to presentation, and
therefore no attempt made at it. Titan brought in the concept of retailing into the watch market,
established a network of fine showrooms which would later become the world's largest network of
exclusive watch stores. These stores not only helped Titan to gain leadership substantially, but also
irrevocably altered the retail landscape of the watch market through a demonstration effect on the
traditional dealers.
Advertising was expenditure - Titan saw this as a vital investment. Right from Day 1, Titan invested
significantly in advertising and in that process created a set of memorable and effective properties
over the years.
So Titan, backed by world-class quality created at a world-class plant located just off Bangalore,
backed by the Tata name, was launched into the Indian market on the back of these new rules. It
created waves right in the early days, mesmerised consumers, demolished competition and rode into
the sunset with panache.
So Titan, backed by world-class quality created at a world-class plant located just off Bangalore,
backed by the Tata name, was launched into the Indian market on the back of these new rules. It
created waves right in the early days, mesmerised consumers, demolished competition and rode into
the sunset with panache.
In 1992, Titan Watches entered into a joint venture with Timex Corporation of USA to market
1
A lakh (also written lac) is a unit in the Indian numbering system equal to
one hundred thousand (100,000)
80
Timex watches in India. The same year the company set up a joint venture with the Economic
Development Board of Goa to manufacture electronic circuit boards in Goa in an effort
towards indigenization. Titan set up its fully integrated, Rs 400 million jewellery plant in
1994 over a built-up area of 13,500 square metres in Hosur.
The plant had a capacity of manufacturing four tonnes of gold a year. Due to poor market
response the company discontinued the manufacture of jewelry watches. The company also
set up a separate manufacturing facility for solid link, sheet metal bracelets, alarm timepieces
and premium table clocks in 1995. In 1995, Titan Watches overtook the market leader HMT
by selling 3.2 million watches against the latter's 3 million.
The same year, the company changed its name Titan Industries Ltd. in order to change its
image from that of a watch manufacturer to that of a fashion accessories manufacturer. Titan
also introduced the Tanishq range of 18-carat gold jewelry. Over the years, the Hosur facility
went on to become one of the largest integrated watch-manufacturing units in the world,
employing around 3500 people.
The facilities in Hosur included a computer aided design (CAD) and prototyping unit, a
comprehensive tool room with capacity for manufacture of precision tools and die-sets.
Besides, Titan had a wide range of computerized numeric control (CNC) machines. Gold was
refined and alloyed in-house at the Hosur plant, but the design center for jewelry was located
in Bangalore.
In 1998, the company decided to move out of the lower segment of the clocks business. The
same year, Titan instituted the ‘PQCD world class-manufacturing program' that placed
renewed emphasis on Productivity, Quality, Cost control and Delivery on time.
This program emphasized greater focus on customer satisfaction and profitability. In order to
cut costs, the company indigenized its components. It was able to increase the proportion of
indigenous components from 44% in 1994 to about 75% in 1998.
The company also implemented SAP Enterprise Resource Planning on the advice of Coopers
& Lybrand consultants, to improve the utilization and planning of resources, lower lead time
and inventories. Over the years, Titan became one of the most successful and respected Indian
brands.
The company was ranked sixth among the world's largest watch manufacturers. It was given
the credit for revolutionizing the Indian watch industry in India through constant innovation,
better product design, heavy branding and good distribution. The advertisement campaign for
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Titan watches with the signature tune adapted from the 25th Symphony of Mozart became a
landmark Indian advertising's history (Refer Table I for key statistics of the Indian watch
industry during the 1990s).
TABLE I
INDIAN WATCH INDUSTRY - KEY STATISTICS
Production (in 000 Market Size (in Rs Market Shares (in %)
Year
nos) crore2) Titan HMT Timex Others
1993 29401.6 516.3 37 47 3 13
1994 30648.4 465.5 49 22 10 19
1995 20918.6 587.4 45 22 12 21
1996 24726 766 41 23 13 23
1997 36480.7 797.3 45 21 10 24
1998 36717.5 746.3 48 22 10 20

Source: www.indiainfoline.com
The company's tryst with outsourcing began in 1999, with the changes in India's foreign trade
policies. Earlier only watches worth Rs 35,000 and above could be imported. The new EXIM
(Export-Import) policy freed the imports of watches of any value under a special import
license. The import duty was also set to be reduced gradually in the future.
According to analysts, this removal of restrictions could cause international players to make a
beeline for marketing their products in India. Titan, which hitherto had only the low-profile,
failing HMT as the main competitor, realized the financial muscle and technological
superiority of the MNCs. In order to be able to meet the challenges of the changing market
dynamics, outsourcing became an imperative for the company.
ABOUT OUTSOURCING
Simply put, outsourcing means getting those things done outside that were hitherto provided
for internally. According to the Outsourcing Institute, “Outsourcing is nothing less than a
basic redefinition of the organization.
Outsourcing suggests an organization focussed on a few, well-chosen core competencies
supported by long-term outside relationships for many of its other activities and resources.”
An organization can outsource many functions of its day to day operations – manufacturing,
marketing, human resources management, information technology services to name a few.
It is thus a type of make-or-buy decision, wherein typically an earlier ‘make'decision is

altered to a ‘buy'decision. Earlier, when competitive pressure on companies was not very
severe, cost management in manufacturing usually resulted in backward integration and
gaining ownership of a large range of manufacturing and subassembly facilities.
2
A crore is a unit in the Indian numbering system. An Indian crore is equal to 100 lakh or
10,000,000.
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However, more and more organizations began moving towards outsourcing manufacturing for
a lot of reasons. Outsourcing helps a company become flexible enough to terminate an
operation if it does not meet the business goals without being concerned about various human
resources, separation, or litigation issues.
It is not necessary to build a fixed overhead infrastructure and the company can acquire and
leverage customer acquisition expertise easily when it outsources certain activities. As
customers increasingly demand quick delivery, companies have discovered the importance of
optimizing the supply chain activities. Moreover, with the markets changing rapidly, there has
been an increase in the investment risk in new technology, machinery and other equipment.
This has necessitated flexible production systems in manufacturing concerns throughout the
world. Most importantly, organizations have also realized that it is in the best interest of the
company to concentrate its resources on its core competencies only. The benefits of
outsourcing can be summarized as follows:
• Provides flexibility and versatility to in-house staff.

• Frees up capital and cash for other activities that are the company's core competencies, such
as R&D or marketing.
• Helps shorten the ‘time-to-market'by focussing on core activities.
• Provides access to industry leading process development expertise and manufacturing
technologies.
• Helps avoid long-term investments in potentially under-utilized production capacity or
excessive inventories.
The materials management department coordinates the outsourcing initiatives in an
organization. This covers the complete cycle of material flow from the purchase and internal
control of production materials to the planning and control of work-in-progress and
distribution of the finished product.
Before deciding in favor of outsourcing, it is essential for organizations to identify, exploit
and protect their core businesses. They should retain or insource those manufacturing
functions that are critical to the product and those the company is distinctively good at
making.
Thus, only those manufacturing functions should be outsourced in which the suppliers have a
distinct comparative advantage, for instance in terms of greater economies of scale, a
fundamentally lower cost structure or stronger performance incentives.
Most importantly, it is necessary to use outsourcing proactively through a stronger focus on
internal core business areas, as a way to improve manufacturing performance by generating
employee commitment at all levels (Refer Table II & III below for the essentials and perils
associated with outsourcing).
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TABLE II
THE ESSENTIALS OF OUTSOURCING
· Understanding company goals and objectives
· Having a strategic vision and plan
· Selecting the right vendor
· Ongoing management of relationships
· Having a properly structured contract
· Communicating with affected individual/groups
· Getting senior executives'support and involvement
· Paying careful attention to personnel issues
· Having short-term financial justification
· Using external expertise

Source: www.salience.com
TABLE III
THE PERILS OF OUTSOURCING
· Loss of control
· Exposure to supplier risks and issues of quality control
· Suppliers can reap undue advantages by imitating

product/technology
· Product degradation because the supplier pays less

attention to it
· The change from collaborative to opportunistic behaviour

of the supplier (or the buyer) over a period of time
· Difficulty in measuring the actual costs of the supplier,

which are typically above baseline costs because of the
experience curve
· Potential problems associated with taking the function

back or substituting the supplier when the outsourcing
agreement terminates
· Possibility of being tied to obsolete technology
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Source: ICMR
Many leading global companies have been reaping the benefits of outsourcing manufacturing.
The practice has been particularly popular among companies in the automobile and
pharmaceutical industries. Titan was one of the first Indian companies from the consumer
electronics business to have opted for outsourcing its manufacturing activities as a strategic
exercise.
OUTSOURCING AT TITAN
Titan's entry into the clock segment in the mid 1990s failed badly because its clocks could not
face the competition from cheaper imports from China. Moreover, the design of Titan's clocks
was also found to be faulty.
To correct these problems, the company decided to stop manufacturing clocks, instead it
decided to import them from Hong Kong. The only input in this ‘virtual manufacturing' setup
from Titan's side was in the form of design, branding and distribution. The company
converted its clock plant into a plastic watch-manufacturing unit to make alarm and travel
watches.
Outsourcing activities were further strengthened in the next few years due to the problems
Titan was facing with the gray market. The gray market has always accounted for a
substantial part of the Indian watch industry (Refer Table IV).
TABLE IV
THE INDIAN WATCH INDUSTRY IN 2001
Indian watch Organized Unorganized
industry Sector Sector*
16-18 million
Volume 20 million units
units
Value Rs 10 billion Rs 3-5 billion
Segment-
Premium 15%
wise breakup
Mid 40% N.A.
45%
Mass
* Estimates.
Source: Business Line, December 6, 2001.
During the early 1990s, when the import duty on watches was reduced to 25% from 50% and
import licenses became easier to obtain, as much as 55% of the demand was met by small
players from the unorganized sector. Since Titan faced stiff competition from these players on
the price, it decided to concentrate on building a strong distribution and support network. This
worked well for the company and soon it became the undisputed market leader in the watches
market.
However, the variety and range available in the mid segment increased dramatically after
1999, with the changes in the EXIM policy. Though the segment itself grew in size, new
85
entrants began to threaten Titan's market share. The company's management was also aware
that outsourcing was the accepted norm in the global watch industry and many leading global
watch brands were not manufactured by the companies that owned them.
Kurien said, “We have to think global, not Hosur. Putting up plants and buying equipment is
clearly not the answer to competing in the new environment. And as we find suitable vendors
for full watches, we will opt for them increasingly.” He added, “In the old days it would have
made sense to put in huge investments in new technology because it was a protected market.
But that is no longer the case.”
According to analysts, Titan's multibillion investment in manufacturing facilities were

proving to be a real drain on its profitability in the changed industry. Moreover, since the
company relied heavily on its marketing finesse than operational excellence, these
investments were deemed to be too high. Though the company had consistently posted yearly
profits, in the first quarter of 1999-00, it reported a loss of Rs 52 million.
This loss was due to the high overheads, excise duties and marketing spending in 1999-00,
which increased expenditure by Rs 1.5 billion. Moreover, net profits had come down by 47%
to Rs 146.4 million in 1998 from Rs 275.7 million in 1996 (Refer Table V). Company
watchers partly attributed this to the heavy investments in the manufacturing setup.
TABLE V
TITAN - KEY STATISTICS (in Rs million)
94-95 95-96 96-97 97-98 98-99 1999-00 2000-01
Sales Volumes (nos. in lakhs)
Watches 325.8 387.5 394.5 435.3 511.1 585.4 667.6
Jewellery 0.9 2 3.7 12 16.8 30 72.1
Table Clocks - 6.7 36.4 30.5 43 32.9 16.2
Sales Income 2824.9 3507.2 4085.2 4420.6 4820.4 6303.3 6969
Expenditure 2239.3 2761.9 3207.3 3572 3934.8 5506.2 6141.9
Interest 218 342.2 564 529.6 519.2 508.8 478.4
Depreciation 131.1 156.8 165.2 188.2 201.4 204 209.3
Operating Profit 236.5 246.3 148.7 130.8 165 84.3 139.4
Other Income 14.4 29.4 129.3 31.6 24.1 130.1 116.3
Profit Before Taxes 250.9 275.7 278 162.4 189.1 214.4 255.7
Taxes - - 35.8 16 18.7 21.6 20.9
Profit After Taxes 250.9 275.7 242.2 146.4 170.4 192.8 234.8
Equity Div. (%) 30% 33% 33% 25% 26% 26% 26%
Source: www.titanworld.com
86
Taking into account the above factors, Titan had no other option but to settle for outsourcing.
Around the same time, Titan decided to change its focus to generating more volumes rather
than value. This was because the growth in the premium segment of the watch market, which
was Titan's mainstay, had been below its expectations. The company wanted to build up a
base in the lower value segment and extend its reach. According to company estimates,
outsourcing worked out be around 30% cheaper than manufacturing in-house.
Another reason why Titan wanted to reduce its focus on manufacturing was the high
employee costs – 11.2% of its revenues in 2000. This was because in the days when the
company had no other option but to manufacture, the Hosur factory had a huge worker base.
In 1997 and 2000, the company entered into various wage agreements with the workers'union.
As a result, even a low-skilled blue-collar worker at the company earned as much as Rs
10,000 per month. This increased overall employee costs. According to analysts, this was
alarming because since 1996, Titan had neither made any fresh recruitments nor replaced
close to 200 supervisory and managerial-level employees who left in the same period.
However, the biggest factor that swung the decision in favor of outsourcing was the fact that
Titan was not being able to meet the onslaught of the unorganized sector for the first time.
Since the company decided to focus on generating volumes from low-end mass products, it
had come in direct competition with players in the unorganized market. With cheaper Chinese
imports flooding the Indian market, Titan realized that the complete technology of making
watches, from hand-plating technology to manufacturing cases, was easily available at prices
much lower than what the Hosur factory could ever deliver. According to a former company
manager, “The extra costs in the system aren't helping in differentiating the brand. Today,
even unique elements of design are being easily copied at a lower cost.”
Rpremium international watch brands such as Swatch, Esprit, Tissot, Longines, Citizen, Rado
and Omega entered India in the late 1990s and catered to the super-premium segment of the
market. During 2001-02, some of these brands such as Citizen, Esprit and Swatch entered the
mid-priced segment, posing stiff competition to Titan's brands in this range . The company's
marketshare in this segment was 75%, which contributed nearly 65% to the Titan brand's
value and one-third of the company's entire watch business.
With the company planning to focus all its energy to meet competition in the lower as well as
higher ends of the market, the watch industry seemed to be all set for an interesting battle.
RECENT DEVELOPMENTS AT TITAN INDUSTRIES

Titan Industries is currently the world's fifth largest and India's leading manufacturer of
watches. The company has manufactured more than a 100 million watches till date; and has a
customer base of over 80 million. Today, the Titan portfolio has around 60% of the domestic
market share in the organised watch market (the total market, including the unorganized
sector, is estimated at around 42 million units). The company has 247 exclusive showrooms
christened World of Titan', making it amongst the largest chains in its category backed by 700
after−sales−service centers. The company has a world−class design studio that constantly
invents new trends in wrist watches.
The brand Titan is committed to offering its consumers watches that represent the compass of
their imagination. Titan's customers are therefore consistently introduced to exciting new
collections, which connect, with various facets of their deep−rooted yearnings for self-
87
expression. The new brand philosophy of Titan, encapsulated in the words "Be More",
touches this as well as all other aspects of the brand.
What is truly amazing about Titan is the sheer scale of its offering and the consequent choice
it offers to multiple segments across taste, age and economic background. The company
currently manufactures four main watch brands, being: (1) Titan, for the mid-premium
segment, (2) Fastrack, focused on the youth and fashion space, (3) Sonata, for the mass
market, and (4) Xylys, for the premium market. The Titan brand architecture comprises
several sub-brands, each of which is a leader in its segment. Notable among them are: Titan
Edge – the world’s slimmest watch which stands for the philosophy of “less is more”; Titan
Raga – the feminine and sensuous accessory for today’s woman; Nebula – crafted in solid
gold and precious stones and several other collections like Wall Street, Heritage, Regalia,
Octane, Orion, Diva, Zoop, WWF and the Aviator series, all of which form a part of the Titan
wardrobe. Sonata is today India’s largest watch selling brand and is priced between Rps295
and Rps1200. The company’s first Swiss Made watch is for the hi-end connoisseur and new
age achiever. It also market Tommy Hilfiger watches under a licensing arrangement and is
introducing Hugo Boss.
The underpinning of this entire market development and segmentation is Innovation. Titan
has kept innovation core to its strategy.
Doing all this in style has earned Titan enormous goodwill and respect.Titan was voted the
Most Admired Brand (across categories) in India by consumers, in the first such study done in
2001. Titan was voted the Most Respected Consumer Durables Company in a Business World
Survey in 2003. And in 2008, it emerges as the 24th Most Admired Brand in the FT Most
Admired Brands survey done annually, it was also the most admired Consumer Durable
Brand.
SUPPLY-CHAIN MANAGEMENT AND OUTSOURCING AT TITAN

“The unseen star of Titan's achievements in securing and retaining customer trust is its
supply-chain methodology.”
- Bijou Kurien, Chief Operating Officer (Watches), Titan, in 2005.
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The precision and sharpness that enables such unwavering customer focus and satisfaction are
products of Titan's standout supply-chain systems. The rapidity with which the company rolls
out new products — it currently has some 2,000 variants in the market — keeps the clock at
Titan ticking at all times. Says Bijou Kurien, chief operating officer (watches): "Customers
are demanding, and time and money are tight. While supply-chain management was earlier
seen as production and stock planning, it is today about the optimal utilisation of capacity."
On the basis of this insight the company started to improve the effectiveness and efficiency of
its supply chain. The main elements of this improvement are discussed below.
Link 1: Reorganising the structure
Up until a few years ago the company’s supply chain consisted of two seperate departments:
manufacturing, and sales and marketing. The idea for one supply chain banner became self-
evident following the implementation of an enterprise resource planning solution in 1999.
"Information suddenly became transparent and we were able to 'see' the stocks across the
entire system at a single glance, in terms of quantity as well as the financial investment, and
for both finished goods and raw materials," says Mr Kurien.
The company sorted out its watch categories and made distinct processes for each. This
happened when the management noticed that the time required to make Sonata products,
which catered more to semi-urban and rural markets, was less than that needed for other
watches under the overall Titan brand. The batch sizes for Sonata were also larger. The
company realised that the components for these could be outsourced from vendors, while the
Titan watches could be taken care of in-house3.
A third category emerged from the styles for which international vendors supplied
components; the time required for these was the highest. At the end of this brainstorming,
Titan created three different segments according to the lead-time required from the start to the
end: Sonata watches that needed 30 days, Titan watches that needed 60 days and Titan
watches that needed 90 days.
Link 2: Forecasting demand
Securing the future of a Titan product is a scientific and rigorous exercise. To accurately
predict which watch the market needs and in what quantity, Titan uses a time-tested method.
First, it studies the historic sales of different styles. The primary information comes from an
account of its own sales. Retail or secondary information is gathered from showrooms and
distributors. The company also keeps in mind elements such as marketing schemes and
advertisement campaigns to foresee demand. Seasonality is also factored in.
Considering that there are about 1,300 variants in the domestic market and 700
internationally, there is a lot of estimating to do. Instead of forecasting for all its varieties,
Titan focuses on about 400 variants that contribute to 75 per cent of the company's overall
sales.
Link 3: Utilising manufacturing capacity
When the forecast is made, the demand for each watch variant will be matched with the
capacity within each of the company's manufacturing plants, as well as those of its vendors. In
case the two do not fit advantageously, the forecast will get modified till a concrete
production plan emerges.
3
Titan has opened a sourcing office in Hong Kong for outsourcing of watches from China, Korea and other such
countries and the company has made significant progress in that regard with nearly 20 pct of the production
being sourced from these countries.
89
As some of the components are bought from vendors, the company will maintain what it calls
its 'supplier network planning' (SNP). Through a portal for its vendors, orders can be placed
keeping lead-times in mind. Vendors will upload information daily on this portal, helping the
company keep track of the production in real time. "It will give us a good feel of whether the
vendor will meet our production plan," says Mr Kurien.
Link 4: Sales and after
Titan reaches the nooks and crannies of its market through 170 exclusive 'World of Titan'
showrooms and 8,000-odd dealers. The availability of spares and accessories is critical to
ensure that every watch sold can be quickly and reliably repaired so that Titan's customers
remain loyal and satisfied.
The journey of your favourite Titan watch, thus, passes along a long and intricate string, for
which precision and finesse at each stage is vital.
But the best never rest. "The watch industry has created issues for itself because of the way it
has developed historically," explains Mr Kurien. "We cannot take comfort from the success of
our current supply chain; we have to keep looking for better benchmarks in other consumer
industries." The company has stepped up pressure by comparing itself to retail chains and
apparel. These have dynamics similar to those of watches but have achieved lower lead times.
90
Two of the most important global trends over the last decade(s) are referred to as outsourcing
and off-shoring. Often these two concepts are mixed up.
1. Explain the difference between outsourcing and off-shoring

What is meant by: domestic outsourcing, near-shore outsourcing and off-shore
outsourcing. Also state some examples.
2. Explain why Titan had to decide in favor of outsourcing its manufacturing activities
despite having a state-of-the-art manufacturing set up.
3. Explain the reasons for the growing popularity of outsourcing in the manufacturing
industry. What are the pros and cons associated with outsourcing the manufacturing
function?
4. Evaluate the benefits Titan derived as a result of outsourcing the manufacturing

function.
5. What are the main risk associated with the outsourcing for Titan? Come up with some
ways in which Titan can control or manage these.
6. Do you agree with the statement made by Mr. Jacob Kurien, quoted at the beginning
of this case:
“Once Titan puts its valuable name on the watch it does not matter to the customer whether
we have manufactured it, or assembled it, or fully outsourced it.”
Possible sources to be used:
Books:
H.W. Lane, M.L. Maznevski, J. McNett, M.E. Mendenhall, Blackwell Handbook of Global
Management: A Guide to Managing Complexity, 1st edition, Blackwell Publishing
91
TASK 6
International entry strategies
92
IEN Case Entry Strategy
Problem Case Study for Curtis Automotive Hoist
Curtis Automotive Hoist (CAH) manufactures and markets surface automotive hoists in
North America. Hoist, is used by garages, service stations and other repair shops to lift cars
for servicing. The problem Curtis is facing is how could Curtis Automotive Hoist (CAH)
maintain its fast growth and prestigious brand image with expanded market share given its
limited financial and human resources? Should it adopt a market penetration strategy in US
or should it follow a market development strategy and expand to Europe? If it adopts the
market penetration strategy, should it approach the US market through the establishment of
a sales office or through enhanced joint efforts with its current distributor? If entering
Europe is desired, should CAH start with licensing or joint venture agreement with Bar
Maisse or through direct investment?
Key Issues
CAH manufactures and markets surface automotive hoists in North America. The company
has successfully positioned its product as a superior offering and used extensive personal
selling to promote and serve the product. Its strengths lie first in its superior product and
the extensive product line. Additionally, CAH has design expertise and possesses four
patents including one for the key safety feature. Second, CAH’s sales force is essential to
CAH’s success. The sales force focuses on serving large ¡°direct¡± accounts and has been
able to get approval from them. It established a distributor network across North America
and has generated about 25% of annual unit sales. Finally, CAH’s prominent reputation
allows it to charge a premium when its competitors are mainly competing on price.
Despite CAH’s competencies, its US distribution faces serious challenges. CAH’s

exclusive US distributor fails to actively promote the sales of Curtis Lift. In fact, the lift is
but a minor product within the wholesaler’s complete product line and accounts for only
20% of its total lift sales. Given that US market currently accounts for 60% of CAH’s sales
and holds growth potential in future, the current US distribution system may hurt CAH’s
growth. Another problem is CAH’s high production cost. Its cost of sales accounts for
93
approximately 72% of sales, which is at least 20% higher than that of dominant players.
The relatively low contribution margin leaves the company little flexibility in competition.
Competitive and Industrial Analysis
The customers of hoists are new car dealers, used car dealers, specialty shops, chains and
independent garages. CAH mainly targets the specialty shop segment, particularly those
wheel alignment shops. As the purchase of a hoist represents a major capital investment,
customers value the features and brand of the hoist. As parent companies of car or service
dealerships often play a key role in the purchasing decision, extensive personal selling is
required to thoroughly convey the large amount of complex information before getting
approval from parent companies.
The hoist industry is a mature one dominated by two large US firms ¨C AHV Lifts and
Berne Manufacturing. Both compete primarily on price in the focused in-ground and two-
post surface markets. Together the two companies take up 60% of the market. The scissor
lift segment is one of the fastest growing product types. Between 1995 and 1997, unit sales
rose 6.7%, second only to the two point lift. In contrast are other product types such as In-
ground lifts and Four Post lifts that are either maturing or declining. It is likely for scissor
lift to grasp shares from those segments. CAH’s direct competitors in this growing market
are AHV Lifts and Mete Lift. They offer less features at lower price. As hoist buyers are
less price sensitive but value product features, CAH has succeeded in acquiring a 46%
share within this segment despite its higher price. The leading position will help CAH to
compete for shares from those maturing and declining product types.
Alternative Courses of Actions
To maintain its rapid growth, CAH faces two strategic moves -- penetrating US market and
entering European market. US market is ten times that of Canada’s and is CAH’s most
important market. CAH has been involved in this market through its US wholesaler for
three years. Its superior offering and established reputation is well received here. More
importantly, the competent sales force and existing customer network may serve as an
excellent starting point for CAH to pursue this market more aggressively. The authorized
supplier status of a few large direct accounts will ensure relatively stable order inflow to
CAH. Another advantage is the close geographic proximity of CAH to targeted US market.
It eliminates the need for capital investment and facilitates communication, distribution and
promotion. If CAH can improve its US distribution system, the market will be easy for it to
tap.
On the other hand, Europe represents a potential growth opportunity as well. The “Big
Four” countries (i.e. Germany, France, the United Kingdom and Italy) have a combined
market size comparable to that of US’s. While changing standards and tariffs may keep
competitors from elsewhere from entering, the free movement of goods, persons, services
and capital within EU countries may greatly facilitate companies¡¯ pursuit of global market
share and profits. Additionally, there appears no dominant player in the market yet.
However, entering European market is not easy. It involves huge time, financial and human
resources investment and/or careful selection of strategic partner. And the key question
here is if CAH can adapt its distinctive competencies to the new market. Little is known
94
about the customer, competition and future sales. What if European customers are more
price sensitive? How can CAH take advantage of its reputation and expertise in personal
selling if it is to rely heavily on its partner for marketing activities? Another question is
whether Bar Maisse, the potential partner, will give its full commitment as it also
manufactures and markets other wheel alignment equipment. Given that only about 25% of
market development strategies are successful, the European market is riskier.
Alternative 1: Penetrating US market
Option 1: Establishing a sales office
Advantages: Establishing a sales office will not only take advantage of the existing sales
expertise, but also allow CAH to get first hand market information and enhance its
distribution expertise. Additional sales efforts may also get more large direct accounts.
Besides, this is an affordable option. It takes 89 unit sales for a new sales office of half the
current size (i.e. two salespeople, a marketing manager and one sales support staff) to
breakeven.
Disadvantages: Direct sales efforts may lead to channel conflict with current US
wholesaler. CAH may risk losing the exclusive distributor and possibly, most of US sales.
A 60% decrease in sales will tumble the company.
Option 2: Encouraging the US wholesaler to ‘push’ the Curtis Lift
Advantages: The current wholesaler’s established reputation and extensive distribution has
greatly facilitated CAH’s initial sales expansion. An effective handholding process from
the US wholesaler will lay a solid foundation for CAH’s future development in US.
Disadvantages: This could be an expensive option. As the wholesaler is only interested in

selling a lift, probably the CAH has to provide further incentive by increasing his markup.
Suppose CAH increases the markup from 22% to 27%. This will reduce the contribution
margin to 23%, and the breakeven point therefore will be almost $ 6 million, a 61% jump
in sales revenue. As Curtis Lifts face direct competition from other products the wholesaler
carries, this appears unlikely. Additionally, this option foregoes the opportunity for getting
first hand market information and thus may hinder CAH’s future marketing efforts in US.
Alternative 2: Entering European market
Option 1: Licensing
Based on estimated cost, CAH makes 5% (assumed) of $10,990 as royalty fee is $549.5 per
unit.
Advantages: Licensing allows CAH to make a quick, low risk and capital free entry into the
market. It brings inexpensive inventory returns and poses no threat to cash flow.
Disadvantages: CAH loses the control over production and marketing, in which the
95
company has strengths. Should quality deteriorate under the licensing agreement, CAH’s
reputation suffers. Also as the technology transfers, new competitors may emerge and
could hinder CAH’s future direct market expansion plan.
Option 2: Joint venture
Based on existing information, this may require a minimum of 273 unit sales for CAH to
breakeven.
Advantages: A joint venture will offer CAH direct access to the market at significantly
lower risk. CAH’s active involvement in production and sales will help adapt its current
strength to the new market, thereby facilitating the Curtis Lift’s expansion into Europe.
Disadvantages: Setting up joint venture requires higher investment and therefore is riskier
than licensing. The question remains about future cooperation between the two partners.
What if Bar Maisse seeks to control the operation? CAH risks losing the technology and
revenue.
Option 3: Direct Investment
Advantages: Direct investment gets CAH closer to its customers and allows it to maintain
the control over operation. CAH may expect higher profits through this.
Disadvantages: Direct investment requires a minimum $1.2 million and takes at least 475
unit sales for CAH to breakeven. This is almost North America unit sales (i.e. 1,054 unit in
1997) after the Curtis Lift has been marketed there for seven years. Given that CAH is a
newcomer to the market with non existing reputation, distribution or customer network, this
is hard to accomplish.
96
1. Give a recommendation concerning alternative 1 Penetrating US market, which option

will you choose
2. Hollensen differentiates between three different categories of entry strategies: export

modes, intermediate entry modes and hierarchical modes. Describe the main
differences between the three categories.
3. What is the difference between direct and indirect export?
4. What are the differences between an agent, a distributor and a sales representative?
5. Which factors have to be taken into account to make a well-argumented decision

about the proper entry strategy?
6. In which way can you take into account that not all factors are usually equally
relevant?
Possible sources to be used:
Books:
- S. Hollensen, Global Marketing; a decision-oriented approach, 3rd (or 4th) edition,
Pearson, especially chapters 9 till 13

profiles and company profile)
97
TASK 7
Customer Relationship Management

(CRM)
98
Case Study “Understanding Dior Customers”
Developed by Cllr Dr Maxwell Winchester,

Senior Lecturer, Harper Adams University College, and
Research Associate, Ehrenberg-Bass Institute, University of South Australia
January 2008
Introduction
Carrie Jones had been thrilled to be offered employment as a brand co-ordinator of a leading
cosmetics company following her graduation. She had always been passionate about fashion
and particularly luxury brands, so to be offered a position at Christian Dior in the cosmetics
area was a dream come true. In order to familiarise herself with the cosmetics market, her
direct line manager had asked her to propose how the Dior cosmetics brand could grow their
brand in the marketplace. She asked her market research manager to supply some basic brand
measures and has asked you to act as a consultant to the project. Your task is to explore
market patterns and propose growth plans for the Dior brand.
You have asked the market research manager for information about the market in terms of
who the customers are and how often they buy. For example, in deciding who to target and
how to position the brand, it is important to know whether Dior’s current sales are due to
either just a few highly loyal customers, or to many customers who buy it occasionally as one
of a wider ‘portfolio’ of brands. It is important to know whether the Dior brand differs from
its competitors in these respects and if so, how and why? There are some long-standing
patterns that will need to be considered in your interpretation.
For example, it has been well established that bigger brands tend to get not only more
customers, but it gets them buying their brand more often. This bias in customer loyalty is
known as the Double Jeopardy Effect (McPhee 1963; Ehrenberg, Goodhardt et al. 1990;
Ehrenberg and Goodhardt 2002).
It is also established however that premium or prestige brands can get more loyalty than non-
premium/prestige brands (Phau 2000; Prendergast and Wong 2003). For example,
Colombo, Ehrenberg and Sabavala (2000) found that Mercedes Benz obtained more
repeat purchasers than expected for its brand size and also found that loyalty to a
group of prestige brands such as Mercedes-Benz, BMW, Porsche and Volvo was
higher than for other brands (Colombo, Ehrenberg et al. 2000).
Carrie has forwarded you a request to interpret market share figures, solely loyal figures and a
duplication of purchase table. In this market, three of the eight brands are considered
prestige brands, this categorisation being determined by previous literature and a pilot study.
The prestige brands are Christian Dior (Dubois and Paternault 1995; Nueno and Quelch 1998;
Phau 2000); Estée Lauder (Dubois and Paternault 1995); and Shiseido (Dubois and Paternault
1995). While Revlon had been cited as prestige (Dubois and Paternault 1995), a pilot study
conducted with marketers was virtually unanimous that it should not be considered a prestige
brand (Romaniuk & Winchester, 2007).
99
A. Market Share:
The first set of figures you are given are for the market share of each brand. Market Share is
a brand size measure that shows the proportion of a market (in terms of sales or product sold)
allocated to each brand.
Market
Share %
Revlon 25
Oil of Olay 20
L’Oreal 14
Clinique 12
Estee Lauder (P) 11
Christian Dior (P) 7
Elizabeth Arden 6
Shishedo (P) 4
Total 100%
Question 1
As can be seen in the above table, the prestige brands tend to be the smaller brands in this
market. Would you expect these figures to change considerably when looking at data for a
month or a year? Why or why not?
100
B. Sole Loyalty:
The next set of figures provided gives an insight into the proportion of solely loyal users (as
in, a customer who exclusively used that brand within the interview period).
Sole
Loyalty
%
Revlon 45
Oil of Olay 21
L’Oreal 20
Clinique 16
Estee Lauder (P) 28
Christian Dior (P) 21
Elizabeth Arden 5
Shishedo (P) 29
Average 23
Question 2
What are your observations about how sole loyalty differs between big and small brands and
prestige and non-prestige brands? Why might this be the case?
101
C. Duplication of Purchase:
One of the common forms of analysis of purchase data is ‘duplication tables’ (Dawes, 2007).
Such tables compare the proportion of a brand’s customers who purchased other competing
brands within the time period of interest. Such a duplication table that relates to the cosmetics
market is presented below.
% who also bought…

Estée
% Revlo L’Ore Oil of Laude Cliniqu Eliz. Shis’d
used n al Olay r e Arden Dior o
Revlon 61 57* 68 53 53 44 35 24
L’Oreal 59 59 52 43 45 38 31 23
Oil of Olay 59 70 52 47 47 40 30 24
Estée Lauder
(P) 43 75 59 64 56 52 43 35
Clinique 39 83 69 71 63 53 49 35
Elizabeth Arden 32 84 71 74 71 65 56 34
Dior (P) 26 84 71 69 72 73 69 44
Shiseido (P) 19 78 71 75 80 73 58 60
Average 42 76 64 68 61 59 51 43 31
Estimated sharing 82 79 79 58 52 43 35 25
Deviation -6 -15 -12 3 7 8 9 6
*interpreted as 57% of people who bought Revlon also bought L’Oreal
Question 3a
What main pattern is evident in the table above? How does customer sharing differ between
large and small brands?
Question 3b
What exceptions are there to any main patterns you have described?
Question 4
What does this tell you about Dior’s main competition in the market?
Question5
If Dior was to lose sales to other brands, which brand(s) is it most likely to lose share to? Do
you have any observations about positioning of brands or the segmentation of the market?
102
References:
Colombo, R., A. Ehrenberg, et al. (2000). "Diversity in Analyzing Brand-Switching Tables: The
Car Challenge." Canadian Journal of Marketing Research 19: 23-36.
Dawes, J. (2008) Regularities in buyer behaviour and brand performance: The case of
Australian beer. Journal of Brand Management 15, 198–208.
Dubois, B. and C. Paternault (1995). "Observations: Understanding the world of international

luxury brands: the "dream formula"." Journal of Advertising Research July/August: 69-
76.
Ehrenberg, A. and G. Goodhardt (2002). "Double Jeopardy Revisited, Again." Marketing
Insights, Marketing Research Spring 2002: 40-42.
Ehrenberg, A. S. C., G. Goodhardt, et al. (1990). "Double Jeopardy Revisited." Journal of
Marketing 54(July): 82-91.
McPhee, W. N. (1963). Formal Theories of Mass Behaviour. New York, The Free Press of
Glencoe.
Nueno, J. L. and J. A. Quelch (1998). "The mass marketing of luxury." Business Horizons
November/December: 61-68.
Phau, I. P., Gerard (2000). "Consuming Luxury Brands: The Relevance of the 'Rarity Principle'."
The Journal of Brand Management 8(2): 122-138.
Prendergast, G. and C. Wong (2003). "Parental influence on the purchase of luxury brands of
infant apparel: an exploratory study in Hong Kong." Journal of Consumer Marketing
20(2): 157-169.
Romaniuk, J. & Winchester, M.K. (2007). The Perceptions and Loyalty of Prestige Brands.
Thought Leaders International Conference on Brand Management, Birmingham, UK.
Sources to be used:
Theory on , Consumer Behaviour, Brands, Brandmanagement

- For example Kotler’s Marketing Management, Chapter 7, 12 and 13

profiles and company profile)
103
TASK 8
Currency risk management
104
Currency Risk: BAKER ADHESIVES

Late June 2010, Doug Baker met with his sales manager Alissa Moreno to discuss the results
of a recent foray into international markets. This was new territory for Baker Adhesives, a
small company manufacturing specialty adhesives. Until a recent sale to Nuevo, a Chilean toy
manufacturer, all of Baker Adhesives’ sales had been to companies not far from its Newark,
New Jersey, manufacturing facility. However, as U.S. manufacturing continued to migrate
overseas, Baker would be under intense pressure to find new markets, which would inevitably
lead to international sales.
Doug Baker was looking forward to this meeting. The recent sale to Nuevo, while modest in
size at 1,210 gallons, had been a significant financial boost to Baker Adhesives. The deal had
been closed on December 15 2009 and payment was due on June 15 2010. The order had used
up some raw-materials inventory that Baker had considered reselling at a loss a few months
before the Nuevo order. Furthermore, the company had been running well under capacity and
the order was easily accommodated within the production schedule. The purpose of the
meeting was to finalize details on a new order from Nuevo that was to be 50% larger than the
original order. Also, payment for the earlier Nuevo order had just been received and Baker
was looking forward to paying down some of the balance on the firm’s line of credit.
As Baker sat down with Moreno, he could tell immediately that he was in for bad news. It
came quickly. Moreno pointed out that since the Nuevo order was denominated in Chilean
peso (CLP), the payment from Nuevo had to be converted into U.S. dollar (US$) at the
current exchange rate. Given exchange rate changes since the time Baker Adhesives and
Nuevo had agreed on the per-gallon price, the value of the payment was substantially lower
than anticipated. More disappointing was the fact that Nuevo was unwilling to consider a
change in the per-gallon price for the follow-on order. Translated into dollars, therefore, the
new order would not be as profitable as the original order had initially appeared. If fact, it
would not even be as profitable as the original order had turned out to be due to a rise in some
of Baker Adhesives’ costs!
Adhesives market
The market for adhesives was dominated by a few large firms who provided the vast bulk of
adhesives in the United States and in global markets. The adhesives giants had international
manufacturing and sourcing capabilities. Margins on most adhesives were quite slim since
competition was fierce. In response, successful firms had developed ever more efficient
production systems which, to a great degree, relied on economies of scale.
105
The focus on scale economies had left a number of specialty markets open for small and
technically savvy firms. The key to success in the specialty market was not the efficient
manufacture of large quantities, but figuring out how to feasibly and economically produce
relatively small batches with distinct properties. In this market a good chemist and a flexible
production system were key drivers of success. Baker Adhesives had both. The business was
started by Doug Baker’s father, a brilliant chemist who left a big company to focus on the
more interesting, if less marketable, products that eventually became the staple of Baker
Adhesives’ product line. While Baker’s father had retired some years ago, he had attracted a
number of capable new employees and the company was still an acknowledged leader in the
specialty markets. The production facilities, though old, were readily adaptable and had been
well maintained.
Until just a few years ago, Baker Adhesives had done well financially. While growth in sales
had never been a strong point, margins were generally high and sales levels steady. The
company had never employed long-term debt and still did not do so. The firm had a line of
credit from a local bank, which had always provided sufficient funds to cover short-term
needs. Baker Adhesives currently owed about $180,000 on the credit line. Baker had an
excellent relationship with its bank, which had been the company’s bank from the beginning.
Nuevo Orders
The original order from Nuevo was for an adhesive Nuevo was using in the production of a
new line of toys for its Chilean market. The toys needed to be waterproof and the adhesive,
therefore, needed very specific properties. Through a mutual friend, Moreno had been
introduced to Nuevo’s purchasing agent. Working with Doug Baker, she had then negotiated
the original order (the basis for the pricing of that original order is shown in Exhibit 1).
Nuevo had agreed to pay shipping costs, so Baker Adhesives simply had to deliver the
adhesive in 55-gallon drums to a nearby shipping facility.
The proposed new order was similar to the last one (except for the size, which is 50% bigger).
As before, Nuevo agreed to make payment 90 days after receipt of the adhesives at the
shipping facility. Baker anticipated a five-week manufacturing cycle once all the raw
materials were in place. All materials would be secured within three weeks. Allowing for
some flexibility, Moreno felt it would be about six months from when the order was agreed
upon to the receipt of payment from Nuevo. That was, in fact, about the length of time it took
for the original order. For this reason, Moreno expected receipt of payment on the new order,
assuming it was agreed upon immediately, somewhere around December 24, 2010.
Whereas a third of the raw materials continued to be materials Baker Adhesives had in excess
supply (those the company had considered selling off) and the rest were on hand, about a
quarter of the materials needed to be purchased, and their cost had recently risen by 10%.
106
Exchange Risks
With her newfound awareness of exchange rate risk, Moreno had gathered additional
information on exchange rate markets before the meeting with Doug Baker. The history of the
dollar-to-peso exchange rate is shown in Exhibit 2. Furthermore, the data in that exhibit
provided the most recent information on the exchange rate, forward rate and currency-options.
Moreno had discussed her concerns about exchange rate changes with the bank when she had
arranged for conversion of the original Nuevo payment.4 The bank, helpful as always, had
described two ways in which the bank could mitigate the exchange rate risk from any new
order. On top of that, the bank provided Moreno some information on key variables on both
the US and the Chilean economy (Exhibit 3).
Hedge in the forward market
Banks would often provide their clients with guaranteed exchange rates for the future
exchange of currencies (forward rates). These contracts specified a date, an amount to be
exchanged, and a rate. Any bank fee would be built into the rate. By securing a forward rate
for the date of a foreign-currency-denominated cash flow, a firm could eliminate any risk due
to currency fluctuations. In this case, the anticipated future inflow of peso from the sale to
Nuevo could be converted at a rate that would be known today.
Hedge in the option market
The bank had also explained to Moreno that Baker could also use currency options to hedge
against the uncertain foreign exchange exposure. Options provide a means of hedging against
volatility without taking a position on expected future rates. She was explained that there are
two basis varieties of option contracts: puts and calls. A put gives the holder the right, but not
the obligation, to sell foreign currency at a set exercise or “strike” price within a specified
time period. A call gives the holder the right to buy foreign currency at a set price. They also
told her that options are complicated and increase the front end cost of hedging in comparison
with a forward hedge. Moreno was informed that she could find the prevailing option contract
prices in every quality financial newspaper or on the internet.
The bank had assured Moreno that they would be able to assist Moreno in implementing
whatever decision Moreno made. They pointed out, however, that Baker could also decide to
do nothing (leave the currency exposure unhedged, as in the previous sale to Nuevo). This
didn’t seem like the way to go for Alissa Moreno, but she understood that this possibility
should be taken into consideration as well when analysing all the pros and cons of the
alternatives faced by Baker Adhesives.
After some discussion and negotiation with the bank Moreno was able to secure the following
agreements: Baker Adhesives’ bank had agreed to offer a forward contract for December 24
at an exchange rate of US$$0.17809/CLP100.
4
Though Baker Adhesives had a capable accountant, Doug Baker had decided to let Alissa Moreno handle the
exchange rate issues arising from the Nuevo order until they better understood the decisions and trade-offs that
needed to be made.
107
The meeting
It took Doug Baker some time to get over his disappointment. However, if international sales
were the key to the future of Baker Adhesives, Baker realized he had already learned some
important lessons. He vowed to put those lessons to good use as he and Moreno turned their
attention to the new Nuevo order.
108
Exhibit 1
BAKER ADHESIVES
Nuevo Price Calculation on Initial Order
Labor 6,000
Materials 32,500
Manufacturing overhead 4,000
Administrative overhead 2,000
Total costs 44,500
Mark-up (25%) 11,125
Cost plus mark-up in dollars 55,625
Conversion (US$/CLP-rate on Dec. 20, 2009) 0.0020
Cost plus mark-up in pesos 27,812,500
Amount (gallons) 1,210
Quoted price per gallon 22,985.54
Notes:
The exchange rate used in the calculation was obtained from the Wall Street Journal.
The spot rate for the US$/Chilean peso exchange rate on December 20, 2009 was:
US$ 1 = CLP 500 (or: CLP 1 = US$ 0.002)
Overhead was applied based on labor hours.
The raw material expense was based on the original cost (book value) of the
materials.
The rounded price of CLP22,985.50 per gallon was used in negotiations with Nuevo.
Thus, for the final order Nuevo was billed a total of 22,995.50 × 1,210 =
CLP27,812,500
109
Exhibit 2
BAKER ADHESIVES
Information on Exchange Rates and Derivative Markets
The Peso/Dollar exchange rate (January-June 2010)
Information from the financial markets for June 24, 2010
Spot currency market:

Spot exchange rate: USD 1 = CLP 538.50 (or: CLP 100 = $0.18570)
Forward market (offer made by Baker’s bank) :

180-days Forward rate of the Chilean peso: USD 1 = CLP 561.50
(or: CLP 100 = $0.17809)
Currency options market:

Call-options on the peso:
Strike price: USD 1 = CLP 540 (or: CLP 100 = $0.18519)
Expire date: December 24, 2010
Option premium: $0.0210/CLP 100
Put-options on the peso:

Strike price: USD 1 = CLP 540
Expire date: December 24, 2010
Option premium: $0.0280/CLP 100
110
Exhibit 3
BAKER ADHESIVES
Key Economic variables for the US and Chile
Chile: key indicators (2006-2012)
200 2007 2008 2009 2010 2011 2012

6
GDP, constant 2000 prices ($ billion) 96.46 101.3 104.6 104.7 107.9 112.1 117.52
7 2 3 1 0
GDP growth rate (%) 4.34 5.10 3.20 0.11 3.03 3.89 4.83
GDP, constant 2000 prices, per capita ($) 5972 6218 6358 6309 6443 6638 6901
Inflation (%) 3.40 4.40 8.70 2.90 3.50 3.00 3.00
Exports, total as % of GDP 45.21 46.90 44.01 48.06 51.44 54.31 56.86
Imports, total as % of GDP 31.85 34.93 35.62 38.63 41.35 43.74 46.07
Mid-year population, total (million) 16.13 16.28 16.43 16.58 16.72 16.86 17.00
Unemployment rate (%) 7.90 8.00 7.80 8.40 8.20 8.10 8.00
Source: Datamonitor
US: Key indicators (2008-2014)

2008 2009 2010 2011 2012 2013 2014
GDP, constant 2000 prices ($ billion) 11807. 11518. 11801. 12169. 12506. 12840. 13127.9
4 0 1 7 1 0
GDP growth rate (%) 0.8 -2.5 2.5 3.1 2.8 2.7 2.2
GDP, constant 2000 prices, per 38811 37492 38039 38852 39543 40209 40716
capita ($)
Exports, total as % of GDP 12.53 11.01 10.60 10.77 10.74 10.72 10.81
Imports, total as % of GDP 17.57 15.40 15.98 16.81 17.01 17.03 17.01
Mid-year population, total (million) 304.06 307.21 310.23 313.23 316.27 319.33 322.42
Unemployment rate (%) 5.80 9.28 10.00 9.17 9.04 8.98 9.12
Source: Datamonitor
111
1. Explain the following concepts used in the case: ‘exposure’ and ‘volatility’. How are
these related to (exchange rate or currency) risk?
Normally three types of currency risk are distinguished: (1) transaction risk, (2) economic or
structural risk, and (3) translation or accounting risk.
2. Explain the three different types of currency risk in a clear way.

Which currency risk(s) is Baker Adhesives confronted with after closing the contract
with the Chilean customer?
Companies can choose for different hedging strategies: (1) a no cover strategy, (2) a partial
cover strategy, and (3) a full-cover strategy.
3. Explain what is meant by the different strategies.
4. State the main advantages and disadvantages of the three alternatives available to
Baker:
- do nothing
- use forward currency contracts
- use currency options
5. What are the factors that (should) determine the choice made by Baker Adhesives with
regard to how the currency risk should be managed?
Sources to be used:
Theory on currency risk management:
- David. Eiteman, Arthur Stonehill, Michael Moffett, Multinational Business Finance,

any edition, Pearson Addison Wesley, especially chapter 6
112
TASK 9
International transport and logistics
113
Case: Electric Vehicles & Incoterms: All Charged Up?

Major cooperative projects are paving the way for the launch of electric vehicles. Experts
from industry and universities are creating the technological basis for linking vehicles to the
power grid. In fact, field tests are now under way, especially in Denmark and Germany. One
key objective is to use electric cars as energy storage units that can compensate for
fluctuations in wind power.
[There’s still a long road ahead before electric cars like the eRuf Stormster (above) can recharge on wind-
generated electricity. Siemens and Danish company Lithium Balance are helping the vision become a reality.]
As recently as five years ago, the idea that hundreds of thousands of electric cars could be on
the road in Europe by 2020 was considered a futuristic scenario. Hardly anyone believed that
the idea of driving with electricity could be implemented so quickly, and on such a grand
scale. Times have changed, however, and work on readying electric cars for everyday use is
proceeding at full speed. At the same time, some components of their energy source—the
power grid—are being completely redefined (see Pictures of the Future, Fall 2009,
Electromobility). Two European regions in particular are leading the way to the future of
electric mobility—Denmark and Germany’s Harz region in the country’s middle. Both
already obtain a large portion of their electricity from renewable sources, especially wind. In
Denmark, the figure is 20 %; in the Harz, wind, biogas and solar facilities cover 50 % of
energy needs. As a result, both regions often face the same problem: too much wind energy.
When strong wind causes turbines to really get moving, they can actually meet more than
100 % of each region’s electricity demand. To prevent the grid from overloading, wind
facilities in Harz are shut down—much to the annoyance of their operators. Danish energy
suppliers, however, are legally required to use the excess wind power, which they pass on to
their European neighbors. What’s more, they have to pay transmission fees for the privilege.
And the problem could get worse, since the share of electricity generated by wind power is
increasing in both the Harz and Denmark. The latter hopes to have around 50 % of its average
electricity demand covered by wind by 2025.
Electric vehicles could help solve the problem by acting as a virtual surplus electricity storage
system. Specifically, thousands of electric cars would recharge their batteries when winds are
strong, primarily at night. Conversely, during periods of calm, they could resupply the grid at
114
higher prices. It’s a great idea—but can it work? For example, how can electric cars and the
power grid communicate reliably? How can vehicles be recharged quickly and safely? And
how is everyone to be billed? Two major cooperative projects in Denmark and the Harz are
seeking answers to these questions with the help of Siemens experts.
One project is headquartered at the Risø research center at the Technical University of
Denmark (DTU), not far from the famous Viking Ship Museum in Roskilde. The center
houses wind turbines, solar photovoltaic systems, a transformer station, and a vanadium-ion
liquid battery the size of a shipping container. Here, the energy consumers are electric heating
units in the center’s office buildings, hybrid cars, and several small batteries that simulate
additional vehicles. The research center thus has a miniature power grid that can be used to
test the interaction between various components.
Risø is home to Denmark’s EDISON (“Electrical vehicles in a Distributed and Integrated
market using Sustainable energy and Open Networks) project, the world’s first major effort
for bringing a pool of vehicles to power outlets. Practical testing will begin in 2011 on the
island of Bornholm. “We’re focusing mostly on the question of how electric vehicles can be
charged quickly, safely, and efficiently,” says Sven Holthusen, who is responsible for the
EDISON project at Siemens’ Energy Sector. Holthusen and his colleagues analyze, for
example, how a vehicle can be recharged at different types of charging stations or how a large
number of batteries can be recharged simultaneously.
Holthusen knows that electric cars will become truly attractive to consumers only when they
can travel long distances and be recharged within a few minutes. Electric cars these days are
normally charged at an 11 kW outlet. A typical battery with a 25-kWh storage capacity thus
takes more than two hours to fully recharge. Increasing the charging power would lower the
charging time. That’s why Holthusen’s team of researchers is developing 120 kW technology,
which reduces the charging time to just a few minutes. However, with charging currents of up
to 300 A and 400 V of alternating current (AC), the load is equivalent to powering nearly 20
households.
[At the Risø research center, scientists from the Technical University of Denmark and Siemens are testing how
electric cars, power grids, and renewable energy generation systems can operate in harmony]
“Heat generation during recharging with AC is one of the biggest challenges at the moment,”
explains Holthusen, who is testing charge controllers that would be installed in vehicles as
well as those that would be part of charging stations. Onboard controllers offer the benefit of
115
not having to be integrated into the power pump, which reduces infrastructure costs. Such
controllers also ensure that each vehicle optimally controls the charging process in line with
its battery’s requirements. External controllers, on the other hand, are better at dissipating
heat, thus enabling higher charging currents.
No one knows which charging technology will gain the upper hand. That’s why Siemens is
developing different technologies in parallel in its Inside Car and Outside Car electric
mobility teams. The teams develop and test components for vehicles and grid technologies.
Along with the DTU and Siemens, EDISON project partners include IBM, which is
developing the software infrastructure for linking decentralized components, the Eurisco
development firm, and energy suppliers Dong Energy and Østkraft. With wind energy
continuing to expand worldwide, Holthusen and his colleagues believe all the technologies
they’re working on have good chances of market success. In the Outside Car area alone, they
estimate that global demand for electronic components capable of expanding the power grid
and charging infrastructure will total over ten billion euros by 2020.
The German government is funding the expansion of electric mobility in eight regions. In
Munich, Siemens is participating in a pilot project with BMW and the local municipal utility
(SWM). Here, BMW plans to expand its trial fleet of “Mini-E” electric vehicles to at least 40,
Siemens is providing technology for the next-generation charging infrastructure—including
fast charging—and SWM is supplying “green” electricity. Siemens has also launched a
project in Berlin in which electric vehicles are being used on a daily basis as company cars.
The project includes six electric smart models provided by Daimler, which can “fill up” at 20
charging stations at the main Siemens locations in Berlin. Siemens has its own medium and
low-voltage network here, which can charge or discharge the cars.
The sale
For testing purposes Siemens GMbH, ordered a different type electric car from a specialized
wholesaler Dansk Electric Cars, having its place of business in Denmark on 26 January 2010.
The order stipulated that the car be delivered under the condition DDU Berlin. The time of
delivery was set at "no later than 15 March 2010”.
On 29 January 2010, Dansk Electric Cars accepted this offer including the time of delivery as
"April, time of delivery remains reserved" and the standard conditions.
Dansk Electric Cars standard conditions include:

(…)
Art. 6. The automobiles will be delivered under the condition CPT Incoterms 2000.
(…)
Art. 10. Payment term: 30 days after date invoice.
(…)
Art. 21. Danish law will apply to the contract of sale and the Danish Court of law has
jurisdiction, unless the seller decides to start litigation for another court having
jurisdiction.
When the electric car was not delivered by the date specified in Siemens' offer, Siemens fixed
an additional period of one week. The seller Dansk Electric Cars did not reply. After the
additional period had lapsed without result, Siemens declared the contract avoided by sending
a notification to Dans Electric Cars.
116
The electric car finally arrives seven weeks later in June. However, Siemens did not take the
delivery and also refused to pay the contract price.
Dansk Electric Cars is of the opinion that delivery delays of two to four weeks are common in
the international sale of vehicles. Dansk Electric Cars threatens to sue Siemens GMbH for
damages, if they do not accept the delivery and if they do not pay the contract price. Siemens
disagrees with the claim and is now urgently in need of some advice on the problem.
[There’s still a long road ahead before electric cars like the eRuf Stormster (above) can recharge on wind-
generated electricity. Siemens and Danish company Lithium Balance are helping the vision become a reality.]
Source:
http://www.siemens.com/innovation/en/highlights/energy/update_03/electromobility.htm
117
Questions for first discussion
1. Explain the main obligations for the seller and the buyer when they include an Incoterm
2000 in their sales contract.
2. What are the main differences between a delivery under the condition DDU and a delivery
under the condition CPT?
3. What are the main differences for these Incoterms in the new version of 2010?
4. Which other payment options than the current one are possible in an international sales
contract? Please explain the main features of those payment terms.
Note:
Use your book “Export Import Basics” and readers for International law 2
Please, consult the book “Incoterms 2010”, ICC Publication No. 715, available in the library.
118
CHAPTER 5 Literature
Dyché J., The CRM Handbook; a business guide to Customer Relationship

Management, Addison Wesley
Eakins, S.G., Finance: investments, institutions and management, 2nd edition,

Boston: Addison Wesley, 2002
D.K. Eiteman, A.I. Stonehill, M.H. Moffet, Multinational Business Finance, 9th edition,
Addison Wesley
Ferrel, O.C., M.D. Hartline, G.H. Lucas jr. and D. Luck, Marketing Strategy, Fort
Worth :The Dryden Press, 1999
Gitman, L.J., Principles of Managerial Finance, 9th edition, Reading,

Massachusetts: Addison Wesley, 2000
Goyder J., EC distribution law, 2nd edition, Oxford University Press,1996
Hollensen, S., Global Marketing: a market–oriented approach, 3nd edition,

Harlow: Pearson Education, 2004
Jain, S.C., Marketing Planning and Strategy, 6th edition, Cincinnati, Ohio: South
Western Publishing, 1999
Johnson, G. and K. Scholes, Exploring Corporate Strategy, 6th edition, New York:
Prentice Hall, 2002
Kotler, P., G. Armstrong, J. Saunders and V. Wong, Principles of Marketing, 4th

European edition, Prentice Hall, 2005
Kotler P., Marketing Management, 11th edition, Upper Saddle River, New Jersey:
Prentice Hall, Pearson Eduscation, 2003
Henry.W. Lane, M.L. Maznevski, J. McNett and M.E. Mendenhall, Blackwell Handbook
of Global Management: A Guide to Managing Complexity, 1st edition, Blackwell
Publishing, 2004
Ross, S.A., R.W. Westerfield and B.D. Jordan, Fundamentals of Corporate

Finance, international edition, 5th edition, Boston: Irwin McGraw-Hill, 2000
Pike, R. and B. Neale, Corporate Finance and Investments: decisions and

strategies, 3rd edition, London: Prentice Hall Europe, 1999
119

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Blockbook International Enterprise, 1st semester 2010-2011

1st semester 2010-2011

How this method of problem-based learning is organised in this course is to be

2.1 Group meetings

2.2 Roles in the tutorial group

Tips for the chairman

During the discussion:

2.3 Schedule of lessons

Planning of group meetings (Tuesdays)

2.4 Survey/planning of tasks and activities

Overview of activities in ‘International Enterprise’ (PBL-part)

Period 2 Week 1 6 hand in task 5

Overview of activities in study unit ‘International Enterprise’

IEN1A: module ‘International Enterprise’ (weekly meetings, total semester)

You are assessed on:

3.1 Your presence:

3.2 Your communication and social skills:

Individual project skills

Being a team member

3.3 Hand-in assignments/Management briefings:

How to write a management briefing:

The structure usually is something like this.

( example based on KFC’s attempt to enter the South American market)

In the briefing you will have sections like:

• Analysis of available data

Grading Form IEN Hand-in Assignment 4: Business Ethics March 2010

Student name and group: .………………………………………………………………….

Problem Definition (including background) ……… 10

Focused on problem statement ……… 10

Use (explicit/implicit) of moral theories and application ……… 30

Both pros and cons (balanced/non-biased) ……… 5

Additional relevant information presented ……… 10

Based on the analysis ……… 10

Total Score / Grade ………. 100

3.4 The -individual- midterm and final tests:

Content of written exams:

These so-called non-integrated assessments all have to be passed (minimum of

ONLY WHEN ALL OF THE ABOVE MENTIONED REQUIREMENTS ARE

CASE 1: International Readiness

Planning an international raid with the FABs (flavoured alcoholic beverages)

 ABV (Alcohol by volume) of 5.5 per cent per 330 ml bottle.

 ABV of 5.3 per cent per bottle;

Total drinks market in the United Kingdom

The UK market for FABs

Some FAB competitors

Questions for first discussion:

2. What are in general the barriers for export initiation in a company?

3. Explain and comment on the “Uppsala Internationalization model”

Before the first export decision: Internationalisation readiness in the

Alvin Tan, Paul Brewer and Peter W. Liesch

pre-internationalisation behaviour and while they attempted to develop a pre-export model,

This paper argues the significance of adopting a pre-internationalisation perspective. Focusing

2. The pre-internationalisation phase: a review of relevant constructs

The innovation model describes internationalisation as an evolution of a firm through distinct

Fig. 1. Positioning the pre-internationalisation phase.

2.1. Internal and external stimuli

Fig. 2. Simplified pre-export model (Wiedersheim-Paul et all, 1975).

the stimulating impact of globalisation forces, higher levels of competition, widespread

According to Wiedersheim-Paul et al. (1975), whether decision-makers perceive relevant

Table 1: Internal and external stimuli categorised (Leonidou, 1998)

Internal stimuli Proactive Achievement of economies of scale

Reactive Offsetting sales of a seasonal product

External stimuli Proactive Encouragement by external agents/organizations