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INTERNATIONAL BUSINESS

CASE 1

Kodak started selling photographic equipment on Japan 1889 and by the 1930s it had a dominant position in the Japanese market. But after World War II, U.S occupation forces persuaded most U.S companies including Kodak to leave Japan to give the war torn local industry a chance to recover. Kodak was effectively priced out of the market by tariff barriers; over the next 35 years Fuji gained 70% share of the market while Kodak saw its share slip to miserable 5%. During this period Kodak limited much of its activities in Japan.

This situation persisted until early 1980s when Fuji launched an aggressive export drive, attacking Kodak in the north American and European markets. Deciding that a good offence is the best defense, in 1984 and the next six year, Kodak outspent Fuji in Japan by a ratio of more than 3 to 1. It erected mammoth $ 1 million near signs as land marks in many of the Japan’s big cities and also sponsored Sumo wrestling, Judo, and tennis tournaments and even the Japanese team at the 1988 Seoul Olympics. Thus Kodak has put Fuji on defensive, forcing it to divert resources from overseas to defend itself at home. By 1990’s, some of Fuji’s best executives had been pulled back to Tokyo.

All this success, however , was apparently not enough for Kodak. In may 1995, Kodak filed a petition with the US trade office, that accured the Japanese government and Fuji of “Unfair trading practices”. According to the petition, the Japanese government helped to create a ‘profile sanctuary’ for Fuji in Japan by systematically denying Kodak access to Japanese distribution channels for consumer film and paper. Kodak claims Fuji has effectively shut Kodak products out of four distributors that have a 70% share of the photo distribution market. Fuji has an equity position in two of the distributors, gives large year –end relates and cash payments to all four distributors as a reward for their loyalty to Fuji, and owns stakes in the banks that finance them. Kodak also claims that Fuji uses similar tactics to control 430 wholesale photo furnishing labs in Japan to which it is the exclusive supplier. Moreover Kodak’s petition claims that the Japanese government has actively encourages these practices.

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But Fuji a similar counter arguments relating to Kodak in U.S. and states bluntly that Kodak’s charges are a clear case of the pot calling the kettle back.

(a) What was the critical catalyst that led Kodak to start taking the Japanese market seriously?

(b) From the evidence given in the case do you think Kodak’s charges of unfair trading practices against Fuji are valid? Support your answer.

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Answers

(a) What was the critical catalyst that led Kodak to start taking the Japanese Market

Seriously?

Till 1980s, due to tariff barriers imposed by Japan after the Second World War, Fuji had covered

70% of the market in Japan and started their exports in countries including USA. In order to

avoid stiff competition from Fuji, Kodak has started taking Japanese Market seriously. Also the

product in which they were dealing from past 50 years became outdated. So Kodak has also

started planning to invent new product.

The following are the also reasons for Kodak to start taking Japanese Market seriously

• Decreased Brand Royalty in the early 1970s. Growth rate slowed by 2-4% for Kodak

• 1980 – Sony Launched Mavica, a filmless electronic camera which would display

pictures on TV screen

• Kodak reduced price of its films

• In 1980s, Japanese players developed 35mm autofocus cameras. In response Kodak

launches small disk cameras, which uses film disks instead of film rolls

No competitors even had a double-digit percentage of the amateur photo market and many

consumers automatically equated Kodak when they thought of film. Competitors were left to

fight for the scraps off Kodak’s table and the pickings were slim. Then, beginning in 1984, the

general photographic market and particularly Kodak has noticed a subtle change in consumer

attitude. Kodak still retains its enviable and commanding share of the market, but the market-

savvy consumers of the new millennium now have more choices and do not automatically and

faithfully equate film with Kodak alone. Three major functions have eroded consumer brand

loyalty and allegiance to Kodak these past 15 years.

First, American consumers are more accepting of foreign-based products, though they enjoy

preaching the virtues of “Buying American.” They celebrate their patriotic freedom by waving the

American flag at picnics on the Fourth of July. However, it is not uncommon for some guests to

drive to the Independence Day celebration in a Mercedes Benz (German) automobile, while

listening to music on a Sony (Japanese) radio/disc player. In addition, while waiting for their all-

American burgers to cook, many Americans are reaching into the ice chest to find Bass

(English) Ale, along with Perrier(French) bottled water.A January1999 study showed that the

U.S. recorded its single largest trade deficit month ever at $17 Billion dollars.

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Imports outweighed exports. Unless protectionist legislation is initiated and passed, U.S.

consumers will continue to purchase what they perceive as the best deal (be it domestic or

foreign) for their money. Second, consumers have found a bona fide competitor to Kodak in the

name of Fujifilm. Clearly, Fujifilm has emerged from a minor player in the early 1980’s to take a

solid number two position within the US market and has caught the attention, as well as the

wrath, of Kodak. Third, the landscape within retail America has changed dramatically within the

past five years. The success of Wal-Mart has taught retailers that diversification, scrambled

marketing and “one-stop” shopping are important to consumers. As consolidation sweeps the

nation in mass merchants, food and drug accounts, retailers realize they must maintain their

competitive advantage or close shop. To survive, they are squeezing manufacturers for quality

products at competitive prices to capture profit margins for expansion within the industry. This

environment has provided an opportunity for Fujifilm to prosper in an otherwise stable and

mature photographic industry. Today an all-out war has emerged. While Kodak and Fuji fight for

market share, the real winner and benefactor is the consumer. “Retailers and consumers will be

the big winners in this struggle for market share among the big players,” says one retailer. “We

are going to get more incentives to sell merchandise and the consumer is going to see a lot

more new products at lower prices.”

By the late 1980s, Fuji Photo Film Co. of Japan had come out of seemingly nowhere to take

over huge portions of Kodak's market share in film. Kodak management began thinking about

photography as a fading business – and decided to diversify by buying a big pharmaceutical

company. Only a few years later, Kodak abandoned the drug company and, finally, began to

invest in the digital imaging products that were displacing filmed X-rays in medical practice. And

it began to push development of its 1976 invention, the digital camera.

(b) From the evidence given in the case do you think Kodak’s charges of unfair trading

practices against Fuji are valid? Support your answer

Kodak’s charges of unfair trading practice was not only a company’s petition but it was US

government support on that steep decision of imposing charges on Japanese company “Fuji”

and Japanese government.

The bilateral trading relationship between the United States and Japan prevails as one

of the most important in the world today. As such, frequent trade disputes, not surprisingly,

arise between the two economic superpowers.' The latest battle pits Eastman Kodak

Company ("Kodak") against Fuji Photo Film Co., Ltd . ("Fuji"). The stakes are substantial.

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Kodak alleges $5.6 billion in lost profits and seeks fair access to the Japanese film

market valued at $13.7 billion. In such trade disputes, the use by the United States of

Section 301 of the Trade Act of 1974("Section 301"),' sometimes called the "nuclear

weapon" of the trade world, often proves controversial. Section 301 authorizes the United

States Trade Representative ("USTR") to take action against any "act, policy or practice"

of a foreign country that is "inconsistent with" or "denies benefits" to the United States

under international trade agreements, or that is "unjustifiable and burdens or restricts

United States commerce." Section 301 also allows the USTR to take action where an

act, policy or practice of a foreign country is "unreasonable" and burdens or restricts

United States commerce." The United States exported over half a trillion dollars worth of

goods and service in 1993.' The government expects that number to climb to $1.2 trillion by

the year 2000. Consequently, great political pressure exists to use Section 301 to afford

U.S. industries fair and meaningful access to foreign markets presently laden with trade

barriers." Section 301 persists as a resonating voice in trade diplomacy. Critics often proclaim

it a rogue instrument when it is used to address the acts, practices and policies of

foreign governments which Congress deems "unreasonable," even if they do not violate

United States' rights under international trade agreements.

Section 301, enacted by Congress with the intent to open foreign markets to United

States exports, was pursued by exceptionally aggressive means, a product of the

egregious trade imbalance and frustration at foreign unfairness, real and perceived. And

its most important single target was Japan. The administration worked, for policy and political

reasons, to spread the pain among countries, but there was no doubt which country

Congress had most in mind.

Analysts deemed Section 301 a matter of "export politics." This law starkly contrasts with

almost all other United States trade remedies, which are designed to protect United

States markets from increasing imports and unfair foreign competition. One author labeled

the policy rationale forming the foundation of Section 301 "aggressive unilateralism." A

former Vice Minister of International Trade in Japan, in referring to Section 301,

commented that "the U.S. uses its own criteria to determine unfairness, prosecutes the

case itself, and hands down the sentence. Notwithstanding this perception of the United

States as prosecutor, judge and executioner, it should be noted that Japan wields its

own version of Section 301. The Japanese counterpart to the U.S. law provides the

Japanese Government with the authority to impose additional duties on products from a

foreign country that discriminates against Japanese goods, shipping, or airlines.

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Case 2

Two Senior executives of world’s largest firms with extensive holdings outside the home country speak. Company A : “We are a multinational firm. We distribute our products in about 100 countries. We manufacture in over 17 countries and do research and development in three countries. We look at all new investment projects both domestic and overseas using exactly the same criteria”.

The execution from company A continues, “ of course the most of the key ports in our subsidiaries are held by home country nationals. Whenever replacements for these men are sought, it is the practice, if not the policy, to look next to you at the lead office and pick some one (usually a home country national) you know and trust”. Company B : “ We are multinational firm. Our product division executives have worldwide profit responsibility. As our organizational chart shows, the united states is just one region on a par with Europe, Latin America, Africa etc, in each division”.

The executive from Company B goes on to explain, “the worldwide Product division concept is rather difficult to implement. The senior executives in charge of this divisions have little overseas experience. They have been promoted from domestic ports and tend to view foreign consumers needs as really basically the same as ours. Also, product division executives tend to focus on domestic market, because it generates more revenue than foreign market. The rewards are for global performance, but strategy is to focus on domestic. Most of the senior executives simply do not understand what happens overseas and really do not trust foreign executives, even those in key portions?

Questions :

1 Which company is truly multinational? Why?

2 List three differences between Company, Multi National Company and Trans Multi National Company?

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Answer:

(a) Which company is truly multinational? Why?

Company B is truly multinational firm because when clear managerial coordination and control

together with some element of ownership link legally distinct businesses operating in several

countries, the result is a multinational corporation (MNC). MNCs became common only from

about 1890. Generally headquartered in developed industrial economies, they developed partly

in response to market forces and partly in reaction to rising barriers to international trade and

levels of state intervention. These forced firms, if they were to retain their share of a national

market, to manufacture locally where they had formerly exported.

Multinationals have been held to be subversive of states, or even of the state system. This is

partly because of a few infamous examples of corporate meddling in the politics of host states,

but much more because of their ability to move capital across frontiers, and to manipulate the

transfer prices at which their component firms exchange goods and services internationally in

order to minimize tax liability. Multinationals have also been criticized for undermining national

cultures through intensive use of advertising to achieve substitutions of synthetic and

standardized goods for natural and distinctively local alternatives.

(b) List three differences between company, multi national company and trans multi national

company?

• The GLOBAL company, exemplified by such Japanese firms as Kao and NEC,

centralizes key functions – including marketing and finance. Headquarters produces the

new technology and disseminates it to subsidiaries. Cost advantages are achieved

through economies of scale and global-scale operations. The need for efficiency and

economies of scale means that products are developed that exploit needs felt across the

range of countries. Specific local needs tend to be ignored. Headquarters of

INTERNATIONAL company retains considerable control over the subsidiary’s

management systems and marketing policy, but less so than in the global company.

Products and technologies are developed for the home market, extended to other

countries with similar market characteristics, then diffused elsewhere, and the

developmental sequence is decided on the basis of managing the product lifecycle as

efficiently and flexibility as possible. The TRANSNATIONAL Company evolved in the

1980s in response to environmental forces and simultaneous demands for global

efficiency, national responsiveness, and worldwide learning. The transnational model

combines features of multinational, global, and international models. A product is

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designed to be globally competitive, and is differentiated and adapted by local

subsidiaries to meet local market demands. Whereas the international company

originates the product in the headquarters country and then transfers it to the subsidiary,

the transnational might reverse this process. Resources, including technology and

managerial talent, might be distributed among subsidiaries and integrated between them

through strong interdependencies.

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Case 3

Strategic R&D by TNCs in developing countries TNCs have had long units in developing host countries for adapting products and processes to the local conditions, and in a few cases, to products for local markets. Since the min-1980s, however, they have also started locating strategic R & D centres in some developing countries, for developing generic technologies and products for regional or global markets. The main incentives for this are : (a) access to highly qualified scientists as shortages of research personnel emerge in certain fields in industrialised countries, (b) Cost differentials in research salaries between developing and industrialised countries, and (c) rationalisation of operations, assigning particular affiliates the responsibility for developing, manufacturing, and marketing particular products worldwide. Th new trends are more visible in industries dealing with new technologies, such as microelectronics, biotechnology, and new materials. In these technologies, the location of R & D can be geographically de-linked more easily from the location of manufacturing. It is also possible to separate R & D in core activities from that in non-core activities. Consequently, countries like India, Israel, Singapore, Malaysia or Brazil serve TNCs as good locations for strategic R & D.

For instance, Sony Corporation of Japan has around nine R & D units in Asian developing countries. It has three units in Singapore conducting R & D on core components such as optical data shortage devices, integrated chip design for audio products and CD-ROM drives, and multimedia and microchip software. It has three units in Malaysia working on video design, derivative models and circuit blocks for new TV chases, radio cassettes, discman and hi-fi receiver designs. It has one unit in Republic of Korea focusing on the design of compact discs, radio cassettes, tape recorders, and car stereos. It has one in Taiwan designing and developing video tape-recorders, minidisk players, video CDs, and duplicators. Finally, it has one unit in Indonesia focusing on the design of audio products.

Such units often work in collaboration with science and technology institutes in the host country. For instance, Daimler Benz has established such a unit in Bangalore, India, in collaboration with the Indian Institute of Science to work on projects related to its vehicles and avionics business. Current work includes interface design of avionics landing systems and smart GPS sensors for use by the group’s business worldwide.

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Source: World Investment Report 1999.

Questions: (a) Explain why MNCs have located R & D centres in developing countries? (b) Mention the areas where R & D activities can easily be decentralised.

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Answer

(a) Explain why MNC have located R & D centers in developing countries?

The following are the points because of which MNC have started establishing R & D centers

in the developing countries

• Access to highly qualified scientists as shortage of research personnel emerge in

certain fields in industrialized countries.

• Cost differentials in research salaries between developing and industrialized

countries

• Rationalization of operations, assigning particular affiliates the responsibility for

developing , manufacturing and marketing particular products worldwide

• TNCs, and the FDI they bring, have the potential to “generate employment, raise

productivity, transfer skills and technology, enhance exports and contribute to the

long-term economic development of developing countries

• They infuse money into an economy where it can supplement or free up government

revenues and/or development assistance funds.

• TNCs also bolster the private sectors of the countries where they operate, a process

deemed important to overall economic growth and economic health.

(b) Mention areas where R & D activities can be decentralized?

The first context is characterized by the fact that R&D activities work along with other

functions within the subsidiary in order to develop a particular product which would be

brought on to the market by the subsidiary. In order to better address local needs, the R&D

laboratory uses company-level knowledge and develops its own manufactured goods.

The second context reflects a more contemporary view, implying that laboratories shape

the company’s core knowledge. The way foreign R&D center may achieve such a task is by

reaping foreign comparative advantages (technological heritage, scientific competences…)

and applying the latter in a company-wide strategic research. This can be done by

developing key capabilities and specialize in a specific field which will make the lab essential

for the company’s growth. Decentralized R&D labs will specialize in an area of competence

reflecting the host-country knowledge legacy, and eventually enhance the enrichment of

group-wide technology. The key challenge in managing decentralized R&D centers is to

maintain and ensure a global coherence and focus of research.

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Case – 4

VK ltd a multi product company, furnishes you the following data relating to the year 2000.

First half of the year Second half of the year

Sales Rs. 45000 Rs. 50000

Total Cost Rs. 40000 Rs. 43000

Assuming that there is no change in prices and variable cost and that the fixed expenses are incurred equally in the two half years periods, calculate for the year 2000

1. The Profit Volume ration

2. Fixed Expenses

3. Break-Even Sales

4. Percentage of margin of safety.  

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Answer

Let

S = selling price,

V = Variable cost,

F = Fixed cost ,

x1=units sold in first year,

x2=units sold in second half year

Hence equation formation would be

S *x1 = 45000____________(1)

S*x2 = 50000 ____________(2)

F/2 + V*x1 = 40000_______(3)

F/2 +V*x2 = 43000_______(4)

Subtracting (1) from (2) ……… S(x1-x2) = -5000___________(5)

Subtracting (3) from (4)……….V(x1-x2) = -3000____________(6)

Dividing (6) by (5), V/S=3/5____________(7)

1. Profit Volume Ratio Profit Volume Ratio = (S-V)/S = 1-3/5=2/5=0.4

2. Fixed Expenses

S*x1=F/2+V*x1 (S-V)* x1=F/2 (S-V)*x1/S = F/2S 4/5*S*x1=F Putting value of S*x1 from equation (1)…….we get F=36000

Hence Fixed expenses = Rs. 36000

3. Break Even Sales Break Even Sales = Fixed Expense P/V Ratio

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= 36000/0.4 = 90000 Hence, Break Even Sales = Rs. 90000

4. Percentage of Margin of Safety Percentage of Margin of Safety = Actual Sales – Breakeven Sales * 100

Actual Sales = 95000 – 90000 *100 90000 = 5.263%