Business Operations

• To increase profitability and profit growth, firms can

• add value
• lower costs
• sell more in existing markets
• enter new markets & expand internationally
How is Value Created?

• To increase profitability, firms need to create more value

• The firm’s value creation is the difference between V (the

value that customer perceives in the product) and C (the
costs of producing that product)
• a firm has high profits when it creates more value for its
customers and does so at a lower cost
How is Value Created?

Value Creation
 Profits Through International Expansion !
International firms can
1. Expand their market – sell domestically produced products in international
markets
2. Realize location economies – They are economies that arise from performing a
value creation activity in the optimal location where they can be performed most
efficiently and effectively for that activity, wherever in the world that might be.
3. Realize greater cost economies from experience effects. The experience curve
refers to the systematic reductions in production costs that occur over the life of a
product. By moving down the experience curve, firms reduce the cost of creating
value. To get down the experience curve quickly, firms can use a single plant to
serve global markets. Learning effects are cost savings that come from learning
by doing. Companies learn the most efficient ways to perform particular tasks.
4. Earn a greater return -leverage skills developed in foreign operations and transfer
them elsewhere in the firm
The Experience Curve
Which Strategy Should a Firm Choose?
 Which Strategy Should
a Firm Choose?
1. Global standardization - increase profitability and profit growth by reaping the cost reductions
from economies of scale, learning effects, and location economies. Goal is to pursue a low-
cost strategy on a global scale. This strategy makes sense when there are strong pressures
for cost reductions and demands for local responsiveness are minimal
2. Localization - increase profitability by customizing goods or services so that they match tastes
and preferences in different national markets. This strategy makes sense when there are
substantial differences across nations with regard to consumer tastes and preferences and
cost pressures are not too intense
3. Transnational - tries to simultaneously achieve low costs through location economies,
economies of scale, and learning effects. Firms differentiate their product across geographic
markets to account for local differences and foster a multidirectional flow of skills between
different subsidiaries in the firm’s global network of operations. This strategy makes sense
when both cost pressures and pressures for local responsiveness are intense
4. International – take products first produced for the domestic market and sell them
internationally with only minimal local customization. This strategy makes sense when there
are low cost pressures and low pressures for local responsiveness
 Basic Decisions Firms Make When
Expanding Globally
• Firms expanding internationally must decide

1. Which markets to enter

2. When to enter them and on what scale
3. Which entry mode to use
 Entry Mode
1. Exporting – it is a common first step for many manufacturing firms. Later, firms may switch to
another mode
2. Turnkey projects - the contractor handles every detail of the project for a foreign client,
including the training of operating personnel. At completion of the contract, the foreign client is
handed the "key" to a plant that is ready for full operation
3. Licensing - a licensor grants the rights to intangible property to the licensee for a specified time
period, and in return, receives a royalty fee from the licensee. There can be patents,
inventions, formulas, processes, designs, copyrights, trademarks
4. Franchising - a specialized form of licensing in which the franchisor not only sells intangible
property to the franchisee, but also insists that the franchisee agree to abide by strict rules as
to how it does business. It is used primarily by service firms.
5. Joint ventures with a host country firm - a firm that is jointly owned by two or more otherwise
independent firms. Most joint ventures are 50–50 partnerships
6. Wholly owned subsidiary - The firm owns 100 percent of the stock in the foreign country.
Companies with long-term & substantial interest in a foreign country may establish wholly
owned manufacturing facilities there. They may set up a new operation/ subsidiary (greenfield
strategy) or acquire (Acquisition) an established firm..
 Entering in Foreign Markets
7. Contract Manufacturing- A company contracts with firms in foreign countries to manufacture or
assemble the products while retaining the responsibility of marketing the product.
8. Management Contracting- A company provides management know-how to another company in
a foreign country but may not have equity stake in the enterprise being managed.
9. Assembly Operations – Companies may ship parts & components to a foreign country when
assembly operations are labour intensive and labour is cheap in the foreign country.
 Important Documents for Export
• Performa Invoice: An invoice provided by the exporter prior to the shipment of
merchandise, informing the buyer of the kinds & quantity of goods to be sent, their
value & importation specifications (weight, size & similar characteristics)
• Commercial Invoice: This document states the value per unit for the goods and
shows the total value of the goods to be exported. Also, the exporter and importer
details like buyer’s order number with date, country of origin of the goods, country
of final destination, terms of payment and delivery, pre-carriage details, vessel/flight
number, port of loading & discharge, container number, number and kind of
packaging, rate, total amount chargeable, etc.
• Sales-purchase contract: This is the proof of purchase-sale between the parties.
Sales purchase contract needs to be well drafted and prepared.
• Packing list: Packing list states the quantity of the goods exported. It carries
details regarding no. of packages, no. of units per package, and measurement of
each package, net & gross weight of the consignment.
• Bill of lading/Airway bill/Railway bill: After the goods had been taken on the
shipboard/ rail/ airplane, then shipper will issue the Bill of lading/ railway bill/ airway
bill. This document confirms that goods described on the document has been
received by carrier and are ready for shipping. This is the proof for receivers and
banks that the goods are ready for shipment.
• Certificate of Inspection: This is the certificate issued by the Export Inspection
Agency after it has conducted the pre-shipment inspection of goods for export
provided the goods fall under the notified category of goods requiring compulsory
shipment of inspection.
• Certificate of Origin: This document serves as a proof of the country of origin of
goods for the importer in his country. Also, the certificate of origin contains the
producer data. This is an official doc what can be issued only by country export and
trading authorities. Importing countries usually require this to be produced at the
time of customs clearance of import cargo. It also plays an important part in
computing the liability and the rate of import duty in the country of import.
• .Freight insurance certificate: If the goods are precious then usually the buyer
requires that exporter signs insurance-policy for the goods. The insurance
certificate is issued by companies which provide insurances.
• Bill of Exchange: Also known as Draft, this is an instruments for payment
realization. It is a written unconditional order for payment from an exporter to an
importer, directing the importer to pay a specified amount of money in a given
currency to the exporter or a named payee at a fixed or determinable future
date.
• Letter of credit : A commercial letter of credit is a contractual agreement
between a bank, known as the issuing bank, on behalf of one of its customers
(importer), authorizing another bank, known as the advising or confirming bank
situated in seller’s (exporter) country, to make payment to the beneficiary
(exporter). The issuing bank, on the request of its customer, opens the letter of
credit. The issuing bank makes a commitment to honour drawings made under
the credit. The beneficiary is normally the provider (exporter) of goods and/or
services. It states that the bank will pay a specified sum of money to a
beneficiary, normally the exporter, on presentation of the specified documents.
Main advantage is that both parties are likely to trust a reputable bank even if
they do not trust each other.
A Typical International Trade Transaction
Incoterms
• International Commercial Terms (‘Incoterms’) are internationally recognized
standard trade terms used in sales contracts are instituted by International
Chamber of Commerce (ICC). They’re used to make sure buyer and seller
know:
• Who is responsible for the cost of transporting the goods, including
insurance, taxes and duties
• Where the goods should be picked up from and transported to
• Who is responsible for the goods at each step during transportation

The current set of Incoterms® is Incoterms 2010.

Incoterms® are used in contracts in a 3-letter format followed by the place

specified in the contract (e.g. the port or where the goods are to be picked up).
There are different terms for sea and inland waterways (e.g. rivers and canals)
compared to all other modes of transport.
 Incoterms
• EXW (‘Ex Works’): The seller makes the goods available to be collected at his premises
and the buyer is responsible for all other risks, transportation costs, taxes and duties from
that point onwards. This term is commonly used when quoting a price. Example: Goods
are being picked up by the buyer from the seller’s premises in Mumbai. The term used in
the contract is ‘EXW Mumbai’.
• FCA (‘Free Carrier’): The seller gives the goods, cleared for export, to the buyer’s carrier
at a specified place. The buyer is then responsible for getting transported to the specified
place of final delivery.
• CPT (‘Carriage Paid To’): The seller pays to transport the goods to the specified
destination. Responsibility for the goods transfers to the buyer when the seller passes
them to the first carrier.
• CIP (‘Carriage and Insurance Paid’): The seller pays for insurance as well as transport
to the specified destination. Responsibility for the goods transfers to the buyer when the
seller passes them to the first carrier. CIP (‘Carriage and Insurance Paid’) is commonly
used for goods being transported by container by more than one mode of transport. If
transporting only by sea, CIF is often used
 Incoterms
• DAT (‘Delivered at Terminal’): The seller pays for transport to a specified terminal at the
agreed destination. The buyer is responsible for the cost of importing the goods. The
buyer takes responsibility once the goods are unloaded at the terminal.
• DAP (‘Delivered at Place’): The seller pays for transport to the specified destination, but
the buyer pays the cost of importing the goods. The seller takes responsibility for the
goods until they’re ready to be unloaded by the buyer.
• DDP/DTP (‘Delivered Duty Paid’):The seller is responsible for delivering the goods to
the named destination in the buyer’s country, including all costs involved.
• FAS (‘Free Alongside Ship’):The seller puts the goods alongside the ship at the
specified port they’re going to be shipped from. The seller must get the goods ready for
export, but the buyer is responsible for the cost and risk involved in loading them. This
term is commonly used for heavy-lift or bulk cargo (e.g. generators, boats), but not for
goods transported in containers by more than one mode of transport (FCA is usually used
for this).
 Incoterms
• FOB (‘Free on Board’):The seller must get the goods ready for export and load them
onto the specified ship. The buyer and seller share the costs and risks when the
goods are on board. This term is not used for goods transported in containers by
more than one mode of transport (FCA is usually used for this).
• CFR (‘Cost and Freight’): The seller must pay the costs of bringing the goods to the
specified port. The buyer is responsible for risks when the goods are loaded onto the
ship.
• CIF (‘Cost, Insurance and Freight’): The seller must pay the costs of bringing the
goods to the specified port. They also pay for insurance. The buyer is responsible for
risks when the goods are loaded onto the ship.
 Challenges in International Trade
• Political risks
• Economic risks
• Legal risks
• Organization Structure
• Human resource & cross-cultural management
• Production & supplier management
• Financial management
• Marketing & sales management.................