Chapter-13

Evaluation of Countries for

Operations

PRESENTED BY : RAJU SHRESTHA

 objective
 1. Grasp company strategies for sequencing the penetration of countries
 2. See how scanning techniques can help managers limit geographic alternatives and consider other wise overlooked
areas
 3. Discern the major opportunity and risk variables in deciding whether and where to expand abroad
 4. Know the methods and problems of collecting and comparing international information
 5. Understand some simplifying tools for helping decide where to operate
 6. Consider how companies allocate emphasis among the countries where they operate
 7. C comprehend why location decisions do not necessarily compare different countries ’possibilities
 8. Fathom the conditions that may cause prime business locations to change in the future
 introduction
 all companies have limited resources, they must be care
full making the following decisions:
• The location of sales, production, and administrative
and auxiliary services
• The sequence for entering different countries
• The portion of resources and efforts to allocate to each
country where they operate
LOCATION
 The old adage that “location, location, and location” are the three most important
factors for business success rings quite true for international business.
 Which markets should we serve? And where should we place production to serve
them On one hand, the answers
 can be the same, particularly if transport costs or government regulations mean
producing in the countries where you sell
 There is no one size-fits-all theory for picking operating location.
scanning
 Scanning is the process by which managers examine many countries broadly and
then narrow them down to the most promising ones.
 “Scanning is like seeding widely and then weeding out;
 escalation of commitment
How Does Scanning Work?
 scanning techniques to examine and compare countries on broad indicators
opportunities and risks.
 it is use full insofar as a company might otherwise consider too few or too many
possibilities.
 compare country information, feasibility and desirability.
 using fairly easy-to-find information,
 What Information Is Important in Scanning

 company’ success or failure.

 Expectation of a large market and sales growth is probably potential location’s
major attraction.
 opportunities and risks
Opportunities: Sales Expansion
 Expectation of a large market and sales growth is probably potential location’s
major attraction.
 use economic and demographic data to project sales potential.
 indicators., (GDP, Per capital income)
Examining Economic and Demographic Variables

• Obsolescence and leapfrogging of product;

do not necessarily follow the same patterns as those in higher-income countries.
• Price :expected based on per capita GDP. Egg japan
• Income elasticity:. demand shifts in relation to income changes,
• Substitution: Consumers in a given country may more conveniently substitute
certain product or services than those in other countries.e.g honking Gasoline- and
diesel-powered cars are also substitutes
• Income inequality: Where income inequality is high, the per capita GDP figures are
less meaningful.
• Cultural factors and taste. Countries with similar per capita GDPs may
have different preferences for products and services because of
values or tastes
• Existence of trading blocs. Although a country may have a small
population and GDP its presence in a regional trading bloc gives its output
access to a much larger market.
 Uruguay has a small domestic market, but its production has duty-free
access to other countries in MERCOSUR.
Opportunities: Resource Acquisition
 Companies undertake international business to secure resources that are either too
expensive or not readily available in their home countries. reserves. When
 resources are very limited, such as prime areas for building beach resorts, land
owners and governments are likely in a strong bargaining position when ceding
rights to a foreign firm.
 However, even when the resource is limited to a few countries, some offer better
opportunities than others
 When considering cost differences, a particular resource
 may be overriding for specific industries or companies, such as sugar for candy
companies or low-cost water power for aluminium companies.
 Cost Considerations

 company’s total cost is made up of numerous sub costs, many of which are
industry- or company-specific
Costs—especially labour costs—are an important factor in companies’ production
location decisions
 Labour : Although capital intensity is growing in most industries, labour
compensation remains an important cost for most companies. Scanning process
allows examination of such factors as labour market size, labour compensation,
minimum wages, customary and required fringe benefits, education levels, and
unemployment rates in order to compare labour cost, skills, and availability.
 South Africa has been a favourite location for MNEs’ African regional offices
because of available skilled office personnel , more in japan USA France and
Senegal.
 Infrastructure:
 Infrastructure problems add too operating costs.
 Cadbury in Nigeria. Its workers spend extra hours getting to and from work on
congested roads, which decreases their productivity
 Ease of Transportation and Communications
 The need to coordinate product, process, production , and sales
influences location decisions.
 Other factors also affect the efficient flow of goods. One is distance,
which roughly correlates with time and cost of shipments; thus, a
geographically isolated country
 Governmental Incentives and Disincentives

• Government practices may increase or decrease companies’ costs. Most countries

seek foreign investment
• because of the jobs it will create, the competitiveness it will enhance, and the
impact it will have on their trade balance.
• Differences in tax rates are particularly important when deciding where to
produce within a regional trading bloc, inasmuch as companies can serve the
entire region from any country within the bloc
• Countries also differ in corruption and in both legal transparency and enforcement
• Nevertheless, companies appear top refer operating in countries where both
corporate social responsibility and environmental regulation are high, as long as
rules and expectations are transparent
 A Caveat
 The continuous development of new production technologies makes cost
comparisons among countries more difficult.
 With more and more ways to make a product, a company might have to compare
the cost of labour- intensive production in a low-wage country with that of
capital-intensive production in a high-wage country
 Risk

 Any company decision involves weighing opportunity against risk.

 For example, a sales-seeking company may not necessarily go to the country
showing the highest sales potential.
 Nor will an asset-seeking company necessarily go where the assets are cheapest
Factors to Consider in Analyzing Risk

 1. Companies and their managers differ in their perceptions of what is risky, how tolerant
they are of taking risk, the returns they expect, and the portion of their assets they are
wellington put at risk.28
 2. One company’s risk may be another’s opportunity. For example, companies offering
security solutions (e.g., alarm systems, guard services, insurance, insuring. But weapons)
may find their biggest
 sales opportunities where other companies find only operating risks.
 3. Companies may reduce their risks by means other than avoiding locations, such as by all
these options incur costs that decision makers should take into account.
 4. There are trade-offs among risks. Avoiding a country where, say, political risk is high may
leave a company more vulnerable to competitive risk if another one earns good profits there.
And returns are usually higher where risk is higher
Other risk

 Political Risk: Changes in political leaders’ opinions and policies, civil disorder,
and animosity between the host and other countries, particularly the firm’s home
country, maybe politically risky for a company .egg .unalive encountered security
concerned. Marriott had a hotel bombed in Indonesia;
 Analyzing Past Patterns: Predicting risk on the basis of past political occurrences
Is problematic because situations may change for better or worse.
 Analyzing statements by political leaders both in and out of office to pol
determine their private business philosophies Opinions
 Examining Social and Economic Conditions; frosted group will create
instability, strike,
 Foreign Exchange Risk
 Changes in exchange rates or the ability to move funds out of country may also
affect an MNE.
 Exchange-Rate Changes The change in foreign currency value is a two-edged
sword, depending on whether you are going abroad to seek sales or resources
• U.S.companyis doing business in India.
 Mobility of Funds: the ability to get funds out of the country is a factor in country
comparison.
• liquidity preference, investors’ desire for some of their holdings to be in highly
liquid assets on which they are willing to take a lower return
• liability of foreignness :survival rate than local companies
 Competitive Risk:
 The comparison of likely success among countries is largely contingent on
competitors’ actions
 Companies are highly z attracted to countries that Are located nearby.
 • Share the same language.
 • Have conditions similar to those in their home countries.
competitive

 Making Operations Compatible: perceive conditions to be more similar to their

home country
 Geographic Diversification : By operating in diverse localities,
 companies may be able to smooth their sales and profits, which, in turn, gains
them a competitive advantage in raising funds.
 Heading Off Competition: getting a strong foothold in markets before competitors
do
 Following Competitors or Customers: Where there are clusters of competitors
Collecting and Analyzing Data
 Information is needed at all levels of control.
 • Companies should compare the cost of information with its value. Information is
needed at all levels of control.
 Companies should compare the cost of information with its value.
 Clearly, information helps managers improve corporate performance
Problems With Research Results And Data

Information in accuracies result from

 Difficulty in collecting and analyzing data.
 • Purposefully misleading data.
 • Exclusion of nonmarket and
 illegal activity.
 Inaccuracy
1. Governmental resources may limit accurate data collection
2. Governments may purposely publish misleading information
3. Respondents may give false information to data collectors
4. Official data may include only legal and reported market activities.
5. Poor methodology may be used
 External Sources Of Information

 Individualized Reports: specify what information it wants.

 Specialized Studies : forms of business, or specific products.
 Service Companies : wide market of companies, informal opinions.
 Government Agencies
 International Organizations and Agencies
 Trade Associations
Country Comparison Tools
 Grids : Grids are tools that May depict acceptable or unacceptable conditions
,rank countries by important variables.:
 Matrices : With an opportunity-risk matrix, a company can
 Decide on indicators and weigh them
 Evaluate each country on the weighted indicators
Allocating among Locations

Alternative Gradual Commitments:

 Companies may reduce risk
 alternative means of risk-minimization expansion patterns
Geographic Diversification Versus Concentration

 diversification strategy rapid movement, gradually increasing.

 concentration strategy: go to one or a few and build up fast before going to
others.
 Growth Rate in Each Market. Growithrate high- insufficient expand.
 Sales Stability in Each Market”: stable sales and profit
 Competitive Lead Time :long lead time over competitors, it
 Need for Product, Communication, and Distribution Adaptation
 Spill over Effects: awareness of the product, advantages.

 Program Control Requirements

Reinvestment And Harvesting

 evaluate how much effort to allocate

 transfers financial capital and has physical and human capital in place.
 Reinvestment Decisions :A company may have to make new commitments to
maintain competitiveness abroad.
 Harvesting :Companies must decide how to get out of operations if
• They no longer fit the overall strategy.
• There are better alternative opportunities.
 No comparative Decision.: Most companies examine
 proposals one at a time and accept them if they meet minimum-threshold criteria