Showing posts with label Marketing Notes. Show all posts
Showing posts with label Marketing Notes. Show all posts
Sunday, November 22, 2009
Tuesday, November 17, 2009
Free Trade Zone
We have to look back more than two thousand years ago, to understand the concept of Free Zone. When the Phoenicians in the cities of Carthage and Tyre, gave fiscal profits on the goods, which had not been sold in the market or had been returned to their point of origin.
In the Middle Ages, Livorno and Marseilles were declared free ports. Lately, Hamburg and Trieste operated as free ports. Hamburg, one of the first operating, had and still has a special importance. Their work made that political and economic trade difference, which dominated the Hanseatic League in that region during the XIX century. Concerning Trieste, its Free Zone dominated the whole trade of the Austro-Hungarian Empire for many years.
In the last decades, Free Trade Zones have been the tools through which many countries overcame their economic crises. Using Free Zones they were able to create new employment and to reduce poverty, without being obliged to wait for many years for the whole economy to be reformed. The list would be too long; we just name two countries: Taiwan and South Korea.
The Free Trade Zones have largely contributed to the fact that both countries have reached an important level of economic development. This has occurred, despite the fact that neither country has any significant amount of natural resources.
HOW TO DEFINE A FREE ZONE
A Free Zone is a portion of clearly defined and isolated land or setting, with a special fiscal and customs status of extra-territoriality.
The main advantages that a Free Zone enjoys, both fiscal and physical, include:
• The infrastructure
• The industrial processes
• The maquila process
• The trade of products and services
• The capital
• The natural or juridical people operating in there
Download full notes below -
In the Middle Ages, Livorno and Marseilles were declared free ports. Lately, Hamburg and Trieste operated as free ports. Hamburg, one of the first operating, had and still has a special importance. Their work made that political and economic trade difference, which dominated the Hanseatic League in that region during the XIX century. Concerning Trieste, its Free Zone dominated the whole trade of the Austro-Hungarian Empire for many years.
In the last decades, Free Trade Zones have been the tools through which many countries overcame their economic crises. Using Free Zones they were able to create new employment and to reduce poverty, without being obliged to wait for many years for the whole economy to be reformed. The list would be too long; we just name two countries: Taiwan and South Korea.
The Free Trade Zones have largely contributed to the fact that both countries have reached an important level of economic development. This has occurred, despite the fact that neither country has any significant amount of natural resources.
HOW TO DEFINE A FREE ZONE
A Free Zone is a portion of clearly defined and isolated land or setting, with a special fiscal and customs status of extra-territoriality.
The main advantages that a Free Zone enjoys, both fiscal and physical, include:
• The infrastructure
• The industrial processes
• The maquila process
• The trade of products and services
• The capital
• The natural or juridical people operating in there
Download full notes below -
Monday, November 16, 2009
Corporate Social Responsibility
Society gets upset when the social cost of or for that matter any business exceeds the social benefit derived from the business. Over the years since the dawn of industrial revolution and particularly after the 1950s, the activities of the corporations have been increasingly affecting the society by way of environmental pollution which include air, water and sound, ozone depletion and overcrowding on account of unplanned industrialization society expect corporation to limit activities which produce harmful effects and correct the problem that are a result of their previous actions. Social reaction to mindless industrial activity gave rise to the concept of corporate social responsibility. Over the years, it has become obvious that the desire to make a fortune must be executed within the laws of the society. During the 1960s, social activists and environmental groups campaigned for a broader notion of corporate social responsibility. The clash between the economic operation of businesses and the changing social values brought questions of social responsibility to the fore-front. The economic performance of business and the social aspects of business behavior were found to be divergent. In order to enforce corporate social responsibility, in the United State government bodies such as the Protection Agency, the Equal Employment Opportunity Commission, the Occupational Safety and Health Administration, and the Consumer Product Safety Commission were set-up. These bodies saw to it that national public policy recognized the environment, employees, and consumer to be significant and legitimate stakeholders of business. Corporate should help solve some of the social problem because businesses are influenced by the society through government policy and business thrive or starve along with the society.
DEFINITIONS OF CORPORATE SOCIAL RESPONSIBILITY:
It refers to corporate actions that protect and improve the welfare of society along with the corporation’s own interests. According to Rogene Bucholz, “a private corporation has a social responsibility to society that goes beyond the production of goods and services at a profit and that a corporation has a broader constituency to serve than that of stockholders alone.”
SOCIAL AUDIT :–
A social audit identifies social issues in which a corporation should be involved, examine what an organization is actually doing with regard to social issues and determine the performance of the organization in the realisation of social work. Social audit is a statutory requirement in European countries like Germany, France, Spain & Norway. However, it is voluntary in the United States. The measurement of social performance of corporation was first attempted by Theodore Kreps. However, Clark Abt used the term ‘social audit’ for the first time in his work ‘Audit for Management’. Any project or programme implemented for generating social benefits can be subjected to social audit. The following social are the benefits of social audit:-
1. It helps to ascertain the usefulness of the corporation to the community with reference to community’s needs & requirements.
2. It helps to inform & convince opinion makers and influential institutions such as consumer forums, financial institutions, non-government organizations, and the government itself, about the social involvement of the corporation.
3. It helps to establish good corporate image and identify & generate goodwill for the corporation.
4. It helps to make a cooperative study of the efficacy of social work with that of non-government organizations and social or extension work undertaken by the government, universities & colleges.
5. It has huge publicity value and implicit or qualitative benefits to the corporation.
Corporations should strive for higher levels of social responsibility and make their presence felt to all concerned at least in the area surrounding their locations. A code of social service ethics should be developed & implemented by all well-meaning corporations. Corporations should also have an interface with other socially involved institutions such as the NGO’s, universities, colleges & extension departments of the government and financial institutions. A helping hand by the corporates in the event of natural calamities like earthquakes & floods and in drought or drought like situations would only integrate corporations with the society in which it operates. On going corporate social work can be done in the areas of adult literacy, education, health care, wildlife & environmental conservation.
MANAGER’S ROLE IN SOCIAL RESPONSIBILITY:
The manager is the primary link between the corporation and the society. Managerial decisions must reflect the values and expectations of all the stakeholders of the society. Managers must interact with a number of clients both within and without the corporation. Every client or group of people approaches a situation with different values, perceptions & expectation and hence managers must be flexible in their approach. The traditional role of the manager was limited to the internal organization of the corporation. Now with the widespread acceptance of the concept of corporate social responsibility, the role of the manager has increased in its scope and dimension. Now managers must ensure that the corporation works in harmony with the environment and with the society’s expectations. Managers must recognize the social and economic dimension of business operations. Managers must treat employees with respect and provide a better quality work of life. The manager must adopt a more participative approach with regard to employee needs. Managers are expert to set goals which are in harmony with the personal goals of the employees. Thus, participation of all concerned in pursuit of organizational goals in the new management credo and while this is being done each one of the employer is given the freedom to decide upon his way of achieving the organizational goals. Mangers are also expected to be effective in social relationships that are external to the organization. The managers are must be conversant with micro and macro sociological aspects of the society. In a micro-social system i.e. the organization, the manager deals with others from a position of authority while in the macro-social system which is external, the managers must learn to deal with equality. The managers must be equipped with problem solving abilities to be successful in the macro-social system.
ARGUEMENTS IN FAVOUR OF SOCIAL RESPONSIBILITIES :-
The arguments made to emphasize the social responsibility of business deals with the mutual benefits that both the society and the business enterprise are likely to enjoy as a result of involvement of businesses in social activities. There are implicit economic returns for explicit social responsiveness by the firms. The following five arguments in favour of social responsibility made to emphasize the social responsibility on business:-
1. An important argument is that businesses exist because they satisfy important needs of society and therefore businesses should change along with the changes in society. They should both cater to the needs of the society and also create new needs. Thus, while being responsive, businesses should also be pro-active.
2. The second argument made to emphasize social responsibility is that if the results are beneficial to both the society and business, social responsiveness should be encouraged. On account of social responsiveness, businesses may benefit in terms of employer loyalty, improved QWL and increased public support for the operations.
3. Thirdly, Business can avoid additional government regulation, which curtails business freedom, adds economic cost and reduce flexibility in decision making.
4. Fourthly, a socially responsive business organization will have a good public image.
5. Lastly, it is the moral obligation of business to solve social problems and help both the society & the government.
Arguments against corporate social responsibility:-
The most important economic argument made against corporate social responsibility is that of the economic doctrine of profit maximization. When business maximizes profit by improving efficiency and reducing the cost, it is the society which benefits in the ultimate analysis. Thus, the society will benefit much more if business is left to do its own business. The topmost priority of business must be economic efficiency and mixing up the economic function with the social function will only reduce the economic efficiency of business for there is an opportunity cost involved in social involvement and the return on social involvement cannot be cardinally measured or explicitly accounted. Hence, economic criteria can only be the criteria to measure the success of business.
MILTON RRIEDMAN says, if business followed a socially responsive course, their actions would raise the price for customers or reduce the wages of employees and hence the only responsibility of business is to maximize profit. Business person should therefore concentrate on shareholders demands and expectation. According to Friedman, the four basic obligations of business to society are:
(1) Obey the law,
(2) Provide goods and services,
(3) Employ resources efficiently and
(4) Pay resources owners fairly in accordance with the market.
Following Friedman’s argument, it can be concluded that the result of social involvement will be a net economic loss to the business. Another argument made against social responsibility is that as a result of social involvement, business will become weak and defunct. A more charitable view on corporate social responsibilities is that business could spend small amount of its resources in social obligations and that business cannot afford major commitments for social involvement unless the cost is born by another institutions. Excessive social involvement would increase the economics costs and reduce the competitiveness of business. Some thinkers vies that business is a powerful organization and social involvement of business will only enhance the power of business which is not a very desirable idea. Further, business people are found wanting in skills and perceptions to effectively deal with social issues.
Business has no direct responsibility to both employees and society and here there is no valid reason for social involvement of business. Business should therefore keep away from social involvement and pursue the sole goal of profit maximization until society develops rules that establish social accountability of business. Finally, it is argued that social involvement of business lacks support from all quarters of the society. Social involvement of business would encourage stockholders dissent and would adversely affect the pursuit of economic objectives.
DEFINITIONS OF CORPORATE SOCIAL RESPONSIBILITY:
It refers to corporate actions that protect and improve the welfare of society along with the corporation’s own interests. According to Rogene Bucholz, “a private corporation has a social responsibility to society that goes beyond the production of goods and services at a profit and that a corporation has a broader constituency to serve than that of stockholders alone.”
SOCIAL AUDIT :–
A social audit identifies social issues in which a corporation should be involved, examine what an organization is actually doing with regard to social issues and determine the performance of the organization in the realisation of social work. Social audit is a statutory requirement in European countries like Germany, France, Spain & Norway. However, it is voluntary in the United States. The measurement of social performance of corporation was first attempted by Theodore Kreps. However, Clark Abt used the term ‘social audit’ for the first time in his work ‘Audit for Management’. Any project or programme implemented for generating social benefits can be subjected to social audit. The following social are the benefits of social audit:-
1. It helps to ascertain the usefulness of the corporation to the community with reference to community’s needs & requirements.
2. It helps to inform & convince opinion makers and influential institutions such as consumer forums, financial institutions, non-government organizations, and the government itself, about the social involvement of the corporation.
3. It helps to establish good corporate image and identify & generate goodwill for the corporation.
4. It helps to make a cooperative study of the efficacy of social work with that of non-government organizations and social or extension work undertaken by the government, universities & colleges.
5. It has huge publicity value and implicit or qualitative benefits to the corporation.
Corporations should strive for higher levels of social responsibility and make their presence felt to all concerned at least in the area surrounding their locations. A code of social service ethics should be developed & implemented by all well-meaning corporations. Corporations should also have an interface with other socially involved institutions such as the NGO’s, universities, colleges & extension departments of the government and financial institutions. A helping hand by the corporates in the event of natural calamities like earthquakes & floods and in drought or drought like situations would only integrate corporations with the society in which it operates. On going corporate social work can be done in the areas of adult literacy, education, health care, wildlife & environmental conservation.
MANAGER’S ROLE IN SOCIAL RESPONSIBILITY:
The manager is the primary link between the corporation and the society. Managerial decisions must reflect the values and expectations of all the stakeholders of the society. Managers must interact with a number of clients both within and without the corporation. Every client or group of people approaches a situation with different values, perceptions & expectation and hence managers must be flexible in their approach. The traditional role of the manager was limited to the internal organization of the corporation. Now with the widespread acceptance of the concept of corporate social responsibility, the role of the manager has increased in its scope and dimension. Now managers must ensure that the corporation works in harmony with the environment and with the society’s expectations. Managers must recognize the social and economic dimension of business operations. Managers must treat employees with respect and provide a better quality work of life. The manager must adopt a more participative approach with regard to employee needs. Managers are expert to set goals which are in harmony with the personal goals of the employees. Thus, participation of all concerned in pursuit of organizational goals in the new management credo and while this is being done each one of the employer is given the freedom to decide upon his way of achieving the organizational goals. Mangers are also expected to be effective in social relationships that are external to the organization. The managers are must be conversant with micro and macro sociological aspects of the society. In a micro-social system i.e. the organization, the manager deals with others from a position of authority while in the macro-social system which is external, the managers must learn to deal with equality. The managers must be equipped with problem solving abilities to be successful in the macro-social system.
ARGUEMENTS IN FAVOUR OF SOCIAL RESPONSIBILITIES :-
The arguments made to emphasize the social responsibility of business deals with the mutual benefits that both the society and the business enterprise are likely to enjoy as a result of involvement of businesses in social activities. There are implicit economic returns for explicit social responsiveness by the firms. The following five arguments in favour of social responsibility made to emphasize the social responsibility on business:-
1. An important argument is that businesses exist because they satisfy important needs of society and therefore businesses should change along with the changes in society. They should both cater to the needs of the society and also create new needs. Thus, while being responsive, businesses should also be pro-active.
2. The second argument made to emphasize social responsibility is that if the results are beneficial to both the society and business, social responsiveness should be encouraged. On account of social responsiveness, businesses may benefit in terms of employer loyalty, improved QWL and increased public support for the operations.
3. Thirdly, Business can avoid additional government regulation, which curtails business freedom, adds economic cost and reduce flexibility in decision making.
4. Fourthly, a socially responsive business organization will have a good public image.
5. Lastly, it is the moral obligation of business to solve social problems and help both the society & the government.
Arguments against corporate social responsibility:-
The most important economic argument made against corporate social responsibility is that of the economic doctrine of profit maximization. When business maximizes profit by improving efficiency and reducing the cost, it is the society which benefits in the ultimate analysis. Thus, the society will benefit much more if business is left to do its own business. The topmost priority of business must be economic efficiency and mixing up the economic function with the social function will only reduce the economic efficiency of business for there is an opportunity cost involved in social involvement and the return on social involvement cannot be cardinally measured or explicitly accounted. Hence, economic criteria can only be the criteria to measure the success of business.
MILTON RRIEDMAN says, if business followed a socially responsive course, their actions would raise the price for customers or reduce the wages of employees and hence the only responsibility of business is to maximize profit. Business person should therefore concentrate on shareholders demands and expectation. According to Friedman, the four basic obligations of business to society are:
(1) Obey the law,
(2) Provide goods and services,
(3) Employ resources efficiently and
(4) Pay resources owners fairly in accordance with the market.
Following Friedman’s argument, it can be concluded that the result of social involvement will be a net economic loss to the business. Another argument made against social responsibility is that as a result of social involvement, business will become weak and defunct. A more charitable view on corporate social responsibilities is that business could spend small amount of its resources in social obligations and that business cannot afford major commitments for social involvement unless the cost is born by another institutions. Excessive social involvement would increase the economics costs and reduce the competitiveness of business. Some thinkers vies that business is a powerful organization and social involvement of business will only enhance the power of business which is not a very desirable idea. Further, business people are found wanting in skills and perceptions to effectively deal with social issues.
Business has no direct responsibility to both employees and society and here there is no valid reason for social involvement of business. Business should therefore keep away from social involvement and pursue the sole goal of profit maximization until society develops rules that establish social accountability of business. Finally, it is argued that social involvement of business lacks support from all quarters of the society. Social involvement of business would encourage stockholders dissent and would adversely affect the pursuit of economic objectives.
Political & Social Environment
A] Examine the various issues that needs to be considered by an international business organization while studying the political environment of a country.
Answer - The International Marketing activities take place within the political environment of national political institutions such as the government, political executive, legislative and the judiciary.
Any company doing business overseas should Carefully study the political environment of he country it intends to operate and analyze issues such as the attitude of the political party in power toward
(a) Sovereignty,
(b) Political Risk,
(c) Taxes,
(d) Threat of Equity dilution and
(e) Expropriation.
Sovereignty:
The sovereign political power of a country in a command economy may determine every aspect of economic life of the people. In contrast, in a market economy, the government may only play the role of a facilitator and a regulator. However, after the fall of the Soviet Union, the command economics around the world have progressed towards a market oriented system. Eastern European countries, countries in Central America, and most importantly, India and China have also adopted the free market system. With globalization and economic integration, political sovereignty of individual nation states is on the wane. However, erosion of political sovereignty is not without a quid pro quo. There are definite economic advantages in forging a regional economic union as exemplified in cases such as the European Union, NAFT A, ASEAN and others.
Political Risk:
There is always a political risk involved in making investments both within and without the country. The element of risk and its severity is relatively high in foreign countries. More objectively, the extent of political risk depends upon the political stability of the host country. An unstable country is fraught with investment risks. A country needs to be stable both internally and externally. Frequent changes in the government and attendant changes in the economic policy of the government will increase the element of uncertainty and adversely effect upon a company's ability to operate effectively in a foreign country. Investments in highly destabilized countries like Afghanistan and Iraq may be very attractive economically speaking but the political risks involved are overwhelming. Political instability is therefore a great .deterrent to foreign investment. In order to justify investment in a foreign country, risk assessment should be undertaken on a regular basis and investments should be made only when opportunities to make profits are much greater than the risks involved.
Taxes:
A company which is geographically diversified needs to take care of the tax laws of the countries in which it operates. Companies, generally minimizes their tax liability by shifting the location of their income. One method of reducing tax liability is called earnings stripping. Foreign companies reduce earnings by' making loans to their affiliates in a country rather than making direct foreign investment. The subsidiary company which takes the loan can deduct the interest it pays on such loans and reduce its tax burden. There is an absence of international laws to govern the levy of taxes on companies that are into international business. In order to provide fair treatment, governments in many countries have negotiated bilateral tax treaties to provide tax credits for taxes paid abroad. Generally foreign' companies are taxed by the host country up to the level imposed in the home country.
Equity Stripping and Dilution of Control:
In less developed countries, there is a general tendency to exert political pressure for governmental control of foreign companies. Host-nation governments may attempt to control ownership of foreign-owned companies operating in their Countries. For instance, foreign equity participation in industries such as insurance is limited to 74 percent in India and as a result, a foreign insurance company must team up with a local company to do insurance business in India. In industries where, the government wants to keep the ownership in the hands of Indian companies, foreign equity participation is less than fifty percent. The threat of equity dilution has forced companies to operate in host countries through joint ventures and strategic alliances.
Expropriation:
Expropriation is the ultimate threat that a government can pose toward a foreign company. Expropriation refers to governmental action to dispossess a company investor. Generally, compensation is provided to foreign investors. However, quite often, the compensation is not prompt, adequate and effective. If there is no compensation then the act of expropriation would be termed as confiscation. When severe limitations are imposed the activities of a foreign company, it is termed as creeping expropriation. Such restriction may include limitations on repatriation of profits, dividends, royalties, local content etc, quotas for hiring local nationals, price controls etc. All these restrictions and limitations adversely affects the profitability of foreign investment. Discriminating tariffs and non-tariff barriers, discriminating laws on patents and trademarks may also limit market entry of certain consumer and industrial goods manufacturing foreign firms. When governments expropriate foreign property, there are limitations on actions to reclaim the property. For instance, according to the United States act of State doctrine, if the government of a foreign State is involved in a specific act, the US court will not get involved. In such a situation, expropriated companies representatives may seek redressal through arbitration at the World Bank Investment Dispute Settlement Center. It is safe to buy expropriation insurance than to seek redressal through World Bank mechanism. In 1970 and 1971; some foreign copper companies in Chile resisted government efforts to employ local nationals in the managerial cadre of the companies. Such companies were expropriated by the Chilean government and companies which obliged were allowed to operate under joint management.
B] Write Short Note On Monopoly and Restrictive Trade Practices
Answer -
Monopoly and Restrictive Trade Practices:
MRTP laws are enacted to fight restrictive business practices and help foster competition. In the United States, anti-trust laws are designed to encourage free competition by limiting the concentration of economic power in the hands of few. The Sherman Act of 18~O prohibits certain restrictive business practices like fixing prices, limiting production, allocating markets and other anti-competitive practices.
The law applies to foreign companies conducting business in the US and extends to the activities of US companies operating overseas if the company conduct is considered to have an effect on US commerce contrary to law. The European commission prohibits agreements and practices that prevent, restrict and distort competition.
In India, the Monopolies and Restrictive Trade Practices Act was passed in the year 1970 under which the MRTP commission was set¬up to investigate the effects of restrictive trade practices on public interest and recommend suitable corrective action.
C] Short Note on Licensing and Trade Screts
Answer -
Licensing and Trade Secrets: .
Licensing is a contractual agreement in which a licensor allows a licensee to use patents, trademarks, trade secrets, technology and other non-material assets in return for royalty payments or other forms of compensation. The duration of the licensing agreement and the amount of royalties a company can receive is commercially negotiated between the two parties i.e., the licensor and the licensee. There are no governmental restrictions on royalty remittances abroad. However, in many countries these elements of licensing are regulated by the government.
Important areas of concern in licensing are:
1] Analysis of assets offered by a firm for license,
2] Pricing of the assets,
3] Whether to grant only the right to make the product or to grant the right to use and sell the product, and
4] The right to sub-license.
Licensing is fraught with danger because it has the potential to create a competitor, if there is none or increase the number of competitors, if there is already one or more. Hence, licensors should be careful enough to protect their competitive advantage and to ensure a sustainable
competitive advantage, the only price the licensor should be willing to pay is in the form of continuous innovation. Else, the licensor may become history.
Trade secrets are confidential information that has commercial value and for which steps have been taken to keep it secret. Trade secrets include: manufacturing processes, formulas, designs and list of customers. In order to prevent disclosure, the licensing of unpatented trade secrets should be linked to confidentiality contracts with" each employer who has access to the protected information. The agreement on TRIPs concluded during the Uruguay round of GAIT negotiations requires all the signatory countries to protect against acquisition, disclosure or use of trade secrets in a manner contrary to honest commercial practices. Notwithstanding the legal developments, companies transferring trade secrets to foreign countries should apprise themselves of the existence of legal protection and the risks associated with lax enforcement.
D] Distinguish between common law and code law
Answer -
COMMON LAW CODE LAW
1. Australia, new Zealand, India, Hongkong, colonial English speaking African countries, united states and Canada have systems based on common law. In Asia, India, Pakistan, Malaysia, Singapore and Hongkong are the common law countries. 1.Japan, Thailand, korea, indo-china, Indonesia, Taiwan and china are all civil law countries.
2. In common law countries trademarks are established by prior use 2. In code law countries, intellectual property rights must be registered.
3. Not as many as civil law countries, have legal systems based on common law. 3. Most countries have legal systems based on civil law
4. This is divided into Statutory, Administrative and Case law. Statutory is codifies at national or state level. Administrative law originates in regulatory bodies and local communities and case law is product of the court system. 4. Code law is divided into judicial system which is further divided into civil, commercial and criminal law.
E] What do you understand by the term “International Law” and trace the Genesis of the International Law?
Answer –
The Term International Law refers to rules, regulations and principles that national governments consider binding upon themselves.
There are two types of international law :
1] The Law of Nations or Public law and
2] International Commercial law.
International law is concerned with trade related issues and other areas that have been ordinarily under the jurisdiction of nation states. The Genesis of international law can be traced back to the early middle ages in Europe and later in the 17th Century peace of Westphalia. Early International law was concerned with war, peace, diplomatic recognition of new nation states etc. Detailed international law gradually evolved with time. To being with, International law was an amalgam of treaties, covenants, Codes and agreements. With the growth of international trade, order in commercial affairs grew in Importance. In the 20th century, the new international judicial organizations contributed to the creation of an established Justice (1920-45), The International court of Justice, established under article seven of the United nations are issues of Public states 1947. Disputes between nations are issues of public international law and they may be referred to the International Court of justice located in the Hague. The sources of International law as defined under article 38 of ICI statute are as follows:
The Court whose function is to decide in accordance with international law such disputes as are submitted to it shall apply:
(a) International Convention, whether general or particular, establishing rules expressly recognized by contesting states.
(b) International custom as evidence of a general practice accepted as law.
(c) The General principles of Law recognized by civilized nations.
(d) Subject to the provision of Article 59, judicial decisions are the teachings of the most highly qualified publicists of various nations as subsidiary means for the determination of the rules of law.
If a nation allows a case to be brought before the ICI and then refuses to accept a judgment against it, the plaintiff nation can seek redresses through the United Nation’s highest political are i.e., the Security Council, which can use its power to enforce the judgment.
Answer - The International Marketing activities take place within the political environment of national political institutions such as the government, political executive, legislative and the judiciary.
Any company doing business overseas should Carefully study the political environment of he country it intends to operate and analyze issues such as the attitude of the political party in power toward
(a) Sovereignty,
(b) Political Risk,
(c) Taxes,
(d) Threat of Equity dilution and
(e) Expropriation.
Sovereignty:
The sovereign political power of a country in a command economy may determine every aspect of economic life of the people. In contrast, in a market economy, the government may only play the role of a facilitator and a regulator. However, after the fall of the Soviet Union, the command economics around the world have progressed towards a market oriented system. Eastern European countries, countries in Central America, and most importantly, India and China have also adopted the free market system. With globalization and economic integration, political sovereignty of individual nation states is on the wane. However, erosion of political sovereignty is not without a quid pro quo. There are definite economic advantages in forging a regional economic union as exemplified in cases such as the European Union, NAFT A, ASEAN and others.
Political Risk:
There is always a political risk involved in making investments both within and without the country. The element of risk and its severity is relatively high in foreign countries. More objectively, the extent of political risk depends upon the political stability of the host country. An unstable country is fraught with investment risks. A country needs to be stable both internally and externally. Frequent changes in the government and attendant changes in the economic policy of the government will increase the element of uncertainty and adversely effect upon a company's ability to operate effectively in a foreign country. Investments in highly destabilized countries like Afghanistan and Iraq may be very attractive economically speaking but the political risks involved are overwhelming. Political instability is therefore a great .deterrent to foreign investment. In order to justify investment in a foreign country, risk assessment should be undertaken on a regular basis and investments should be made only when opportunities to make profits are much greater than the risks involved.
Taxes:
A company which is geographically diversified needs to take care of the tax laws of the countries in which it operates. Companies, generally minimizes their tax liability by shifting the location of their income. One method of reducing tax liability is called earnings stripping. Foreign companies reduce earnings by' making loans to their affiliates in a country rather than making direct foreign investment. The subsidiary company which takes the loan can deduct the interest it pays on such loans and reduce its tax burden. There is an absence of international laws to govern the levy of taxes on companies that are into international business. In order to provide fair treatment, governments in many countries have negotiated bilateral tax treaties to provide tax credits for taxes paid abroad. Generally foreign' companies are taxed by the host country up to the level imposed in the home country.
Equity Stripping and Dilution of Control:
In less developed countries, there is a general tendency to exert political pressure for governmental control of foreign companies. Host-nation governments may attempt to control ownership of foreign-owned companies operating in their Countries. For instance, foreign equity participation in industries such as insurance is limited to 74 percent in India and as a result, a foreign insurance company must team up with a local company to do insurance business in India. In industries where, the government wants to keep the ownership in the hands of Indian companies, foreign equity participation is less than fifty percent. The threat of equity dilution has forced companies to operate in host countries through joint ventures and strategic alliances.
Expropriation:
Expropriation is the ultimate threat that a government can pose toward a foreign company. Expropriation refers to governmental action to dispossess a company investor. Generally, compensation is provided to foreign investors. However, quite often, the compensation is not prompt, adequate and effective. If there is no compensation then the act of expropriation would be termed as confiscation. When severe limitations are imposed the activities of a foreign company, it is termed as creeping expropriation. Such restriction may include limitations on repatriation of profits, dividends, royalties, local content etc, quotas for hiring local nationals, price controls etc. All these restrictions and limitations adversely affects the profitability of foreign investment. Discriminating tariffs and non-tariff barriers, discriminating laws on patents and trademarks may also limit market entry of certain consumer and industrial goods manufacturing foreign firms. When governments expropriate foreign property, there are limitations on actions to reclaim the property. For instance, according to the United States act of State doctrine, if the government of a foreign State is involved in a specific act, the US court will not get involved. In such a situation, expropriated companies representatives may seek redressal through arbitration at the World Bank Investment Dispute Settlement Center. It is safe to buy expropriation insurance than to seek redressal through World Bank mechanism. In 1970 and 1971; some foreign copper companies in Chile resisted government efforts to employ local nationals in the managerial cadre of the companies. Such companies were expropriated by the Chilean government and companies which obliged were allowed to operate under joint management.
B] Write Short Note On Monopoly and Restrictive Trade Practices
Answer -
Monopoly and Restrictive Trade Practices:
MRTP laws are enacted to fight restrictive business practices and help foster competition. In the United States, anti-trust laws are designed to encourage free competition by limiting the concentration of economic power in the hands of few. The Sherman Act of 18~O prohibits certain restrictive business practices like fixing prices, limiting production, allocating markets and other anti-competitive practices.
The law applies to foreign companies conducting business in the US and extends to the activities of US companies operating overseas if the company conduct is considered to have an effect on US commerce contrary to law. The European commission prohibits agreements and practices that prevent, restrict and distort competition.
In India, the Monopolies and Restrictive Trade Practices Act was passed in the year 1970 under which the MRTP commission was set¬up to investigate the effects of restrictive trade practices on public interest and recommend suitable corrective action.
C] Short Note on Licensing and Trade Screts
Answer -
Licensing and Trade Secrets: .
Licensing is a contractual agreement in which a licensor allows a licensee to use patents, trademarks, trade secrets, technology and other non-material assets in return for royalty payments or other forms of compensation. The duration of the licensing agreement and the amount of royalties a company can receive is commercially negotiated between the two parties i.e., the licensor and the licensee. There are no governmental restrictions on royalty remittances abroad. However, in many countries these elements of licensing are regulated by the government.
Important areas of concern in licensing are:
1] Analysis of assets offered by a firm for license,
2] Pricing of the assets,
3] Whether to grant only the right to make the product or to grant the right to use and sell the product, and
4] The right to sub-license.
Licensing is fraught with danger because it has the potential to create a competitor, if there is none or increase the number of competitors, if there is already one or more. Hence, licensors should be careful enough to protect their competitive advantage and to ensure a sustainable
competitive advantage, the only price the licensor should be willing to pay is in the form of continuous innovation. Else, the licensor may become history.
Trade secrets are confidential information that has commercial value and for which steps have been taken to keep it secret. Trade secrets include: manufacturing processes, formulas, designs and list of customers. In order to prevent disclosure, the licensing of unpatented trade secrets should be linked to confidentiality contracts with" each employer who has access to the protected information. The agreement on TRIPs concluded during the Uruguay round of GAIT negotiations requires all the signatory countries to protect against acquisition, disclosure or use of trade secrets in a manner contrary to honest commercial practices. Notwithstanding the legal developments, companies transferring trade secrets to foreign countries should apprise themselves of the existence of legal protection and the risks associated with lax enforcement.
D] Distinguish between common law and code law
Answer -
COMMON LAW CODE LAW
1. Australia, new Zealand, India, Hongkong, colonial English speaking African countries, united states and Canada have systems based on common law. In Asia, India, Pakistan, Malaysia, Singapore and Hongkong are the common law countries. 1.Japan, Thailand, korea, indo-china, Indonesia, Taiwan and china are all civil law countries.
2. In common law countries trademarks are established by prior use 2. In code law countries, intellectual property rights must be registered.
3. Not as many as civil law countries, have legal systems based on common law. 3. Most countries have legal systems based on civil law
4. This is divided into Statutory, Administrative and Case law. Statutory is codifies at national or state level. Administrative law originates in regulatory bodies and local communities and case law is product of the court system. 4. Code law is divided into judicial system which is further divided into civil, commercial and criminal law.
E] What do you understand by the term “International Law” and trace the Genesis of the International Law?
Answer –
The Term International Law refers to rules, regulations and principles that national governments consider binding upon themselves.
There are two types of international law :
1] The Law of Nations or Public law and
2] International Commercial law.
International law is concerned with trade related issues and other areas that have been ordinarily under the jurisdiction of nation states. The Genesis of international law can be traced back to the early middle ages in Europe and later in the 17th Century peace of Westphalia. Early International law was concerned with war, peace, diplomatic recognition of new nation states etc. Detailed international law gradually evolved with time. To being with, International law was an amalgam of treaties, covenants, Codes and agreements. With the growth of international trade, order in commercial affairs grew in Importance. In the 20th century, the new international judicial organizations contributed to the creation of an established Justice (1920-45), The International court of Justice, established under article seven of the United nations are issues of Public states 1947. Disputes between nations are issues of public international law and they may be referred to the International Court of justice located in the Hague. The sources of International law as defined under article 38 of ICI statute are as follows:
The Court whose function is to decide in accordance with international law such disputes as are submitted to it shall apply:
(a) International Convention, whether general or particular, establishing rules expressly recognized by contesting states.
(b) International custom as evidence of a general practice accepted as law.
(c) The General principles of Law recognized by civilized nations.
(d) Subject to the provision of Article 59, judicial decisions are the teachings of the most highly qualified publicists of various nations as subsidiary means for the determination of the rules of law.
If a nation allows a case to be brought before the ICI and then refuses to accept a judgment against it, the plaintiff nation can seek redresses through the United Nation’s highest political are i.e., the Security Council, which can use its power to enforce the judgment.
International Social & Cultural Enviornment
Q.1 Illustrate the impact of social and cultural environment on the marketing of industrial products.
Ans. The social and cultural environment encompassing the religious aspects; language; customs; traditions and beliefs; tastes and preferences; social stratification; social institutions; buying and consumption habits etc are all very important factors for business. What is liked by people of one culture may not be liked by those of some other culture. One of the most important reasons for the failure of a number of companies in foreign markets is their failure to understand the cultural environment of these markets and to suitably formulate their business strategies.
Many companies modify their products and/or promotion strategies to suit the tastes and preferences or other characteristics of the population of the different countries. Significant differences in the tastes and preferences may exist even within the same country, particularly when the country is very vast, populous and multi-cultural like India.
For a business to be successful, its strategy should be the one that is appropriate in the socio-cultural environment. The marketing mix will have to be so designed as best to suit the environmental characteristics of the market. In Thailand, Helene Curtis switched to black shampoo because Thai women felt that it made their hair look glossier.
Even when people of different cultures use the same basic product, the mode of consumption, conditions of use, purpose of use or the perceptions of the product attributes may vary so much so that the product attributes, method of presentation, positioning, or method of promoting the product may have to be varied to suit the characteristics of different markets.
The differences in language sometime pose a serious problem, even necessitating a change in the brand name. For instance, Chevrolet’s brand name Nova in Spanish means “it doesn’t go”. In some languages, Pepsi-Cola’s slogan “come alive” translates as “come out of the grave”.
The values and beliefs associated with colour vary significantly between different cultures. White indicates death and mourning in China and Korea; but in some countries, it expresses happiness and is the colour of the bridal dress. Boeing an United States based aero-space manufacturer has felt the impact of an unwritten “buy national policy” in Europe. As a result, the market share of Airbus for commercial planes which is a consortium of European countries grew to 50 percent. The market share of Boeing in Europe declined resulting in a loss. Boeing attempted joint venture with Russian, Ukrainian and Norwegian partners and hired a designer to decorate a facility to watch the launch of the Sea Launch rocket. The designer decorated the facility in black which is considered as bad luck colour in Russia. The Russians were furious to see black colour. Boeing repainted the facility with a shade of blue to avoid a cultural blunder.
While dealing with the social environment, we must also consider the social environment of the business which encompasses its social responsibility and the alertness or vigilance of the consumers and of society at large. Marketing people are at interface between company and society. In this position, they have the responsibility not merely for designing a competitive marketing strategy, but for sensitizing business to the social as well as the product, demand of the society.
Q.2 Write short notes on:
a) Self-reference criterion: - A person’s understanding or perception of market needs is determined by his or her own cultural experience. James Lee – developed a systematic framework to reduce perceptual blockage and distortion. This framework is known as the self-reference criterion (SRC) – which addresses the problem of unconscious reference to one’s own cultural values. In order to reduce cultural myopia or short sightedness, James Lee proposed a four-step framework which is as below:
(1) Define the problem or goal in terms of home-country cultural traits, habit and norms.
(2) Define the problem or goal in terms of host culture, traits, habits and norms. Make no value judgments.
(3) Isolate the self-references criterion influence and examine it carefully to see how it complicates the problems and
(4) Redefine the problem without the self-references criterion influence and solve for the host-country market situation.
An important skill that an international marketer needs to possess is that of unbiased perception. The framework of self-references criterion brings out this important skill to be learnt by international marketers. The use of SRC and the tendency towards ethnocentrism is widespread and it can become a strong negative form in international business. The international marketer must check this tendency to avoid misunderstanding and failure. In order to avoid SRC, a person needs to forget assumptions based on earlier experience and success and be prepared to acquire new understanding and knowledge about human behaviour and motivation.
b) Communication and Negotiation: - Language is the medium through which any given culture is expressed and the subtleties of a culture can best be expressed only through a language that is home to a given culture. Cultural transliterations are only approximations and hence a compromise on the meaning and essence of a certain context. The international marketer with a hold over multiple languages has an edge over those who do not. Whenever, languages and cultures change, communication challenges comes to the fore. For instance, ‘yes’ and ‘no’ are used differently in Japanese than in western languages. In English, the answer ‘yes’ or ‘no’ to a question is based on whether the answer is affirmative or negative. In Japanese, the answer ‘yes’ or ‘no’ may indicate whether or not the answer affirms or negates the question. For instance, in Japanese the question, “Don’t you like meat!” would be answered “yes”. If the answer is negative, as in, “Yes, I don’t like meat.” The word “Wakarimashita” means both “I understand” and “I agree”. In order to avoid misunderstandings, foreigners must learn to distinguish which interpretation is correct in terms of the entire context of conversation. The challenges of non-verbal communication are more formidable.
c) Environmental Sensitivity: - Environmental sensitivity is the extent to which products must be adapted to the culture-specific needs of different needs of different national markets. Environmental sensitivity can be measured by viewing product on an environmental sensitivity continuum. At one end of the continuum are environmentally insensitive products that do not require significant adaptation to the environments of local markets in the world. At the other end of the continuum are products that are highly sensitive to different environmental factors. A firm with environmental insensitive products will spend less time determining the specific conditions of local markets as the product in question is universal in nature. In case of environmentally sensitive products, managers need to address country-specific economic, regulations, technological, social and cultural environmental conditions.
The sensitivity of products can be represented on a two dimensional scare wherein the horizontal axis shows environmental sensitivity and the vertical axis shows the extent of need for product adaptation. Products showing low levels of environmental sensitivity such as technical products belong to the lower left of the figure. As we move to the right or the horizontal axis, the environmental sensitivity increases along with the need for adaptation. Computers have low levels of environmental sensitivity but variations in country voltage requirements require some adaptation. At the top right of the figures we have products with high environmental sensitivity. For example, food is highly sensitive to climate and culture.
Ans. The social and cultural environment encompassing the religious aspects; language; customs; traditions and beliefs; tastes and preferences; social stratification; social institutions; buying and consumption habits etc are all very important factors for business. What is liked by people of one culture may not be liked by those of some other culture. One of the most important reasons for the failure of a number of companies in foreign markets is their failure to understand the cultural environment of these markets and to suitably formulate their business strategies.
Many companies modify their products and/or promotion strategies to suit the tastes and preferences or other characteristics of the population of the different countries. Significant differences in the tastes and preferences may exist even within the same country, particularly when the country is very vast, populous and multi-cultural like India.
For a business to be successful, its strategy should be the one that is appropriate in the socio-cultural environment. The marketing mix will have to be so designed as best to suit the environmental characteristics of the market. In Thailand, Helene Curtis switched to black shampoo because Thai women felt that it made their hair look glossier.
Even when people of different cultures use the same basic product, the mode of consumption, conditions of use, purpose of use or the perceptions of the product attributes may vary so much so that the product attributes, method of presentation, positioning, or method of promoting the product may have to be varied to suit the characteristics of different markets.
The differences in language sometime pose a serious problem, even necessitating a change in the brand name. For instance, Chevrolet’s brand name Nova in Spanish means “it doesn’t go”. In some languages, Pepsi-Cola’s slogan “come alive” translates as “come out of the grave”.
The values and beliefs associated with colour vary significantly between different cultures. White indicates death and mourning in China and Korea; but in some countries, it expresses happiness and is the colour of the bridal dress. Boeing an United States based aero-space manufacturer has felt the impact of an unwritten “buy national policy” in Europe. As a result, the market share of Airbus for commercial planes which is a consortium of European countries grew to 50 percent. The market share of Boeing in Europe declined resulting in a loss. Boeing attempted joint venture with Russian, Ukrainian and Norwegian partners and hired a designer to decorate a facility to watch the launch of the Sea Launch rocket. The designer decorated the facility in black which is considered as bad luck colour in Russia. The Russians were furious to see black colour. Boeing repainted the facility with a shade of blue to avoid a cultural blunder.
While dealing with the social environment, we must also consider the social environment of the business which encompasses its social responsibility and the alertness or vigilance of the consumers and of society at large. Marketing people are at interface between company and society. In this position, they have the responsibility not merely for designing a competitive marketing strategy, but for sensitizing business to the social as well as the product, demand of the society.
Q.2 Write short notes on:
a) Self-reference criterion: - A person’s understanding or perception of market needs is determined by his or her own cultural experience. James Lee – developed a systematic framework to reduce perceptual blockage and distortion. This framework is known as the self-reference criterion (SRC) – which addresses the problem of unconscious reference to one’s own cultural values. In order to reduce cultural myopia or short sightedness, James Lee proposed a four-step framework which is as below:
(1) Define the problem or goal in terms of home-country cultural traits, habit and norms.
(2) Define the problem or goal in terms of host culture, traits, habits and norms. Make no value judgments.
(3) Isolate the self-references criterion influence and examine it carefully to see how it complicates the problems and
(4) Redefine the problem without the self-references criterion influence and solve for the host-country market situation.
An important skill that an international marketer needs to possess is that of unbiased perception. The framework of self-references criterion brings out this important skill to be learnt by international marketers. The use of SRC and the tendency towards ethnocentrism is widespread and it can become a strong negative form in international business. The international marketer must check this tendency to avoid misunderstanding and failure. In order to avoid SRC, a person needs to forget assumptions based on earlier experience and success and be prepared to acquire new understanding and knowledge about human behaviour and motivation.
b) Communication and Negotiation: - Language is the medium through which any given culture is expressed and the subtleties of a culture can best be expressed only through a language that is home to a given culture. Cultural transliterations are only approximations and hence a compromise on the meaning and essence of a certain context. The international marketer with a hold over multiple languages has an edge over those who do not. Whenever, languages and cultures change, communication challenges comes to the fore. For instance, ‘yes’ and ‘no’ are used differently in Japanese than in western languages. In English, the answer ‘yes’ or ‘no’ to a question is based on whether the answer is affirmative or negative. In Japanese, the answer ‘yes’ or ‘no’ may indicate whether or not the answer affirms or negates the question. For instance, in Japanese the question, “Don’t you like meat!” would be answered “yes”. If the answer is negative, as in, “Yes, I don’t like meat.” The word “Wakarimashita” means both “I understand” and “I agree”. In order to avoid misunderstandings, foreigners must learn to distinguish which interpretation is correct in terms of the entire context of conversation. The challenges of non-verbal communication are more formidable.
c) Environmental Sensitivity: - Environmental sensitivity is the extent to which products must be adapted to the culture-specific needs of different needs of different national markets. Environmental sensitivity can be measured by viewing product on an environmental sensitivity continuum. At one end of the continuum are environmentally insensitive products that do not require significant adaptation to the environments of local markets in the world. At the other end of the continuum are products that are highly sensitive to different environmental factors. A firm with environmental insensitive products will spend less time determining the specific conditions of local markets as the product in question is universal in nature. In case of environmentally sensitive products, managers need to address country-specific economic, regulations, technological, social and cultural environmental conditions.
The sensitivity of products can be represented on a two dimensional scare wherein the horizontal axis shows environmental sensitivity and the vertical axis shows the extent of need for product adaptation. Products showing low levels of environmental sensitivity such as technical products belong to the lower left of the figure. As we move to the right or the horizontal axis, the environmental sensitivity increases along with the need for adaptation. Computers have low levels of environmental sensitivity but variations in country voltage requirements require some adaptation. At the top right of the figures we have products with high environmental sensitivity. For example, food is highly sensitive to climate and culture.
India & WTO
I. India’s commitment to WTO.
A- India is committed to phased liberalization of trade and investment and progressive integration of its domestic economy with the world economy. Post 2005, India is likely to be the largest free market economy in the world, purely on account of her 1 billion populations. India’s progress in fulfilling her commitment to the WTO can be explained as follows –
1. Quantitative Restrictions – India has been maintaining QR’s on imports on BoP grounds and had committed to the WTO that the QR’s will be completely phased out by 2003. However, the United States had filed a case in the WTO dispute settlement body against these QR’s in May 1997. The DSB had ruled against India and had found that India’s QR’s on imports were not justified on BoP grounds. The DSP recommended that India should bring its imports regime in conformity with its commitment under the WTO agreement. Accordingly, quantitative restrictions on all imports were withdrawn on April 2001.
2. Trade Related Intellectual Property Rights (TRIPs)– The agreement on TRIPS lays down the minimum standards of protection to be adopted by the parties in respect of -
i. Copyrights
ii. Trade marks
iii. Geographical indications
iv. Industrial designs
v. Patents
vi. Lay-out designs of integrated circuits and
vii. Protection of trade secrets and its enforcement
The developing countries were given a transition period of 5 yrs to implement the TRIPs agreement. Those countries who don’t give product patents in certain areas were given the facilities to delay the provisions of product patents for an additional period of 5yrs on the condition that these countries will provide exclusive marketing rights for products which obtain patents after 1st Jan 1995. India cleared the patents (Amendments) Act, 1999 in March 1999 to provide for exclusive marketing rights.
3. Commitments related to industrial design and lay-out design of integrated circuits – Under WTO agreements, the Government of India has committed to protect new industrial design and lay-put design of integrated circuit. The bill related with industrial design and lay-out design was cleared by parliament in December 1999 and bill related with industrial design has been introduced in Rajya Sabha on 20th Dec 1999.
4. Copyrights and related rights – In case of rights of performers, producers of phonograms and broadcasting organizations, the agreement requires compliance with the provision of the Berne Convention. Computer programs are to be protected as literary works. The term of protection for copyrights and rights of performers and producers of phonograms is 50yrs. In case of broadcasting organizations the term is 20yrs. Since India is a signatory to the Berne convention, India has to comply with its provisions. Accordingly the Copyright Act 1957 was amended in 1994 to be in tune with the requirements of the TRIPs agreement. A bill to increase the term of performers rights to 50yrs was passed by parliament in December 1999.
5. Trademarks – A bill to amend the Trade and Merchandise Marks Act 1958 was passed by the parliament in December 1999 which amongst other things provides protection to Service Marks.
6. Geographic Indications – The GATT agreement contains a general obligation that parties shall provide the legal means for interested parties to prevent the use of any means in the designation or presentation of a good that indicates or suggests that the good in questions originates in a geographical area other than the true place of origin of the good. An Act on geographical indication was passed by the parliament in December 1999.
7. Trade Related Investment Measures (TRIMs) – The TRIMs agreement provides a transition period of 5yrs to developing countries i.e. upto December 1999. The developing countries have demanded for additional transition period of 5yrs i.e. upto 2004. A decision by the General Council of the WTO is awaited.
8. Industrial designs – According to the agreements independently created new industrial designs or original designs are to be protected. The Indian Design Act 1911 was reworked to suit to the requirements of the agreement and a bill in this regard was cleared by the Rajya Sabha in December 1999.
9. Reduction of Tariff – India has committed to WTO to reduce tariff on non-agricultural goods. The government has undertaken the phased reduction of tariff over the period March 1995 to 2005. In case of textiles, the reduction of tariff will be achieved over a period of 10yrs but India reserves the right to revert back duties to 1990 level, if certain conditions are not fulfilled according to agreement.
10. Commitment under GATS – Under the General Agreement on Trade in Services (GATS), India has made commitment to WTO in 33 activities. The foreign service providers will be allowed to enter into these activities.
Conclusion – It is clear from the above points that India has fulfilled some of the major commitments made to WTO. The government of India in order to face the challenges from WTO has to accelerate the process of reforms in agriculture, industry and service sector to make them competitive and to take advantage of globalization.
II. Implications of WTO agreement for Indian economy
A- Implications of WTO agreement for Indian economy are as follows –
1. Reduction in Custom Duties and Export Subsidies – India has agreed to reduce custom duties by 30% over a period of 6yrs. Accordingly the union budget 2000-01 brought down the peak rate of basic custom duty to 35% along with rationalization of total number of slabs in custom duty rates to four i.e. 35, 25, 15 and 5%. Basic custom duty reduction was to be made on items such as raw materials, intermediates and capital goods with the exception of agricultural products, petroleum products, fertilizers and non-ferrous metals like zinc and copper. The WTO agreement enjoins upon its members to remove all export subsidies. However, countries with per capita income of less than $1000 and less than 3.25/- share in the world trade for products are exempted from the removal of subsidies. The economic survey 1998-99 reported that items such as rice, tea, spices, iron ore, leather manufacturer, gems and jewellery had a share of more than 3.25/- and the share of these items in the total exports of India for the year 1996 was 22.8% which means 77% of India’s exports are mot affected by the clause on removal of subsidies.
2. Trade Related Intellectual Property Rights – Under the agreement on TRIPs patents are made available for both product and process inventions in the field of industrial technology. The industrial, agricultural and the bio-technology sectors are covered under the patents provision. The patent regime is feared to affect the drugs and the pharmaceutical industry in India. It is estimated that about 70% of the drugs will be covered by the new patent laws. This will entail royalty payment to the patent holders resulting in a steep rise in prices of drugs in India. However there are conflicting estimates if the percentage of the drugs that will be covered by the new patent laws. For instance, Bibek Debroy, Director, Rajiv Gandhi Institute for Contemporary Studies observed that only less than 10% of the drugs are covered by the patents worldwide. The rest of the drugs i.e. more than 90% of them have become generic i.e. they need no protection.
TRIPs also extends patent like protection to agriculture. Accordingly protection is sought to be extended to micro-organisms, non-biological and micro-biological processes and plant varieties. Article 27 of the text on TRIPs states that India may provide for protection of plant varieties either by patents or by an effective sui generic system or by a combination of the two. This system shall come into existence after the expiry of the transitional period of 10yrs i.e. after 2005. India needs to work hard on documenting its traditional knowledge on Ayurvedic and herbal plants and obtain patent protection or a sui genesis system in order to prevent bio-piracy.
3. Trade Related Investment Measures (TRIMs) – The text on TRIMs provides that governments shall not discriminate against foreign capital i.e. foreign capital should be given national treatment. The main features of the text on TRIMs are as follows –
a) All restrictions on foreign capital, investors and companies should be abandoned.
b) National treatment to foreign investors i.e. they will be given the same rights as a national investor has with regard to investment.
c) Unrestricted investment in all spheres of economic activities.
d) No limitation on the extent of foreign investment in any economic entity.
e) Free imports of raw materials and components.
f) Local content clause will not be imposed on foreign investors.
g) No mandatory export obligations on foreign investors.
h) Elimination of restrictions on repatriation of dividend, interest and royalty income.
i) Complete exclusion of provisions such as phased manufacturing programmes which is intended to increase the indigenous content in manufacture.
Restrictions on foreign capital investment both portfolio and direct have been progressively reduced and more and more industries and sectors of national economy have been thrown open to foreign investment. The opening of the insurance sector to foreign direct investment has been the latest in the league with international airlines industry very much on the block.
4.Textiles and Clothing – The GATT agreement proposes to abandon the Multi – Fibre Agreement by 2003 and fully liberalize the textile sector. The Multi – Fibre agreement is a comprehensive agreement on quota restrictions imposed by the rich countries over the textile exports of developing countries. These quotas will be phased out under the WTO Act in three phases. In the 1st phase (1993-96), 16% of the textile exports to the developed countries will be liberalized. It will be followed by 17% in the 2nd phase (1996-2000) and 18% in the 3rd phase (2000-2003). Thus by 2003 51% of the textiles market will be liberalized.
A- India is committed to phased liberalization of trade and investment and progressive integration of its domestic economy with the world economy. Post 2005, India is likely to be the largest free market economy in the world, purely on account of her 1 billion populations. India’s progress in fulfilling her commitment to the WTO can be explained as follows –
1. Quantitative Restrictions – India has been maintaining QR’s on imports on BoP grounds and had committed to the WTO that the QR’s will be completely phased out by 2003. However, the United States had filed a case in the WTO dispute settlement body against these QR’s in May 1997. The DSB had ruled against India and had found that India’s QR’s on imports were not justified on BoP grounds. The DSP recommended that India should bring its imports regime in conformity with its commitment under the WTO agreement. Accordingly, quantitative restrictions on all imports were withdrawn on April 2001.
2. Trade Related Intellectual Property Rights (TRIPs)– The agreement on TRIPS lays down the minimum standards of protection to be adopted by the parties in respect of -
i. Copyrights
ii. Trade marks
iii. Geographical indications
iv. Industrial designs
v. Patents
vi. Lay-out designs of integrated circuits and
vii. Protection of trade secrets and its enforcement
The developing countries were given a transition period of 5 yrs to implement the TRIPs agreement. Those countries who don’t give product patents in certain areas were given the facilities to delay the provisions of product patents for an additional period of 5yrs on the condition that these countries will provide exclusive marketing rights for products which obtain patents after 1st Jan 1995. India cleared the patents (Amendments) Act, 1999 in March 1999 to provide for exclusive marketing rights.
3. Commitments related to industrial design and lay-out design of integrated circuits – Under WTO agreements, the Government of India has committed to protect new industrial design and lay-put design of integrated circuit. The bill related with industrial design and lay-out design was cleared by parliament in December 1999 and bill related with industrial design has been introduced in Rajya Sabha on 20th Dec 1999.
4. Copyrights and related rights – In case of rights of performers, producers of phonograms and broadcasting organizations, the agreement requires compliance with the provision of the Berne Convention. Computer programs are to be protected as literary works. The term of protection for copyrights and rights of performers and producers of phonograms is 50yrs. In case of broadcasting organizations the term is 20yrs. Since India is a signatory to the Berne convention, India has to comply with its provisions. Accordingly the Copyright Act 1957 was amended in 1994 to be in tune with the requirements of the TRIPs agreement. A bill to increase the term of performers rights to 50yrs was passed by parliament in December 1999.
5. Trademarks – A bill to amend the Trade and Merchandise Marks Act 1958 was passed by the parliament in December 1999 which amongst other things provides protection to Service Marks.
6. Geographic Indications – The GATT agreement contains a general obligation that parties shall provide the legal means for interested parties to prevent the use of any means in the designation or presentation of a good that indicates or suggests that the good in questions originates in a geographical area other than the true place of origin of the good. An Act on geographical indication was passed by the parliament in December 1999.
7. Trade Related Investment Measures (TRIMs) – The TRIMs agreement provides a transition period of 5yrs to developing countries i.e. upto December 1999. The developing countries have demanded for additional transition period of 5yrs i.e. upto 2004. A decision by the General Council of the WTO is awaited.
8. Industrial designs – According to the agreements independently created new industrial designs or original designs are to be protected. The Indian Design Act 1911 was reworked to suit to the requirements of the agreement and a bill in this regard was cleared by the Rajya Sabha in December 1999.
9. Reduction of Tariff – India has committed to WTO to reduce tariff on non-agricultural goods. The government has undertaken the phased reduction of tariff over the period March 1995 to 2005. In case of textiles, the reduction of tariff will be achieved over a period of 10yrs but India reserves the right to revert back duties to 1990 level, if certain conditions are not fulfilled according to agreement.
10. Commitment under GATS – Under the General Agreement on Trade in Services (GATS), India has made commitment to WTO in 33 activities. The foreign service providers will be allowed to enter into these activities.
Conclusion – It is clear from the above points that India has fulfilled some of the major commitments made to WTO. The government of India in order to face the challenges from WTO has to accelerate the process of reforms in agriculture, industry and service sector to make them competitive and to take advantage of globalization.
II. Implications of WTO agreement for Indian economy
A- Implications of WTO agreement for Indian economy are as follows –
1. Reduction in Custom Duties and Export Subsidies – India has agreed to reduce custom duties by 30% over a period of 6yrs. Accordingly the union budget 2000-01 brought down the peak rate of basic custom duty to 35% along with rationalization of total number of slabs in custom duty rates to four i.e. 35, 25, 15 and 5%. Basic custom duty reduction was to be made on items such as raw materials, intermediates and capital goods with the exception of agricultural products, petroleum products, fertilizers and non-ferrous metals like zinc and copper. The WTO agreement enjoins upon its members to remove all export subsidies. However, countries with per capita income of less than $1000 and less than 3.25/- share in the world trade for products are exempted from the removal of subsidies. The economic survey 1998-99 reported that items such as rice, tea, spices, iron ore, leather manufacturer, gems and jewellery had a share of more than 3.25/- and the share of these items in the total exports of India for the year 1996 was 22.8% which means 77% of India’s exports are mot affected by the clause on removal of subsidies.
2. Trade Related Intellectual Property Rights – Under the agreement on TRIPs patents are made available for both product and process inventions in the field of industrial technology. The industrial, agricultural and the bio-technology sectors are covered under the patents provision. The patent regime is feared to affect the drugs and the pharmaceutical industry in India. It is estimated that about 70% of the drugs will be covered by the new patent laws. This will entail royalty payment to the patent holders resulting in a steep rise in prices of drugs in India. However there are conflicting estimates if the percentage of the drugs that will be covered by the new patent laws. For instance, Bibek Debroy, Director, Rajiv Gandhi Institute for Contemporary Studies observed that only less than 10% of the drugs are covered by the patents worldwide. The rest of the drugs i.e. more than 90% of them have become generic i.e. they need no protection.
TRIPs also extends patent like protection to agriculture. Accordingly protection is sought to be extended to micro-organisms, non-biological and micro-biological processes and plant varieties. Article 27 of the text on TRIPs states that India may provide for protection of plant varieties either by patents or by an effective sui generic system or by a combination of the two. This system shall come into existence after the expiry of the transitional period of 10yrs i.e. after 2005. India needs to work hard on documenting its traditional knowledge on Ayurvedic and herbal plants and obtain patent protection or a sui genesis system in order to prevent bio-piracy.
3. Trade Related Investment Measures (TRIMs) – The text on TRIMs provides that governments shall not discriminate against foreign capital i.e. foreign capital should be given national treatment. The main features of the text on TRIMs are as follows –
a) All restrictions on foreign capital, investors and companies should be abandoned.
b) National treatment to foreign investors i.e. they will be given the same rights as a national investor has with regard to investment.
c) Unrestricted investment in all spheres of economic activities.
d) No limitation on the extent of foreign investment in any economic entity.
e) Free imports of raw materials and components.
f) Local content clause will not be imposed on foreign investors.
g) No mandatory export obligations on foreign investors.
h) Elimination of restrictions on repatriation of dividend, interest and royalty income.
i) Complete exclusion of provisions such as phased manufacturing programmes which is intended to increase the indigenous content in manufacture.
Restrictions on foreign capital investment both portfolio and direct have been progressively reduced and more and more industries and sectors of national economy have been thrown open to foreign investment. The opening of the insurance sector to foreign direct investment has been the latest in the league with international airlines industry very much on the block.
4.Textiles and Clothing – The GATT agreement proposes to abandon the Multi – Fibre Agreement by 2003 and fully liberalize the textile sector. The Multi – Fibre agreement is a comprehensive agreement on quota restrictions imposed by the rich countries over the textile exports of developing countries. These quotas will be phased out under the WTO Act in three phases. In the 1st phase (1993-96), 16% of the textile exports to the developed countries will be liberalized. It will be followed by 17% in the 2nd phase (1996-2000) and 18% in the 3rd phase (2000-2003). Thus by 2003 51% of the textiles market will be liberalized.
International Marketing
DEFINITION OF INTERNATIONAL MARKETING
International Marketing can be defined as exchange of goods and services between different national markets involving buyers and sellers.
According to the American Marketing Association, “International Marketing is the multi-national process of planning and executing the conception, prices, promotion and distribution of ideal goods and services to create exchanges that satisfy the individual and organizational objectives.”
CONCEPTS OF INTERNATIONAL MARKETING
I. Domestic Marketing: Domestic Marketing is concerned with marketing practices within the marketer’s home country.
II. Foreign Marketing: It refers to domestic marketing within the foreign country.
III. Comparative Marketing: when two or more marketing systems are studied, the subject of study is known as comparative marketing. In such a study, both similarities and dis-similarities are identified. It involves an analytical comparison of marketing methods practiced in different countries.
IV. International Marketing: It is concerned with the micro aspects of a market and takes the company as a unit of analysis. The purpose is to find out as to why and how a product succeeds or fails in a foreign country and how marketing efforts influence the results of international marketing.
V. International Trade: International Trade is concerned with flow of goods and services between the countries. The purpose is to study how monetary and commercial conditions influence balance of payments and resource transfer of countries involved. It provides a macro view of the market, national and international.
VI. Global Marketing: Global Marketing consider the world as a whole as the theatre of operation. The purpose of global marketing is to learn to recognize the extent to which marketing plans and programmes can be extended world wide and the extent to which they must be adopted.
DIFFERENCE BETWEEN DOMESTIC MARKETING AND INTERNATIONAL MARKETING
Marketing is the process of focusing the resources and objectives of an organisation on environmental opportunities and needs. It is a universal discipline. However, markets and customers are different and hence the practice of marketing should be fine tuned and adjusted to the local conditions of a given country. The marketing man must understand that each person is different and so also each country which means that both experience and techniques obtained and successful in one country or countries. Every country has a different set of customers and even within a country there are different sub-sets of customers, distribution channels and media are different. If that is so, for each country there must be a unique marketing plan. For instance, nestle tried to transfer its successful four – flavour coffee from Europe to the united states lost a 1% market share in the us. It is important in international marketing to recognize the extent to which marketing plans and programmes can be extended to the world and the extent to which marketing plans must be adapted. Prof.Theodore Levitt thought that the global village or the world as a whole was a homogeneous entity from the marketing point of view. He advocated organisation to develop standardized high quality word products and market them around the world using standardized advertising, pricing and distribution. The companies who followed Prof. Levitt’s prescription had to fail and a notable failure amongst them was Parker pen. Carl Spiel Vogel, Chairman and CEO of the Backer Spiel Vogel Bates worldwide advertising agency expressed his view that Levitt’s idea of a homogeneous world is non – sensible and the global success of Coca Cola proved that Prof. Levitt was wrong. The success of Coca Cola was not based on total standardization of marketing mix. According to Kenichi Ohmae, Coke succeeded in Japan because the company spent a huge amount of time and money in Japan to become an insider. Coca Cola build a complete local infrastructure with its sales force and vending machine operations. According to Ohmae, Coke’s success in Japan was due to the ability of the company to achieve global localisation or ‘Glocalisation’ i.e. the ability to be an insider or a local company and still reap the benefits of global operations. Think global and act local is the meaning of Glocalisation and to be successful in international marketing, companies must have the ability to think global and act local. International marketing requires managers to behave both globally and locally simultaneously by responding to similarities and dissimilarities in international markets. Glocalisation can be a source of competitive advantage. By adapting sales promotion, distribution and customer service to local needs, Coke capture 78% of soft drink market share in Japan. Apart from the flagship brand Coca Cola, the company produces 200 other non- alcoholic beverages to suit local beverages. There are other companies who have created strong international brands through international marketing. For instance, Philip Morris has made Marlboro the number one cigarette brand in the world. In automobiles, Daimler Chrysler gained global recognition for its Mercedes brand like his competitor Bayerische. Mc Donald’s has designed a restaurant system that can be set up anywhere in the world. Mc Donald’s customizes its menu in accordance with local eating habits.
SCOPE OF INTERNATIONAL MARKETING
International Marketing constitutes the following areas of business:-
ii. Marketing, sales and services alliances in which a company makes use of the marketing infrastructure of another company in the foreign market for its products.
iii. Multiple activity alliance involves the combining of two or more types of alliances. For instance technology development and operations alliances are generally multi- country alliances.
On the basis of structure, strategic alliance can be equity based or non equity based. Technology transfer agreements, licensing agreements, marketing agreements are non equity based strategic alliances.
International Marketing can be defined as exchange of goods and services between different national markets involving buyers and sellers.
According to the American Marketing Association, “International Marketing is the multi-national process of planning and executing the conception, prices, promotion and distribution of ideal goods and services to create exchanges that satisfy the individual and organizational objectives.”
CONCEPTS OF INTERNATIONAL MARKETING
I. Domestic Marketing: Domestic Marketing is concerned with marketing practices within the marketer’s home country.
II. Foreign Marketing: It refers to domestic marketing within the foreign country.
III. Comparative Marketing: when two or more marketing systems are studied, the subject of study is known as comparative marketing. In such a study, both similarities and dis-similarities are identified. It involves an analytical comparison of marketing methods practiced in different countries.
IV. International Marketing: It is concerned with the micro aspects of a market and takes the company as a unit of analysis. The purpose is to find out as to why and how a product succeeds or fails in a foreign country and how marketing efforts influence the results of international marketing.
V. International Trade: International Trade is concerned with flow of goods and services between the countries. The purpose is to study how monetary and commercial conditions influence balance of payments and resource transfer of countries involved. It provides a macro view of the market, national and international.
VI. Global Marketing: Global Marketing consider the world as a whole as the theatre of operation. The purpose of global marketing is to learn to recognize the extent to which marketing plans and programmes can be extended world wide and the extent to which they must be adopted.
DIFFERENCE BETWEEN DOMESTIC MARKETING AND INTERNATIONAL MARKETING
Marketing is the process of focusing the resources and objectives of an organisation on environmental opportunities and needs. It is a universal discipline. However, markets and customers are different and hence the practice of marketing should be fine tuned and adjusted to the local conditions of a given country. The marketing man must understand that each person is different and so also each country which means that both experience and techniques obtained and successful in one country or countries. Every country has a different set of customers and even within a country there are different sub-sets of customers, distribution channels and media are different. If that is so, for each country there must be a unique marketing plan. For instance, nestle tried to transfer its successful four – flavour coffee from Europe to the united states lost a 1% market share in the us. It is important in international marketing to recognize the extent to which marketing plans and programmes can be extended to the world and the extent to which marketing plans must be adapted. Prof.Theodore Levitt thought that the global village or the world as a whole was a homogeneous entity from the marketing point of view. He advocated organisation to develop standardized high quality word products and market them around the world using standardized advertising, pricing and distribution. The companies who followed Prof. Levitt’s prescription had to fail and a notable failure amongst them was Parker pen. Carl Spiel Vogel, Chairman and CEO of the Backer Spiel Vogel Bates worldwide advertising agency expressed his view that Levitt’s idea of a homogeneous world is non – sensible and the global success of Coca Cola proved that Prof. Levitt was wrong. The success of Coca Cola was not based on total standardization of marketing mix. According to Kenichi Ohmae, Coke succeeded in Japan because the company spent a huge amount of time and money in Japan to become an insider. Coca Cola build a complete local infrastructure with its sales force and vending machine operations. According to Ohmae, Coke’s success in Japan was due to the ability of the company to achieve global localisation or ‘Glocalisation’ i.e. the ability to be an insider or a local company and still reap the benefits of global operations. Think global and act local is the meaning of Glocalisation and to be successful in international marketing, companies must have the ability to think global and act local. International marketing requires managers to behave both globally and locally simultaneously by responding to similarities and dissimilarities in international markets. Glocalisation can be a source of competitive advantage. By adapting sales promotion, distribution and customer service to local needs, Coke capture 78% of soft drink market share in Japan. Apart from the flagship brand Coca Cola, the company produces 200 other non- alcoholic beverages to suit local beverages. There are other companies who have created strong international brands through international marketing. For instance, Philip Morris has made Marlboro the number one cigarette brand in the world. In automobiles, Daimler Chrysler gained global recognition for its Mercedes brand like his competitor Bayerische. Mc Donald’s has designed a restaurant system that can be set up anywhere in the world. Mc Donald’s customizes its menu in accordance with local eating habits.
SCOPE OF INTERNATIONAL MARKETING
International Marketing constitutes the following areas of business:-
- Exports and Imports: International trade can be a good beginning to venture into international marketing. By developing international markets for domestically produced goods and services a company can reduce the risk of operating internationally, gain adequate experience and then go on to set up manufacturing and marketing facilities abroad.
- Contractual Agreements: Patent licensing, turn key operations, co – production, technical and managerial know – how and licensing agreements are all a part of international marketing. Licensing includes a number of contractual agreements whereby intangible assets such as patents, trade secrets, know – how, trade marks and brand names are made available to foreign firms in return for a fee.
- Joint Ventures: A form of collaborative association for a considerable period is known as joint venture. A joint venture comes into existence when a foreign investor acquires interest in a local company and vice versa or when overseas and local firms jointly form a new firm. In countries where fully owned firms are not allowed to operate, joint venture is the alternative.
- Wholly owned manufacturing: A company with long term interest in a foreign market may establish fully owned manufacturing facilities. Factors like trade barriers, cost differences, government policies etc. encourage the setting up of production facilities in foreign markets. Manufacturing abroad provides the firm with total control over quality and production.
- Contract manufacturing: When a firm enters into a contract with other firm in foreign country to manufacture assembles the products and retains product marketing with itself, it is known as contract manufacturing. Contract manufacturing has important advantages such as low risk, low cost and easy exit.
- Management contracting: Under a management contract the supplier brings a package of skills that will provide an integrated service to the client without incurring the risk and benefit of ownership.
- Third country location: When there is no commercial transactions between two countries due to various reasons, firm which wants to enter into the market of another nation, will have to operate from a third country base. For instance, Taiwan’s entry into china through bases in Hong Kong.
- Mergers and Acquisitions: Mergers and Acquisitions provide access to markets, distribution network, new technology and patent rights. It also reduces the level of competition for firms which either merge or acquires.
- Strategic alliances: A firm is able to improve the long term competitive advantage by forming a strategic alliance with its competitors. The objective of a strategic alliance is to leverage critical capabilities, increase the flow of innovation and increase flexibility in responding to market and technological changes. Strategic alliance differs according to purpose and structure. On the basis of purpose, strategic alliance can be classified as follows:
ii. Marketing, sales and services alliances in which a company makes use of the marketing infrastructure of another company in the foreign market for its products.
iii. Multiple activity alliance involves the combining of two or more types of alliances. For instance technology development and operations alliances are generally multi- country alliances.
On the basis of structure, strategic alliance can be equity based or non equity based. Technology transfer agreements, licensing agreements, marketing agreements are non equity based strategic alliances.
- Counter trade: Counter trade is a form of international trade in which export and import transactions are directly interlinked i.e. import of goods are paid by export of goods. It is therefore a form of barter between countries. Counter trade strategy is generally used by UDCs to increase their exports. However, it is also used by MNCs to enter foreign markets. For instance, PepsiCo’s entry in the former USSR. There are different forms of counter trade such as barter, buy back, compensation deal and counter purchase. In case of barter, goods of equal value are directly exchanged without the involvement of monetary exchange. Under a buy back agreement, the supplier of a plant, equipment or technology. Payments may be partly made in kind and partly in cash. In a compensation deal the seller receives a part of the payment in cash and the rest in kind. In case of a counter purchase agreement the seller receives the full payment in cash but agrees to spend an equal amount of money in that country in a given period.
Multinational Companies/Corporations
Q1: What are the merits and demerits of MNC’s?
Ans: Jacques Maisonrouge, president of IBM world trade corporations defines an MNC as a company that meets five criteria:
1) It operates in many countries at different levels of economic developments.
2) Nationals manage its local subsidiaries.
3) It maintains complete industrial organizations, including R and d and manufacturing facilities in several countries.
4) It has a multinational central management.
5) It has multinational stock ownership.
James C. Baker also defines MNC’s as a company:
1) Which has direct investment base in several countries.
2) Which generally derives from 20% to 50% or more its net profits from foreign operations.
3) Whose management makes policy decisions based on the alternatives available anywhere in the world.
A significant share of the world’s industrial investment, production, employment and trade are accounted for by these more than 65000 MNC’s with over 8,00,000 affiliates.
MERITS OF THE MNC’S: -
Multinationals offer advantages to host countries as well as to the countries of their origin as explained below:
Advantages of the MNC’s to the host countries: -
1) Raise the rate of investment: - MNC’s raise the rate of investment in the host countries and thereby bring rapid industrial growth accompanied by massive employment opportunities in different sectors of the economy.
2) Facilitate transfer of technology: -Multinationals act as agents for the transfer of technology to developing countries and thereby help such countries to modernize there industries. They remove technological gaps in developing countries by providing techno-managerial skills.
3) Accelerate industrial growth: - multinationals accelerate industrial growth in host countries through collaborations, joint ventures and establishment of subsidiaries and branches. They facilitate economic growth through financial, marketing and technological services. MNC’s are rightly called “ messengers of progress”.
4) Promote export and reduce imports: - MNC’s help the host countries to reduce the imports and promote the exports by raising domestic production. Marketing facilities at global level are provided by MNC’s due to their global business contacts.
5) Provide services to professionals: - MNC’s provide the services of the skilled professional managers for managing the activities of the enterprises in which they are involved/interested. This raises overall managerial efficiency or enterprises connected with multinationals. MNC’s bring managerial revolution in host countries.
6) Facilitate efficient utilization of resources: - Multinationals facilitate efficient utilization of resources available in host countries. This leads to economic development.
7) Provide benefits of R and D activities: -Multinationals has enormous resources at their disposal. Some are utilized for R and D activities. The benefits of R and D activities are passed on to the enterprises operating in the host countries.
8) Support enterprises in host countries: - MNC’s support to enterprises in the host countries in order to support their own operations indirectly. This is how MNC’s support enterprises in the host countries to grow. Even consumers get new goods and services due to the operations of MNC’s.
9) Break domestic monopolies: - MNC’s raise competition in the host countries and thereby break domestic monopolies.
ADVANTAGES OF MULTINATIONALS TO COUNTRIES OF THEIR ORIGIN: -
1) Facilitate inflow of foreign exchange: - MNC’s collect funds from the enterprises of other countries in the form of fees, royalty, and service charges. This money is taken to the country of their origin. MNC’s make their home countries rich by facilitating inflow of foreign exchange from other countries.
2) Promote global co-operations: - MNC’s provide co-operation to poor or developing countries to develop their industries. The countries of their origin participate in such international co-operation, which is beneficial to all countries- rich and poor.
3) Ensure optimum utilization of resources: -MNC’s ensure optimum utilization of natural and other resources available in their home countries. This is possible due to their worldwide business contacts.
4) Promote bilateral trade relations: -MNC’s facilitate bilateral trade relations between their home countries and the other countries with which they have business relations.
DEMERITS OF MULTINATIONAL COMPANIES: -
1) Provide outdated technologies: - MNC’s design the technologies, which can be used in different countries. They don’t supply technology to poor countries for industrial development but for profit maximization. The technologies designed for profit maximization and not purely for meeting the needs of developing countries. The technologies supplied may be costly and may be outdated and obsolete or may not be suitable for the needs of developing countries.
2) Harm the national interests: - the activities of MNC’s in the host countries may be harmful to the national interests as MNC’s are solely guided by the profit maximization. They ignore the interests of host countries. MNC’s even make profits at the cost of developing countries.
3) Charge heavy fees: - MNC’s charge heavy fees and service charges from the enterprises in the host countries. They repatriate profits of their subsidiaries to their home countries. This leads the outflow of countries.
4) Develop monopolies: - MNC’s restrict competition and acquire monopoly power in certain areas in the host countries.
5) Use resources recklessly: -MNC’s use the resources in the host countries in a very reckless manner, which leads to fast reduction of non-renewable natural resources.
6) Dominate domestic policies: -MNC’s use their money power for political purposes. They take undue interest in political matters in the host countries. MNC’s are being openly termed as an extension of the imperialistic forces.
7) Adverse effects on life style/culture in the host countries: - MNC’s create demand for goods and services in developing countries through advertising and sales promotion techniques. As a result, people purchase costly/ luxury goods which are not really useful nor within their capacity to purchase. MNC’s create adverse effects on the cultural background of many developing countries.
8) Interfere in economic and political systems: - they put indirectly pressures for the formulation of policies that are favorable to them. They even topple the government in the host countries if its policies are against the MNC’s and their operations.
9) Avoid tax liabilities: - transfer pricing enables multinational corporations to avoid taxes by manipulating prices in the case of intra company transactions.
10) Lead to brain drain in developing countries: - multinationals are now entering in countries like India in a bigger way. They hire qualified technocrats and managerial experts. These people work for a few years in India, acquire experience and relocated as experts in Singapore, Korea or the United States for managing the activities of MNC’s. This leads to brain drain in developing countries.
MNC’S have helped and also harmed the developing countries. It is a peculiar mixture of virtues and vices, boons and banes. However no country can afford to avoid MNC’s only because it has dangers associated with them. It may be concluded that MNC’s constitute a mixed blessing to developing countries. They are helping as well as harming the developing countries. It is rightly said “MNC’s are bound to exist and eveloping countries have to learn to live with Them”.
Q) EXPLAIN THE GROWTH OF MNCs AND FACTORS CONTRIBUTING TO THE GROWTH OF MNCs?
GROWTH OF MNCs
The MNCs share in global investment, production, employment and trade has assumed considerable proportions.
According to the UN, there are 63,000 MNCs with 6,90,000 affiliates all over the globe with 2,40,000 in China and only 1400 in India. The US was the forerunner in giving births to MNCs. Today, biggest MNC’s are Japanese. T
He global liberalization wave, paved the path for faster expansion and growth of MNCs. The value added by the foreign affiliates of MNCs, as a percentage of global GDP grew from 5% in the 1980s to about 7% by the end of 90s. The MNCs control about a third of world output and the total sales of their foreign affiliates is almost equal to the GNP of all developing countries. The value of the annual sales of the largest manufacturing multinational General Motors, was about $178bn in 1996. The total sales of the 3 largest automobile firms of the world, namely, General Motors, Ford and Toyota is greater than the value of India’s GDP.
In terms of direct employment, the MNCs accounted for 73mn people worldwide and if indirect employment is considered, the figure approximates 150mn people. Over 350m people were employed by the foreign affiliates of MNCs in 1988.
A number of factors have contributed to the phenomenal growth of MNCs. Some of the important factors are as follows: -
1) Expansion of market territories: -
Rapid economic growth in a number of countries resulting in rising GDPs and per capita incomes contributed to the growing standards of living. This in turn contributed to the continuous expansion of market territories. MNCs, both contributed to the expansion of market territories and also grew in size and spread as a result of expansion of market territories.
2) Market superiorities: -
In many ways, MNCs have an edge over domestic firms, such as: -
a) Availability of reliable and current data,
b) MNCs enjoy market reputation,
c) MNCs encounters relatively less problems and difficulties in marketing the products,
d) MNCs adopt more effective advertising and sales promotion techniques, and
e) MNCs enjoy faster transportation and adequate warehousing facilities
3) Financial superiorities: -
MNCs also enjoy a number of financial advantages over domestic firms. These are: -
a) Availability of huge financial resources with the MNCs helps them to transform business environment and circumstances in their favor.
b) MNCs can use the funds more effectively and economically on account of their activities in numerous countries.
c) MNCs have easy access to international capital markets, and
d) MNCs have easy assessed to international banks and financial institutions.
4) Technological superiorities: -
MNCs are technologically prosperous on account of high and sustained spend on R&D. developing countries on account of their technological backwardness welcome MNCs to their countries because of the attendant benefits of technology transfer.
Ans: Jacques Maisonrouge, president of IBM world trade corporations defines an MNC as a company that meets five criteria:
1) It operates in many countries at different levels of economic developments.
2) Nationals manage its local subsidiaries.
3) It maintains complete industrial organizations, including R and d and manufacturing facilities in several countries.
4) It has a multinational central management.
5) It has multinational stock ownership.
James C. Baker also defines MNC’s as a company:
1) Which has direct investment base in several countries.
2) Which generally derives from 20% to 50% or more its net profits from foreign operations.
3) Whose management makes policy decisions based on the alternatives available anywhere in the world.
A significant share of the world’s industrial investment, production, employment and trade are accounted for by these more than 65000 MNC’s with over 8,00,000 affiliates.
MERITS OF THE MNC’S: -
Multinationals offer advantages to host countries as well as to the countries of their origin as explained below:
Advantages of the MNC’s to the host countries: -
1) Raise the rate of investment: - MNC’s raise the rate of investment in the host countries and thereby bring rapid industrial growth accompanied by massive employment opportunities in different sectors of the economy.
2) Facilitate transfer of technology: -Multinationals act as agents for the transfer of technology to developing countries and thereby help such countries to modernize there industries. They remove technological gaps in developing countries by providing techno-managerial skills.
3) Accelerate industrial growth: - multinationals accelerate industrial growth in host countries through collaborations, joint ventures and establishment of subsidiaries and branches. They facilitate economic growth through financial, marketing and technological services. MNC’s are rightly called “ messengers of progress”.
4) Promote export and reduce imports: - MNC’s help the host countries to reduce the imports and promote the exports by raising domestic production. Marketing facilities at global level are provided by MNC’s due to their global business contacts.
5) Provide services to professionals: - MNC’s provide the services of the skilled professional managers for managing the activities of the enterprises in which they are involved/interested. This raises overall managerial efficiency or enterprises connected with multinationals. MNC’s bring managerial revolution in host countries.
6) Facilitate efficient utilization of resources: - Multinationals facilitate efficient utilization of resources available in host countries. This leads to economic development.
7) Provide benefits of R and D activities: -Multinationals has enormous resources at their disposal. Some are utilized for R and D activities. The benefits of R and D activities are passed on to the enterprises operating in the host countries.
8) Support enterprises in host countries: - MNC’s support to enterprises in the host countries in order to support their own operations indirectly. This is how MNC’s support enterprises in the host countries to grow. Even consumers get new goods and services due to the operations of MNC’s.
9) Break domestic monopolies: - MNC’s raise competition in the host countries and thereby break domestic monopolies.
ADVANTAGES OF MULTINATIONALS TO COUNTRIES OF THEIR ORIGIN: -
1) Facilitate inflow of foreign exchange: - MNC’s collect funds from the enterprises of other countries in the form of fees, royalty, and service charges. This money is taken to the country of their origin. MNC’s make their home countries rich by facilitating inflow of foreign exchange from other countries.
2) Promote global co-operations: - MNC’s provide co-operation to poor or developing countries to develop their industries. The countries of their origin participate in such international co-operation, which is beneficial to all countries- rich and poor.
3) Ensure optimum utilization of resources: -MNC’s ensure optimum utilization of natural and other resources available in their home countries. This is possible due to their worldwide business contacts.
4) Promote bilateral trade relations: -MNC’s facilitate bilateral trade relations between their home countries and the other countries with which they have business relations.
DEMERITS OF MULTINATIONAL COMPANIES: -
1) Provide outdated technologies: - MNC’s design the technologies, which can be used in different countries. They don’t supply technology to poor countries for industrial development but for profit maximization. The technologies designed for profit maximization and not purely for meeting the needs of developing countries. The technologies supplied may be costly and may be outdated and obsolete or may not be suitable for the needs of developing countries.
2) Harm the national interests: - the activities of MNC’s in the host countries may be harmful to the national interests as MNC’s are solely guided by the profit maximization. They ignore the interests of host countries. MNC’s even make profits at the cost of developing countries.
3) Charge heavy fees: - MNC’s charge heavy fees and service charges from the enterprises in the host countries. They repatriate profits of their subsidiaries to their home countries. This leads the outflow of countries.
4) Develop monopolies: - MNC’s restrict competition and acquire monopoly power in certain areas in the host countries.
5) Use resources recklessly: -MNC’s use the resources in the host countries in a very reckless manner, which leads to fast reduction of non-renewable natural resources.
6) Dominate domestic policies: -MNC’s use their money power for political purposes. They take undue interest in political matters in the host countries. MNC’s are being openly termed as an extension of the imperialistic forces.
7) Adverse effects on life style/culture in the host countries: - MNC’s create demand for goods and services in developing countries through advertising and sales promotion techniques. As a result, people purchase costly/ luxury goods which are not really useful nor within their capacity to purchase. MNC’s create adverse effects on the cultural background of many developing countries.
8) Interfere in economic and political systems: - they put indirectly pressures for the formulation of policies that are favorable to them. They even topple the government in the host countries if its policies are against the MNC’s and their operations.
9) Avoid tax liabilities: - transfer pricing enables multinational corporations to avoid taxes by manipulating prices in the case of intra company transactions.
10) Lead to brain drain in developing countries: - multinationals are now entering in countries like India in a bigger way. They hire qualified technocrats and managerial experts. These people work for a few years in India, acquire experience and relocated as experts in Singapore, Korea or the United States for managing the activities of MNC’s. This leads to brain drain in developing countries.
MNC’S have helped and also harmed the developing countries. It is a peculiar mixture of virtues and vices, boons and banes. However no country can afford to avoid MNC’s only because it has dangers associated with them. It may be concluded that MNC’s constitute a mixed blessing to developing countries. They are helping as well as harming the developing countries. It is rightly said “MNC’s are bound to exist and eveloping countries have to learn to live with Them”.
Q) EXPLAIN THE GROWTH OF MNCs AND FACTORS CONTRIBUTING TO THE GROWTH OF MNCs?
GROWTH OF MNCs
The MNCs share in global investment, production, employment and trade has assumed considerable proportions.
According to the UN, there are 63,000 MNCs with 6,90,000 affiliates all over the globe with 2,40,000 in China and only 1400 in India. The US was the forerunner in giving births to MNCs. Today, biggest MNC’s are Japanese. T
He global liberalization wave, paved the path for faster expansion and growth of MNCs. The value added by the foreign affiliates of MNCs, as a percentage of global GDP grew from 5% in the 1980s to about 7% by the end of 90s. The MNCs control about a third of world output and the total sales of their foreign affiliates is almost equal to the GNP of all developing countries. The value of the annual sales of the largest manufacturing multinational General Motors, was about $178bn in 1996. The total sales of the 3 largest automobile firms of the world, namely, General Motors, Ford and Toyota is greater than the value of India’s GDP.
In terms of direct employment, the MNCs accounted for 73mn people worldwide and if indirect employment is considered, the figure approximates 150mn people. Over 350m people were employed by the foreign affiliates of MNCs in 1988.
A number of factors have contributed to the phenomenal growth of MNCs. Some of the important factors are as follows: -
1) Expansion of market territories: -
Rapid economic growth in a number of countries resulting in rising GDPs and per capita incomes contributed to the growing standards of living. This in turn contributed to the continuous expansion of market territories. MNCs, both contributed to the expansion of market territories and also grew in size and spread as a result of expansion of market territories.
2) Market superiorities: -
In many ways, MNCs have an edge over domestic firms, such as: -
a) Availability of reliable and current data,
b) MNCs enjoy market reputation,
c) MNCs encounters relatively less problems and difficulties in marketing the products,
d) MNCs adopt more effective advertising and sales promotion techniques, and
e) MNCs enjoy faster transportation and adequate warehousing facilities
3) Financial superiorities: -
MNCs also enjoy a number of financial advantages over domestic firms. These are: -
a) Availability of huge financial resources with the MNCs helps them to transform business environment and circumstances in their favor.
b) MNCs can use the funds more effectively and economically on account of their activities in numerous countries.
c) MNCs have easy access to international capital markets, and
d) MNCs have easy assessed to international banks and financial institutions.
4) Technological superiorities: -
MNCs are technologically prosperous on account of high and sustained spend on R&D. developing countries on account of their technological backwardness welcome MNCs to their countries because of the attendant benefits of technology transfer.
Globalisation
Q.1.GLOBALISATION OF INDIAN BUSINESS:
Globalization, liberalization and privatization were the three cornerstones of India’s New Economic Policy of 1991. The year 1991 marks the beginning of a new era in the Indian economy. The new objective to be pursued by the policy makers, strategists and executives was to make India the largest free market economy of the 21st century. In pursuit of this objective, the Indian economy was to be integrated with the world economy through a programme of structural adjustment and stabilization. While the stabilization programme included inflation control, fiscal adjustment and BOP adjustment, the structural reforms included trade and capital flows reforms, industrial deregulation, disinvestment and public enterprise reforms and financial sector reforms. The programme of economic reforms has not been entirely successful and as a result, the globalization process of the Indian economy has not gathered momentum. Indian business continues to face a number of difficulties and obstacles in their effort to globalize their business. These obstacles are as follows:
GOVERNMENT POLICY AND PROCEDURES:
Government policy and procedures in India are extremely complex and confusing. Swift and efficient action is a pre-requisite for globalization- which sadly missing. The procedures and practice continue to be bureaucratic and hence a speed breaker in the globalization effort.
HIGH COST OF INPUTS AND INFRASRUCTURAL FACILITIES:
The cost of raw materials, intermediate goods, power, finance, infrastructural facilities etc. in India is high which reduces the global competitiveness of Indian business. The quality and adequacy of infrastructural facilities in India is far from satisfactory. Further the technology employed by Indian industries and the style of operation is generally out dated.
RESISTANCE TO CHANGE:
The pre-reform era (1951- 1991) breeded lethargy, created rigid structures, systems, practices and procedures and generally instilled a laid back attitude. These factors are a hindrance to the processes of modernization, rationalization and efficiency improvement. Technological change is generally perceived to be employment reducing and hence resisted to the extent possible. For instance, information technology was introduced in India in the early eighties. However, computerization process of nationalized banks began only in the mid nineties. Excess labour is particularly employed in the public sectors in areas such as banking, insurance, and the railways and Indian industry in general. As a result, labour productivity is low and cheap labour in many a cases turns out to be dear.
SMALL SIZE AND POOR IMAGE:
Grant Indian firms are known to be global pygmies. A look at the fortune 500 list would reveal all to you. On a global scale, Indian firms are found to be small in size with low availability of resources. Indian firms there for cannot compete successfully in the international market. Indian products suffer from a poor image in the international market for both reasons valid and otherwise. Indian firms continue to miss consumer focus both domestically and internationally. The value-money equilibrium is missing in Indian products. Further, Indian firms are do not have the where- withal to keep up to the delivery schedule, accepts large orders and match up to international specifications.
GROWING COMPETITION AND POOR SPEND:
Indian firms are not only up and against competition from developed countries but also emerging Asian powerhouses such as South Korea and China. Continuous improvement in quality and usefulness and competitive costs with competitive pricing can only keep you afloat and in order to remain afloat, one has to spend quite a lot on R & D. both public and private sector outlays on research in India is deliberately low when compared to the developed countries.
NON – TARIFF BARRIERS (NTBs)
Member nations of the World Trade Organizations are bound to progressively reduce tariff rates across the board over a definite period of time so that level playing field is created in global trade. Tariff barriers are therefore not of much concern. What concerns developing nations in particular, are non- tariff barriers imposed by the developed countries. Issues such as child labor content in some of the products exported by India to the developed nations had cropped up and remain unresolved.
Q.2. ADVANTAGES OF GLOBALISATION:
For successful globalization, countries need to chalk out strategies and policies to open up the doors for the inflows of foreign direct investment (FDI). The FDI by the MNCs brings with it flow of foreign exchange/ foreign capital, inflow of technology, real capital goods, managerial and technical skills and know- how.
Globalization can easily promote exports of the country by exploiting its export potentials in a right way. Globalization can be the engine of growth by facilitating export- led growth strategy of developing country. ASEAN countries such as Indonesia, Malaysia and Thailand have demonstrated their success of export- led growth strategy supported by the FDI under globalization approach.
Globalization can provide sophisticated job opportunities to the qualified people and check ‘brain drain’ in a country. Globalization would provide varieties of products to consumers at a cheaper rate when they are domestically produced rather than imported. This would help in improving the economic welfare of the consumer class.
Under globalization, the rising inflow of capital would bring foreign exchange into the country. Consequently, the exchange reserve and balance of payments position of the country can improve. This also helps in stabilizing the external value of the country’s currency.
Under global finance, companies can meet their financial requirements easily. Global banking sector would facilitate e banking and e-business. This would integrate countries economy globally and its prosperity would be enhanced.
DISADVANTAGES OF GLOBALIZATION
Globalization is never accepted as unmixed blending. Critics have pessimistic views about its ill- consequences.
When a country is opened up and its market economy and financial sectors are well liberalized, its domestic economy may suffer owing to foreign economic invasion.
A developing economy hen lacks sufficient maturity; globalization may have adverse effect on its growth.
Globalization may kill domestic industries when they fail to improve and compete with foreign well-managed, well-established firms.
Globalization may result into economic imperialism.
Unguarded openness may become a playground for speculators. Currency speculation and speculators attacks, as happened in case of Indonesia, Malaysia, Philippines, Thailand, etc. recently, may lead to economic crisis. It may lead to unemployment, poverty and growing economic inequalities.
Q.3. STRATEGIES FOR GLOBALISATION:
Ans. When a company makes the commitment to go international, it must choose an entry strategy. This decision should reflect an analysis of market potential, company capabilities and the degree of marketing involvement and commitment management is prepared to make. The approach to foreign marketing can range from minimal investment with infrequent and indirect exporting with little thought given to market development, to large investments of capital and management in an effort to capture and maintain a permanent, specific share of world markets. Depending on the firm’s objectives and market characteristics, either approach can be profitable. In fact, a company in various country markets may employ a variety of entry modes since each country market poses a different set of conditions. Having more than one strategy allows the company to match its expertise with the specific needs of each country market.
The various strategies available to Indian firms to enter the international environment are discussed as follows:
1. EXPORTING
Exporting is perhaps the first step for a company to go global. It is the first of the attempts to understand the international environment develop markets abroad.
Exporting can be direct or indirect. With direct exporting the company sells to a customer in another country. This is the most common approach employed by companies taking their first international step because the risks of financial loss can be minimized. In contrast, indirect exporting usually means that the company sells to a buyer in the home country who in turn exports the product. Customers include large retailers like Wal-Mart or Sears, Wholesale supply houses, trading companies, and others that buy to supply customers abroad.
In a global environment, the sourcing of finance, materials, managerial inputs etc. will also be global. However, with 0.5 percent share in the world trade, India is an insignificant player. There are a number of products with large export potential but these have not been tapped properly. With a more pragmatic and realistic export policy, procedural reforms and institutional support, with technological development, modernization and expansion of production facilities, India can definitely improve its share in the world trade from its present poor status. There are three strategies to increase export revenue. These are:
1. increase the average unit value realization,
2. increase the quantity of exports and
3. Export new products.
Value added exports assume significance in the context of increasing the average unit value realization. The bulk of India’s manufactured exports constitute the low price segment of international markets. Quality improvement and aggressive marketing is required to enter the high price segments of the markets. This can be achieved by technology imports and or foreign collaborations.
The size of India’s export basket needs to be expanded by adding new products. In order to identify new products for exports, export opportunities needs to be explored and products with high foreign demand also need to be identified.
There are also market segments, and industries which are abandoned by the developed countries on account of factors such as environmental consideration, lack of competitiveness etc. For instance, developed countries are progressively vacating production of a range of chemicals due to higher expenditure on overheads and wages. Yet another strategy available to Indian Companies is Niche Marketing.
2. FOREIGN INVESTMENT
It refers to investment in foreign country. Foreign investment by Indian Companies have been negligible because of factors such as assured domestic market, want of global orientation, protective government regulation etc. However, this inward orientation has undergone substantial change after the adoption of the new economic policy 1991. With the economic liberalization and growing global orientation, many Indian firms are setting up manufacturing, assembling and trading bases overseas. These facilities are either wholly owned or foreign partnership firms.
Further, through acquisition route, Indian companies have made substantial investments abroad. The Aditya Birla Group has been pioneer in making foreign investments much before the adoption of the new economic credo. Indian companies are also setting up production bases in foreign countries to get an easy entry into the regional trade blocks. For instance, a production facility in Mexico opens the doors to the NAFTA area for Arvind Mills. Yet another example is that of Cheminoor Drugs by Dr. Reddy’s Labs in New Jersey which is set up as a subsidiary.
3. MERGERS AND ACQUISITIONS
In merger, two companies come together but only one survives and the other goes out of existence as it is merged in the other company. While in acquisition, one company (acquirer) gets control over the other company (acquired) at the willingness of each of the companies.
Mergers and acquisitions is an important entry strategy in international business. Mergers and acquisitions can be used to acquire new technology, reduce the level of competition and provides quick access to markets and distribution network. Many Indian firms have resorted to the acquisition route to gain a foothold in the foreign market. For instance, Indian companies had spent $ 711.4 million in acquisitions abroad in 2000 in industries such as InfoTech, drugs and pharmaceuticals, paints, tele-communication, petroleum and broadcasting. Some of the major acquisitions include investments by Zee Telefilms, Leading Edge System BPL Software and Tata Tea. Dataline Transcription, Teamasia semiconductors, Goa Carbons, Wockhordt and Acro lab are few other firms to name from a long list.
A very important acquisition has been the $ 271 billion leveraged buy out of Tetley by Tata Tea. With the acquisition of Tetley, Tata Tea, having been the largest integrated tea producer in the world, also got possession of the second largest global tea marketer.
Indian companies have also acquired foreign brands. Nicholas Piramal India has acquired the Indian rights for three anti-infective brands from the US firm Eli Lilly.
Ranbaxy interred the German pharma market by acquiring the generics business of Bager Ali.
The Indian Rayon acquired Madura Garments; a subsidiary of the UK based coats Viyella and also acquired global rights for Coats Viyella brands such as Louis Phillipe, Allen Solly and Peter England.
4. JOINT VENTURES
Joint Ventures as a means of foreign market entry have accelerated sharply since the 970s. Joint ventures refer to joining with foreign companies to produce or market the products or services. Besides serving as a means of lessening political and economical risks by the amount of the partner’s contribution to the venture, JVs provide a less risky way to enter markets that pose legal and cultural barriers than would be the case in an acquisition of an existing company.
There are two types of JVs, namely:
1. Contractual JVs and
2. Equity based JVs.
A contractual JV consists of a contractual arrangement between two or more companies in which certain assets and liabilities are shared for a specific purpose and time. Contractual JVs are common in the construction, extractive and consultancy services.
An equity JV is a capital sharing arrangement between an MNC and a local company or another MNC or even a foreign government. Each partner holds share in the subsidiary and shares the profits in proportion to its ownership share.
The advantage of a JV for MNC is that it can spread its investment across locations, and thereby minimize its risks.
The liberalization of policy towards the foreign investment by Indian firms along with the new economic environment seems to have given joint venture a boost. At the beginning of 1995 although there were 177 JVs in operation, there were 347 under implementation. Not only the number of JVs is increasing but also the number of countries and industries in the map of Indian JVs is expanding. Companies like Ranbaxy, Dr. Reddy’s Lab, Lupin etc. have taken the JV route to mark their presence in the overseas market.
5. STRATEGIC ALLIANCE:
A Strategic International Alliance (SIA) is a business relationship established by two or more companies to cooperate out of mutual need and to share risk in achieving a common objective.
It is an agreement between companies that is of strategic importance to one or both companies’ competitive viability. Strategy refers to the means to fulfill company’s objectives. In every day business, the term ‘strategic alliance’ is generally used to describe a wide variety of collaborations, irrespective of strategic importance. In a strategic alliance, a firm could establish relationships with organization that have the potential to add values. Bench marking, re-engineering, outsourcing, merger and acquisition are examples of strategic alliance.
On the basis of structure, strategic alliances can be classified into equity based and non- equity based.
Non-equity based alliances such as licensing agreements, marketing agreements, technology transfer agreements etc. are found to be more dynamic, constructive and strategic. The scope of strategic alliance ranges from Research and Development to distribution.
6. LICENSING AND FRANCHISING:
A means of establishing a foothold in foreign markets without large capital outlays is licensing. It is a favorite strategy for small and medium sized companies. International licensing helps a firm from one country (licensor) to permit another firm in a foreign country (licensee) to use its intellectual property such as patents, trademarks, copyrights, technology, technical know-how, marketing skill etc. in return for royal payments. Royal payments or license fee is regulated in most of the countries.
The advantages of licensing are most apparent when: capital is scarce, import restrictions forbid other means of entry, a country is sensitive to foreign ownership, or it is necessary to protect trademarks and patents against cancellation of nonuse.
An important risk of licensing is that the licensor may give birth to his own competitor i.e. the licensee can become a competitor after the expiry of the licensing agreement. The only anti-dote that is available to the licensor to pre-empt any potential or actual competition is continuous innovation. Only innovation will provide sustainable competitive advantage.
Franchising is a form of licensing in which a parent company (franchiser) grants another company (franchisee) the right to do business in a specific manner. Franchising can assume various forms such as selling the franchiser’s products, using the name of the franchiser, production and marketing techniques etc. Important forms of franchising are:
1. Manufacturer- retailer systems e.g. automobile dealership
2. Manufacturer- wholesaler system e.g. soft drink companies
3. Service firm- retailer systems e.g. lodging and fast food outlets.
Potentially, the franchise system provides an effective blending of skill centralization and operational decentralization, and has become increasingly important form of international marketing.
Globalization, liberalization and privatization were the three cornerstones of India’s New Economic Policy of 1991. The year 1991 marks the beginning of a new era in the Indian economy. The new objective to be pursued by the policy makers, strategists and executives was to make India the largest free market economy of the 21st century. In pursuit of this objective, the Indian economy was to be integrated with the world economy through a programme of structural adjustment and stabilization. While the stabilization programme included inflation control, fiscal adjustment and BOP adjustment, the structural reforms included trade and capital flows reforms, industrial deregulation, disinvestment and public enterprise reforms and financial sector reforms. The programme of economic reforms has not been entirely successful and as a result, the globalization process of the Indian economy has not gathered momentum. Indian business continues to face a number of difficulties and obstacles in their effort to globalize their business. These obstacles are as follows:
GOVERNMENT POLICY AND PROCEDURES:
Government policy and procedures in India are extremely complex and confusing. Swift and efficient action is a pre-requisite for globalization- which sadly missing. The procedures and practice continue to be bureaucratic and hence a speed breaker in the globalization effort.
HIGH COST OF INPUTS AND INFRASRUCTURAL FACILITIES:
The cost of raw materials, intermediate goods, power, finance, infrastructural facilities etc. in India is high which reduces the global competitiveness of Indian business. The quality and adequacy of infrastructural facilities in India is far from satisfactory. Further the technology employed by Indian industries and the style of operation is generally out dated.
RESISTANCE TO CHANGE:
The pre-reform era (1951- 1991) breeded lethargy, created rigid structures, systems, practices and procedures and generally instilled a laid back attitude. These factors are a hindrance to the processes of modernization, rationalization and efficiency improvement. Technological change is generally perceived to be employment reducing and hence resisted to the extent possible. For instance, information technology was introduced in India in the early eighties. However, computerization process of nationalized banks began only in the mid nineties. Excess labour is particularly employed in the public sectors in areas such as banking, insurance, and the railways and Indian industry in general. As a result, labour productivity is low and cheap labour in many a cases turns out to be dear.
SMALL SIZE AND POOR IMAGE:
Grant Indian firms are known to be global pygmies. A look at the fortune 500 list would reveal all to you. On a global scale, Indian firms are found to be small in size with low availability of resources. Indian firms there for cannot compete successfully in the international market. Indian products suffer from a poor image in the international market for both reasons valid and otherwise. Indian firms continue to miss consumer focus both domestically and internationally. The value-money equilibrium is missing in Indian products. Further, Indian firms are do not have the where- withal to keep up to the delivery schedule, accepts large orders and match up to international specifications.
GROWING COMPETITION AND POOR SPEND:
Indian firms are not only up and against competition from developed countries but also emerging Asian powerhouses such as South Korea and China. Continuous improvement in quality and usefulness and competitive costs with competitive pricing can only keep you afloat and in order to remain afloat, one has to spend quite a lot on R & D. both public and private sector outlays on research in India is deliberately low when compared to the developed countries.
NON – TARIFF BARRIERS (NTBs)
Member nations of the World Trade Organizations are bound to progressively reduce tariff rates across the board over a definite period of time so that level playing field is created in global trade. Tariff barriers are therefore not of much concern. What concerns developing nations in particular, are non- tariff barriers imposed by the developed countries. Issues such as child labor content in some of the products exported by India to the developed nations had cropped up and remain unresolved.
Q.2. ADVANTAGES OF GLOBALISATION:
For successful globalization, countries need to chalk out strategies and policies to open up the doors for the inflows of foreign direct investment (FDI). The FDI by the MNCs brings with it flow of foreign exchange/ foreign capital, inflow of technology, real capital goods, managerial and technical skills and know- how.
Globalization can easily promote exports of the country by exploiting its export potentials in a right way. Globalization can be the engine of growth by facilitating export- led growth strategy of developing country. ASEAN countries such as Indonesia, Malaysia and Thailand have demonstrated their success of export- led growth strategy supported by the FDI under globalization approach.
Globalization can provide sophisticated job opportunities to the qualified people and check ‘brain drain’ in a country. Globalization would provide varieties of products to consumers at a cheaper rate when they are domestically produced rather than imported. This would help in improving the economic welfare of the consumer class.
Under globalization, the rising inflow of capital would bring foreign exchange into the country. Consequently, the exchange reserve and balance of payments position of the country can improve. This also helps in stabilizing the external value of the country’s currency.
Under global finance, companies can meet their financial requirements easily. Global banking sector would facilitate e banking and e-business. This would integrate countries economy globally and its prosperity would be enhanced.
DISADVANTAGES OF GLOBALIZATION
Globalization is never accepted as unmixed blending. Critics have pessimistic views about its ill- consequences.
When a country is opened up and its market economy and financial sectors are well liberalized, its domestic economy may suffer owing to foreign economic invasion.
A developing economy hen lacks sufficient maturity; globalization may have adverse effect on its growth.
Globalization may kill domestic industries when they fail to improve and compete with foreign well-managed, well-established firms.
Globalization may result into economic imperialism.
Unguarded openness may become a playground for speculators. Currency speculation and speculators attacks, as happened in case of Indonesia, Malaysia, Philippines, Thailand, etc. recently, may lead to economic crisis. It may lead to unemployment, poverty and growing economic inequalities.
Q.3. STRATEGIES FOR GLOBALISATION:
Ans. When a company makes the commitment to go international, it must choose an entry strategy. This decision should reflect an analysis of market potential, company capabilities and the degree of marketing involvement and commitment management is prepared to make. The approach to foreign marketing can range from minimal investment with infrequent and indirect exporting with little thought given to market development, to large investments of capital and management in an effort to capture and maintain a permanent, specific share of world markets. Depending on the firm’s objectives and market characteristics, either approach can be profitable. In fact, a company in various country markets may employ a variety of entry modes since each country market poses a different set of conditions. Having more than one strategy allows the company to match its expertise with the specific needs of each country market.
The various strategies available to Indian firms to enter the international environment are discussed as follows:
1. EXPORTING
Exporting is perhaps the first step for a company to go global. It is the first of the attempts to understand the international environment develop markets abroad.
Exporting can be direct or indirect. With direct exporting the company sells to a customer in another country. This is the most common approach employed by companies taking their first international step because the risks of financial loss can be minimized. In contrast, indirect exporting usually means that the company sells to a buyer in the home country who in turn exports the product. Customers include large retailers like Wal-Mart or Sears, Wholesale supply houses, trading companies, and others that buy to supply customers abroad.
In a global environment, the sourcing of finance, materials, managerial inputs etc. will also be global. However, with 0.5 percent share in the world trade, India is an insignificant player. There are a number of products with large export potential but these have not been tapped properly. With a more pragmatic and realistic export policy, procedural reforms and institutional support, with technological development, modernization and expansion of production facilities, India can definitely improve its share in the world trade from its present poor status. There are three strategies to increase export revenue. These are:
1. increase the average unit value realization,
2. increase the quantity of exports and
3. Export new products.
Value added exports assume significance in the context of increasing the average unit value realization. The bulk of India’s manufactured exports constitute the low price segment of international markets. Quality improvement and aggressive marketing is required to enter the high price segments of the markets. This can be achieved by technology imports and or foreign collaborations.
The size of India’s export basket needs to be expanded by adding new products. In order to identify new products for exports, export opportunities needs to be explored and products with high foreign demand also need to be identified.
There are also market segments, and industries which are abandoned by the developed countries on account of factors such as environmental consideration, lack of competitiveness etc. For instance, developed countries are progressively vacating production of a range of chemicals due to higher expenditure on overheads and wages. Yet another strategy available to Indian Companies is Niche Marketing.
2. FOREIGN INVESTMENT
It refers to investment in foreign country. Foreign investment by Indian Companies have been negligible because of factors such as assured domestic market, want of global orientation, protective government regulation etc. However, this inward orientation has undergone substantial change after the adoption of the new economic policy 1991. With the economic liberalization and growing global orientation, many Indian firms are setting up manufacturing, assembling and trading bases overseas. These facilities are either wholly owned or foreign partnership firms.
Further, through acquisition route, Indian companies have made substantial investments abroad. The Aditya Birla Group has been pioneer in making foreign investments much before the adoption of the new economic credo. Indian companies are also setting up production bases in foreign countries to get an easy entry into the regional trade blocks. For instance, a production facility in Mexico opens the doors to the NAFTA area for Arvind Mills. Yet another example is that of Cheminoor Drugs by Dr. Reddy’s Labs in New Jersey which is set up as a subsidiary.
3. MERGERS AND ACQUISITIONS
In merger, two companies come together but only one survives and the other goes out of existence as it is merged in the other company. While in acquisition, one company (acquirer) gets control over the other company (acquired) at the willingness of each of the companies.
Mergers and acquisitions is an important entry strategy in international business. Mergers and acquisitions can be used to acquire new technology, reduce the level of competition and provides quick access to markets and distribution network. Many Indian firms have resorted to the acquisition route to gain a foothold in the foreign market. For instance, Indian companies had spent $ 711.4 million in acquisitions abroad in 2000 in industries such as InfoTech, drugs and pharmaceuticals, paints, tele-communication, petroleum and broadcasting. Some of the major acquisitions include investments by Zee Telefilms, Leading Edge System BPL Software and Tata Tea. Dataline Transcription, Teamasia semiconductors, Goa Carbons, Wockhordt and Acro lab are few other firms to name from a long list.
A very important acquisition has been the $ 271 billion leveraged buy out of Tetley by Tata Tea. With the acquisition of Tetley, Tata Tea, having been the largest integrated tea producer in the world, also got possession of the second largest global tea marketer.
Indian companies have also acquired foreign brands. Nicholas Piramal India has acquired the Indian rights for three anti-infective brands from the US firm Eli Lilly.
Ranbaxy interred the German pharma market by acquiring the generics business of Bager Ali.
The Indian Rayon acquired Madura Garments; a subsidiary of the UK based coats Viyella and also acquired global rights for Coats Viyella brands such as Louis Phillipe, Allen Solly and Peter England.
4. JOINT VENTURES
Joint Ventures as a means of foreign market entry have accelerated sharply since the 970s. Joint ventures refer to joining with foreign companies to produce or market the products or services. Besides serving as a means of lessening political and economical risks by the amount of the partner’s contribution to the venture, JVs provide a less risky way to enter markets that pose legal and cultural barriers than would be the case in an acquisition of an existing company.
There are two types of JVs, namely:
1. Contractual JVs and
2. Equity based JVs.
A contractual JV consists of a contractual arrangement between two or more companies in which certain assets and liabilities are shared for a specific purpose and time. Contractual JVs are common in the construction, extractive and consultancy services.
An equity JV is a capital sharing arrangement between an MNC and a local company or another MNC or even a foreign government. Each partner holds share in the subsidiary and shares the profits in proportion to its ownership share.
The advantage of a JV for MNC is that it can spread its investment across locations, and thereby minimize its risks.
The liberalization of policy towards the foreign investment by Indian firms along with the new economic environment seems to have given joint venture a boost. At the beginning of 1995 although there were 177 JVs in operation, there were 347 under implementation. Not only the number of JVs is increasing but also the number of countries and industries in the map of Indian JVs is expanding. Companies like Ranbaxy, Dr. Reddy’s Lab, Lupin etc. have taken the JV route to mark their presence in the overseas market.
5. STRATEGIC ALLIANCE:
A Strategic International Alliance (SIA) is a business relationship established by two or more companies to cooperate out of mutual need and to share risk in achieving a common objective.
It is an agreement between companies that is of strategic importance to one or both companies’ competitive viability. Strategy refers to the means to fulfill company’s objectives. In every day business, the term ‘strategic alliance’ is generally used to describe a wide variety of collaborations, irrespective of strategic importance. In a strategic alliance, a firm could establish relationships with organization that have the potential to add values. Bench marking, re-engineering, outsourcing, merger and acquisition are examples of strategic alliance.
On the basis of structure, strategic alliances can be classified into equity based and non- equity based.
Non-equity based alliances such as licensing agreements, marketing agreements, technology transfer agreements etc. are found to be more dynamic, constructive and strategic. The scope of strategic alliance ranges from Research and Development to distribution.
6. LICENSING AND FRANCHISING:
A means of establishing a foothold in foreign markets without large capital outlays is licensing. It is a favorite strategy for small and medium sized companies. International licensing helps a firm from one country (licensor) to permit another firm in a foreign country (licensee) to use its intellectual property such as patents, trademarks, copyrights, technology, technical know-how, marketing skill etc. in return for royal payments. Royal payments or license fee is regulated in most of the countries.
The advantages of licensing are most apparent when: capital is scarce, import restrictions forbid other means of entry, a country is sensitive to foreign ownership, or it is necessary to protect trademarks and patents against cancellation of nonuse.
An important risk of licensing is that the licensor may give birth to his own competitor i.e. the licensee can become a competitor after the expiry of the licensing agreement. The only anti-dote that is available to the licensor to pre-empt any potential or actual competition is continuous innovation. Only innovation will provide sustainable competitive advantage.
Franchising is a form of licensing in which a parent company (franchiser) grants another company (franchisee) the right to do business in a specific manner. Franchising can assume various forms such as selling the franchiser’s products, using the name of the franchiser, production and marketing techniques etc. Important forms of franchising are:
1. Manufacturer- retailer systems e.g. automobile dealership
2. Manufacturer- wholesaler system e.g. soft drink companies
3. Service firm- retailer systems e.g. lodging and fast food outlets.
Potentially, the franchise system provides an effective blending of skill centralization and operational decentralization, and has become increasingly important form of international marketing.
Saturday, November 14, 2009
Key Performance Indicators of Supply Chain Retail
Abstract
This paper attempts to track key performance indicators (KPIs) in order to figure out the performance of the Supply Chain in the retail sector. It also focuses on inventory replenishment strategies and capacity utilization in the retail sector. In recent years, this sector has spent considerable amount of time and money trying to improve its operations in such a way so as to respond efficiently to customers’ needs. This has led to several developments like the introduction of automated store ordering, usage of RFID and etc.
The KPIs helps in directly analyzing the performance of every specific activity and operation and hence also helps in zeroing down to the exact root of the problem, if any, and thus helps the managers to rectify them. The Improvement Opportunities are further explained in detail for achieving a better performance.
The Key Performance Indicators (KPIs)
The KPIs are segregated into different categories accordingly as follows:
Supply Chain and Logistics: The network of retailers, distributors, transporters, storage facilities and suppliers that participate in the sale, delivery and production of a particular product.
• % of time spent picking back orders: Number of hours spent on picking back orders as a percentage of working hours.
• Sales order by FTE : This indicator measures the number of customer orders that are processed by full time employees per day. This helps evaluate the workforce cost per order.
• Scrap (or leftover) value %: Scrap (or leftover) value as a percentage of production value.
• Inventory Accuracy: Most Advanced Planning Systems calculate net inventory requirements. If the book inventory used as the basis for these calculations has a high error, the net inventory requirements generated will not reflect the true inventory needs. The inventory error should be factored into the safety stock calculation to protect service levels from variance in inventory due to inventory count accuracy.
Assertive continuous improvement programs should be in place to support a decrease in inventory count errors.
Inventory Accuracy = (|book inventory - counted inventory|)/book inventory
• Inventory Carrying Costs: Inventory Carrying Cost = Inventory Carrying Rate x Average Inventory Value
• Inventory Carrying Rate: This can best be explained by the example below
1. Add up annual Inventory Costs: Example: Storage =Rs800k, Handling= Rs400k, Obsolescence =Rs600k, Damage= Rs800k, Administrative= Rs600k, Loss (pilferage etc)= Rs200k. Hence Total=Rs3,400k
2. Divide the Inventory Costs by the Average Inventory Value: Example: Rs3,400k / Rs34,000k = 10%
3. Add: Opportunity Cost of Capital (the return you could reasonably expect if you used the money elsewhere) = 9%, Insurance =4%, Taxes= 6%. Hence, total= 19%
4. Add the percentages: 10% + 19% = 29%. The Inventory Carrying Rate = 29%
• Missed Deliveries per Million (MPM): Measures supplier on time delivery by part reference ordered using the same logic as the quality measure PPM.
Several missed categories are defined such as ; Missing part reference, undershipped, overshipped, delivery window missed etc.
MPM = (Total number of missed deliveries / Total number of part references ordered) x 1,000,000
• Delivery Schedule Adherence (DSA): Delivery Schedule adherence (DSA) is a business metric used to calculate the timeliness of deliveries from suppliers. Delivery schedule adherence is calculated by dividing the number of on time deliveries in a period by the total number of deliveries made. The result is then multiplied by 100 and expressed as a percentage.
• Customer order promised cycle time: The anticipated or agreed upon cycle time of a Purchase Order. It is gap between the Purchase Order Creation Date and the Requested Delivery Date. This tells you the cycle time that you should expect (NOT the actual).
• Inventory replenishment cycle time: Measure of the Manufacturing Cycle Time plus the time included to deploy the product to the appropriate distribution center.
• Material value add : Sell price minus material cost divided by material cost.
• Supply chain cycle time: The total time it would take to satisfy a customer order if all inventory levels were 0.
• Fill Rate: The number of items ordered compared with items shipped. Fill rate can be calculated on a line item, SKU, case or value basis.
• On time ship rate: What percent of orders where shipped on or before the requested ship date. On time ship rate can be calculated on a line item, SKU, case or value basis.
• Perfect Order Measure / Fulfillment: The error-free rate of each stage of an order. Error rates are captured at each stage (order entry, picking, delivery, shipped without damage, invoiced correctly) and multiplied together.
• Customer order cycle time: The average time it takes to fill a customer order.
• % of backorders: The number (or percentage) of unfulfilled orders.
Inventory: Inventory is a list for goods and materials, or those goods and materials themselves, held available in stock by a business. Inventory are held in order to manage and hide from the customer the fact that supply delay is longer than delivery delay, and also to ease the effect of imperfections in the manufacturing process that lower production efficiencies if production capacity stands idle for lack of materials.
• Independent demand ratio: For manufacturers that also supply replacement parts and consumables this metric helps to define the % mix of demand for an item from independent (outside sources) vs dependent (inside sources). The ratio is calculated by dividing the unit usage for customer orders by the total unit usage of the item from all sources (work orders, sales samples, destructive testing, inventory adjustments, etc.)
• Early receipts to MRP date (required date): Early receipts to MRP date - This is a measure on your Planning efficiencies. Some planners or warehouse personnel may request that the material be brought in long before the plant/operators need the parts. Reasons for doing so may be quality, lead time variance, buffer stock etc. Early receipts to MRP produce higher levels of inventory that are not required yet. In a way, this is at the other end of the scale than JIT. Measure: MRP due date vs Receive to Dock (stores) date.
• Early PO Receipts to PO due date: Early receipts to PO date - This is a measure on your suppliers and their diligence to supply per the contract date. Early receipts to PO produce unexpected deliveries turning up, congested goods inwards and of course higher that projected inventory levels. Measure: PO due date vs Receive to Dock (stores) date.
• Sell through %: A percentage of units sold during a period and is equal to Units sold divided by (units sold + on hand inventory). This can also be described as Units sold divided by Beginning Inventory Quantity.
• Inactive Stock: Products with Stock (in units or Rs), and without movement-sales in a given period of time (depending on movement of the market). Useful to define continuity of a specific product-size (SKU), or promotion campaigns. Most useful in companies with a big number of SKUs.
• Average age of inventory: The (average) age of each product in stock. For example, product received in Jan, but remains until Aug.
• Unit Cost per batch: Unit Cost per batch = (Cost/Quantity) for each batch Primarily used in FIFO (First In First Out) Method Assumes an inventory of non-unique goods (that is, every one is similar to every other one) Generally preferred inventory valuation method. Assumes inventory is sold in the order that it is stocked, with the oldest goods sold first and the newest goods sold last. Uses the unit cost per batch of acquired/produced goods, and counts the inventory backwards from the newest batch.
• Inventory Value: Inventory Value = (Average Unit Cost) x (Units of current Inventory)
• Stock cover: Stock cover is the length of time that inventory will last if current usage continues.
• Stockouts in period: Stockouts indicate where a demand cannot be met due to the absence of the required inventory.
• Inventory lead time: Lead time is the length of time it takes to obtain inventory from suppliers.
• Inventory Turnover: The number of times that a company’s inventory cycles or turns over per measurement period (month, quarter, year).
• Inventory months of supply: Inventory On Hand / Avg Monthly Usage
SCOR: The Supply-Chain Operations Reference-model (SCOR) is a process reference model that has been developed and endorsed by the Supply-Chain Council as the cross-industry standard diagnostic tool for supply-chain management. SCOR enables users to address, improve, and communicate supply-chain management practices within and between all interested parties.
• Order fulfillment cycle time: Order Fulfillment Cycle Time is a continuous measurement defined as the amount of time from customer authorization of a sales order to the customer receipt of product.
• Total supply chain management cost: Total Supply Chain Management Cost is a discrete measurement defined as the fixed and operational costs associated with the Plan, Source, Make, and Deliver supply chain processes.
• Upside supply chain flexibility: Upside Supply Chain Flexibility is a discrete measurement defined as the amount of time it takes a supply chain to respond to an unplanned 20% increase in demand without service or cost penalty.
• Direct Product Cost: Sum of costs associated with manufacturing a specific product.
• Direct Labor Cost: Sum of costs associated with payment of the employee insurances, taxes etc.
• Direct Material Cost: Sum of costs associated with acquisition of support material.
• Time needed to recruit/hire/train additional labor: Amount of time required to achieve a certain substantial improvement concerning the number of employees.
• Time needed to obtain additional capital: Amount of time required to achieve a certain substantial improvement concerning capital.
• Time needed to obtain additional equipment: Amount of time required to achieve a certain substantial improvement concerning equipment acquisition.
• Finished product cycle time: Average time associated with finalizing activities, such as: package, stock, etc.
• Test cycle time: Average time associated with testing and trying out activities.
• Cost of managing processes: Periodic costs of managing processes, usually based on the number of FTEs involved in management functions for processes.
• Cost of goods sold (COGS): Cost of Goods Sold includes all expenses directly associated with the production of goods or services the company sells (such as material, labor, overhead, and depreciation). It does not include SG&A.
• Perfect Order Measure / Fulfillment: The error-free rate of each stage of an order. Error rates are captured at each stage (order entry, picking, delivery, shipped without damage, invoiced correctly) and multiplied together.
Cash Conversion Cycle (CCC): A metric that expresses the length of time, in days, that it takes for a company to convert resource inputs into cash flows. The cash conversion cycle attempts to measure the amount of time each net input dollar is tied up in the production and sales process before it is converted into cash through sales to customers. This metric looks at the amount of time needed to sell inventory, the amount of time needed to collect receivables and the length of time the company is afforded to pay its bills without incurring penalties. Also known as “cash cycle”. Calculated as: CCC = DIO + DSO - DPO Where: DIO represents days inventory outstanding, DSO represents days sales outstanding, DPO represents days payable outstanding. Usually a company acquires inventory on credit, which results in accounts payable. A company can also sell products on credit, which results in accounts receivable. Cash, therefore, is not involved until the company pays the accounts payable and collects accounts receivable. So the cash conversion cycle measures the time between outlay of cash and cash recovery. This cycle is extremely important for retailers and similar businesses. This measure illustrates how quickly a company can convert its products into cash through sales. The shorter the cycle, the less time capital is tied up in the business process, and thus the better for the company’s bottom line.
Improvement Opportunities in Retail Logistics
In general, the logistic decisions taken by the retailer can be improved by increasing:
• the level of differentiation when controlling the operations;
• the level of sophistication in the Decision Support Systems;
• the level of integration of multiple decisions (made by the retailer company and/or its supply chain partners).
Below, several examples are given to illustrate how each of these general guidelines can be translated into specific solutions, taking into account the fact that different retailers and/or different products need different logistic solutions.
The Level of Differentiation when Controlling the Operations
Different types of items need different ways of replenishment. For example ABC-classification, based on the perception that items with large turnover (A-items) need to be treated differently compared to items with low turnover (C-items). While there is some value in this approach, we propose a different classification for retail-items. We distinguish the following five main product categories:
1. Phasing-in/out items (including items with a short Product Life Cycle)
2. Promotion items
3. Purchasing driven items
4. Capacity driven items
5. Regular items
Below, each of these five product categories is discussed in more detail.
The phasing-in/out items (including items with a short product life cycle) are different from other items since there is either very little demand history available, or it becomes very risky to carry inventory due to obsolescence. Thus, for these items, special attention is given to issues like demand forecasting and inventory management in an environment with high risk of obsolescence and/or markdown policies. Improvement opportunities reported in the literature are:
• Using similarity in forecasts made by different individual people as an indicator of forecast accuracy when no sales data are available yet;
• Using early sales data to improve demand forecasts in the case of style goods;
• Using repeat rate information from customer cards to improve demand forecasts when new products are introduced;
• Using optimal markdown policies to reduce the risk of obsolescence.
The demand forecasts for items with a short product life cycle (like style goods) can be improved substantially in two ways. The first improvement applies when an initial production or buy decision has to be made and no sales data are available yet for the new assortment. When each member of a buying committee makes an independent demand forecast for every product, the variance in these individual forecasts is an almost perfect predictor of the overall demand forecast accuracy. This allows the manufacturer and/or retailer to select the items with a high demand forecast accuracy, which can be manufactured at the beginning of the production season. The production of items with low demand forecast accuracy is postponed until a group of large retailers placed their first orders (called the Early Write program). These first orders typically make up approximately 20% of the total orders. While this procedure was first applied at a manufacturer, a similar procedure may also be used at a retailer, when he/she receives his/her first actual sales data in the new season. Fisher et al. (2001) report how the inventory replenishment of products with a short product lifecycle can be optimized for a retailer, when the retailer has two buying opportunities: an initial buy and a reorder opportunity.
Another tool to quickly evaluate the performance of items that are phasing in is applied by Dunnhumby at Tesco (Hill and Dowle, 2003). The strength of their approach is that they use detailed information on the buying behavior of individual customers. This is possible thanks to the retailer’s customer card, which is providing them with information for more than millions of customers. When a new product is introduced, they measure not only the sales rate, but also the repeat rate, which is defined as the proportion of customers who come back to the store for the new product. This information enables them to tell within weeks of the launch whether a product is successful or not. To forecast demand, they identify the 10 most similar product launches (in terms of how the repeat rate evolves over time) that have taken place in the same product category in the last 2.5 years.
The promotion items are items that are part of the regular assortment, but are either offered temporarily at a reduced price or offered at the regular price but with additional visibility (e.g. via advertisements or via a special location in the store).
Some of the possible Improvement opportunities are:
• Using marketing intelligence and/or econometric models to forecast demand for the promotion items and their substitutes
• Using a push-strategy with two waves
• Coordinating the promotion with the supplier
For these items, demand should no longer be forecasted based on extrapolation of time series (e.g. via methods like exponential smoothing or moving average, which are typically used when the item is not promoted), but based on marketing intelligence taking into account price-elasticities and/or the impact of promotions and advertising on consumer buying behavior. Since the sales during promotions may well be a (large) multiple of regular sales, promotions should be typically coordinated with external suppliers to make sure enough products are available in time in the retailers’ DC. For items in the same product category as the promoted item, substitution effects may occur, which have to be taken into account when forecasting their demand.
While regular items are typically pulled by the retail stores, promotion items are typically pushed by a central decision maker. For example, the shipments from the DC may typically be based on a so-called “alpha-policy”: the items are distributed in two waves, and, in the first wave, alpha % is pushed to the stores. Often, the optimal value for alpha is somewhere between 70 and 80%. A few days after the promotion started, the remaining 20 to 30% is distributed based on the early sales data.
The purchasing driven items are one-time-items that are not part of the regular assortment, but are bought by the Purchasing department. The reason might be that they spotted a special buying or selling opportunity. The purchasers buy a certain quantity of the product, and when this lot is sold-out, no replenishment from the supplier takes place.
The amount purchased is often determined by purchasing considerations (e.g. based on discount-opportunities) rather than by demand forecasting. For the distribution of the purchasing driven items to the stores, a push-strategy with two waves, like the alpha-policy, may be adopted.
The capacity driven items are items used by the Operations department to smooth handling and/or transportation capacities. If, for example, the demand for these capacities varies within the week, smoothing may lead to a reduction in the total assets needed.
To smooth handling-capacities in the DC and the stores, the review period for items with sufficient excess shelf space1 may be increased by decreasing the delivery frequency. For example, a store may order part of its assortment on a weekly basis, while another part of its assortment is ordered on a daily basis. The items ordered on a weekly basis can be ordered in the quiet part of the week, in order to smooth the handling capacity in the retail supply chain. Ordering with a lower frequency often leads to higher lot-sizes per item, implying also higher handling efficiency. Another way to benefit from reduced ordering frequencies is to redesign the retailer’s DC. If all items ordered on a weekly basis are stored in a separate part of the DC, the total walking distance for the order pickers per week can be reduced substantially. A pre-requisite for this is that all items in this part of the DC have excess shelf space in all stores.
To smooth transportation capacities, large volume/large sales items may be used. In groceries, these are typically items like soft drinks. On Tuesday and Wednesday, the regular replenishment quantities ordered by the stores may be low, while on Thursday and Friday these quantities may be high. By ordering these items in advance on Tuesday and Wednesday instead of on Thursday and Friday, the capacity load is smoothed. If the retail store has little storage space available, this option may not be feasible.
The regular items are all items that are not phasing in or out, are not on promotion, and are not purchasing or capacity driven. Before discussing the operational control of the regular items in the store, a few notes should be made on the trade-off between inventory holding costs and customer service, and its impact on the control of the entire supply chain. In several projects with retailers, it has been noted that at the operational level (where the size of the store and the assortments are given), the space in the retail store should be considered as a constraint rather than a cost factor. Moreover, handling costs at the retailer’s DC and particularly at the store level usually outweigh the relevant
1 The items with sufficient excess shelf space are often slow-moving items and/or (physically) small items.
inventory holding costs for regular items by far. In addition, the inventory contributes most to the service level of the final customer, if this inventory is stored mainly downstream in the supply chain. Therefore, the supply chain should often aim to handle goods as long as possible in the most efficient handling units (trucks or pallets (or even layers) when distributed from the manufacturer to the retailer’s DC), and accept the higher inventory levels in the retailer’s DC. The goods can be shipped as soon as they are produced. This concept is called Supply Driven Coordination or Chain Synchronization. Moreover, from the retailer’s DC one might ship inventory as soon as possible to the store, when it fits on the shelves (given the number of facings, determined at the tactical level in the planograms).
In current ASO systems, the regular items often follow a traditional (R,s,nQ)-policy2. This means that every review period (R), the inventory position is checked to see whether it is below the reorder level (s). If so, n times Q items are being ordered with Q being the case pack size and n the minimal integer number of case packs needed to make sure that, after reordering, the inventory position is equal to or higher than s. These parameters still leave a number of options open to further differentiate the inventory replenishment strategies within the regular items.
For example, the review period R may be different for different items. In a supermarket environment, we noted that perishables and non-perishables have clear distinct sales and logistic characteristics. By definition, perishables have a smaller Shelf Life than non-perishables. As a result, when controlling perishables’ inventories, the focus is more on reducing waste. For perishables with a very low Shelf Life, this reduction of waste may be achieved by decreasing the review period (i.e. by increasing the delivery frequency).
Not only the review period may be different for different items, but also the reorder level may be determined in a different way for different items. If we consider again the perishables with a very low Shelf Life, we note that apart from decreasing the review period, other options to reduce the waste are: reduction of the lead-time (e.g. by using cross-docking or direct delivery), keeping average sales per item relatively high (by keeping assortments limited) and/or using the customers’ willingness to substitute demand within a product category.
2 Note that a full-service concept (fill the shelves as soon as a new case pack fits in) is a special case of (R,s,nQ) with s equal to the maximum shelf capacity minus the case pack size plus one consumer unit.
Apparently, for these items, the reorder level should not only be based on small lead-times and high average demand, but also take into account the product substitution. Most ASO systems are primarily designed for non-perishables and do not take into account these substitution effects. For items with very high substitution rate (e.g. bread) this would lead to unrealistic reorder levels.
For vegetables and fruit, reduction of waste is also important, and this can be improved by increasing the quality of the demand forecast. Note that the demand forecast is a major factor in the reorder level. The demand forecast might be improved by taking into account price-elasticity, the quality of the inventory on hand and seasonal effects.
Finally, for perishables with multiple lots on the shelf, each lot having a different age, more complex models may be needed to determine the reorder level. There are numerous models in the literature dealing with perishable items.
The Level of Sophistication in Reorder Systems
Thanks to economies of scale and cheaper and better information technology, large retail chains are trying to distinguish themselves from other retailers by increasing the level of sophistication of their reorder systems. At this moment, the quality of reorder systems varies greatly between retail chains, and, even within retail chains, it may differ substantially per retailer. The level of sophistication of their reorder system may differ with respect to:
1. the level of automation;
2. the quality of the input data;
3. the intelligence in setting the logistic parameters in the reorder system;
4. the ability to visualize economic trade-offs;
5. the ability of the personnel to make decisions or to evaluate proposed decisions.
In some stores, the reorder decisions are still made manually, without any support from a computer. In other stores, the computer may give advice on the timing and the quantity to be ordered for most items. But even in those stores, part of the assortment may still be ordered without the help of a computer. At a grocer’s for example, we noted that the majority of non-perishables were ordered via an ASO system, while certain perishables were ordered manually, since they either required additional intelligence (like a judgment on the quality of the inventory for vegetables), or they had to be ordered via a separate ordering system (belonging to a particular supplier).
Even when automated store ordering is implemented, the data quality has a large impact on the success of the system. It is known from empirical research that inventory data are highly inaccurate. To increase the sales data accuracy retailers may either apply more strict rules on how to register sales, or they may attach an electronic identification device to each individual product, which is scanned automatically at the cash register.
The intelligence in setting the logistic parameters in the system (i.e. the reorder level and the order quantity) also differs a great deal. Sometimes, a fixed reorder level is applied, and sometimes the reorder level varies over time, taking into account weekly sales patterns, seasonality and/or trends in sales. In some cases, the determination of the reorder level depends on many different variables like the weather, substitution effects, the review period, the price, etc. These more complex situations are often not dealt with by the ASO systems, but are often handled by store clerks who have considerable experience in their product category.
Also the order quantity is determined in many different ways. The simplest case is when the supplier determines the order quantity by fixing the case pack size (typically for most items in the supermarket). If, however, the item is made for one particular retailer only, the retailer can optimize the case pack size. This optimization should not only include the minimization of the inventory holding costs and the fixed ordering costs, but also take into account operational constraints like the maximum shelf capacity. Ideally, the computer should not only calculate the optimal solution, but also offer insight to the decision maker on the economic trade-offs between important performances indicators. In the example of the case pack size, we can think of the following performance indicators: the number of orders per year, the total handling time needed, the expected total number of refills needed (if the case pack size is too big to put on the shelf), the total inventory and the resulting service level to the customers
To be able to make this trade-offs the personnel needs good training. Purchasers for example, who are often responsible for setting the case pack size in cooperation with the supplier, may be more focused on and trained in getting the lowest price than in making an overall evaluation of the impact of the case pack size on all performance indicators. In addition, at the store level, where store managers or store clerks are responsible for the determination of the order quantities, the level of education may differ greatly.
The Level of Integration of Multiple Decisions (Made by the Retail Company and/or Its Supply Chain Partners).
The decisions with respect to inventory and capacity management are often affecting many different performance indicators, organizational units and hierarchical levels within these organizational units at the same time. Often, in practice only partial effects are taken into account when decisions are being made. As a result, the quality of the decision-making can be improved by increasing the level of integration. We distinguish three types of integration:
1. Integration of all relevant performance indicators in the supply chain;
2. Integration of decisions made at different organizational units;
3. Integration or coordination of decisions made at different hierarchical levels.
Below some examples are given, which are related to inventory and capacity management and which were encountered in retail supply chains. Each example includes one or more types of integration.
Example 1
When deciding on the case pack size, a non-food-retailer used the classical Economic Order Quantity formula. This formula is almost a hundred years old and applied successfully at many companies in multiple industries. The formula is derived from a model, which only considers the inventory holding costs and the fixed ordering costs. Cost analysis in several retail supply chains (including this one) showed that, in fact, handling costs are often far more important than inventory holding costs, and should, therefore, be included in the decision-making. As a matter of fact, not only handling costs in the store, but also handling costs at the retailers’ DC and/or the supplier may be significant and affected by the decision on the case pack size. In this case, the handling at the retailer’s DC had to be taken into account as well, whereas the implications for the supplier were only minor. Finally, note that even a focus on total relevant costs in the entire supply chain may be too narrow-minded. The customer service level for example may also be affected by the case pack size.
Example 2
Within retail chains, Marketing and Operations are often separate departments. Marketing typically decides on issues like the marketing strategy, target customer service level, the store layout, depth and breadth of the assortment, pricing, promotions and shelf space allocation (via planograms). Operations typically decide on issues like (in) direct delivery, delivery frequencies, replenishment strategies (pull/push), reorder levels, minimum lot-sizes, etc.
Sometimes the decisions from both departments are interdependent, but this is not always taken into account when the actual decisions are being made. For example, planograms and reorder levels should be matched. If the space allocated to a product is less than the space required for operations (which is mainly based on the reorder level and the case pack size), inefficient handling may be the result: if an order arrives at the store, it may not fit on the shelves, leading to leftovers, which are sent to the backroom and have to be taken back to the shelves again later on.
Example 3
A retailer typically aims for a particular market segment and designs his logistics strategy to meet the requirements of this market segment. For example, some retailers aim for high customer service, while others primarily aim for low costs. To make their strategies work, the retail companies have to ensure that their long-term marketing and logistics strategies are in line with the replenishment strategies applied at the store level every day. If, e.g. at the shop floor, the replenishment strategy is to fill the shelves completely as soon as a new case pack fits in, this would be in line with a high customer service objective, but not with a low cost strategy. In case the inventory replenishment strategy is determined locally (at the store level) by individual people, there is a serious risk that either these people have different objectives, or they are simply not aware of the link between their decisions and the strategy of the retail chain.
Concluding Remarks
In this paper, we have shown that with the knowledge of the KPIs both customer service and the capacity utilization in retail chains can be increased by improving the logistic decisions taken by the retailer. New technologies allow the retailers to improve their logistic decisions by increasing either the level of differentiation, the level of sophistication and/or the level of integration in their decision-making.
We have described the KPIs by dividing it into different categories of its respective field: Supply Chain and Logistics, Inventory, SCOR (Supply-Chain Operations Reference-model), Cash Conversion Cycle (CCC). All these metrics aids in the supply chain management of the retail sector. In this paper, we described the meaning, formula and significance of each KPI.
In many retail chains, different items need different logistic solutions. In this paper, we distinguished five product categories: items that are phasing-in/out, items that are on promotion, items that are driving the utilization of capacities, and regular items. All these categories require a different way of controlling the operations. Most ASO systems currently applied are primarily developed for regular items. In this paper, we describe how these ASO systems can be improved to also support other products. All these findings are based on observations at the retailers in Kolkata.
A final remark can be made on the importance of the analysis of the KPIs in retail chains, and its impact on the focus of Retail Logistics and its decisions.
This paper attempts to track key performance indicators (KPIs) in order to figure out the performance of the Supply Chain in the retail sector. It also focuses on inventory replenishment strategies and capacity utilization in the retail sector. In recent years, this sector has spent considerable amount of time and money trying to improve its operations in such a way so as to respond efficiently to customers’ needs. This has led to several developments like the introduction of automated store ordering, usage of RFID and etc.
The KPIs helps in directly analyzing the performance of every specific activity and operation and hence also helps in zeroing down to the exact root of the problem, if any, and thus helps the managers to rectify them. The Improvement Opportunities are further explained in detail for achieving a better performance.
The Key Performance Indicators (KPIs)
The KPIs are segregated into different categories accordingly as follows:
Supply Chain and Logistics: The network of retailers, distributors, transporters, storage facilities and suppliers that participate in the sale, delivery and production of a particular product.
• % of time spent picking back orders: Number of hours spent on picking back orders as a percentage of working hours.
• Sales order by FTE : This indicator measures the number of customer orders that are processed by full time employees per day. This helps evaluate the workforce cost per order.
• Scrap (or leftover) value %: Scrap (or leftover) value as a percentage of production value.
• Inventory Accuracy: Most Advanced Planning Systems calculate net inventory requirements. If the book inventory used as the basis for these calculations has a high error, the net inventory requirements generated will not reflect the true inventory needs. The inventory error should be factored into the safety stock calculation to protect service levels from variance in inventory due to inventory count accuracy.
Assertive continuous improvement programs should be in place to support a decrease in inventory count errors.
Inventory Accuracy = (|book inventory - counted inventory|)/book inventory
• Inventory Carrying Costs: Inventory Carrying Cost = Inventory Carrying Rate x Average Inventory Value
• Inventory Carrying Rate: This can best be explained by the example below
1. Add up annual Inventory Costs: Example: Storage =Rs800k, Handling= Rs400k, Obsolescence =Rs600k, Damage= Rs800k, Administrative= Rs600k, Loss (pilferage etc)= Rs200k. Hence Total=Rs3,400k
2. Divide the Inventory Costs by the Average Inventory Value: Example: Rs3,400k / Rs34,000k = 10%
3. Add: Opportunity Cost of Capital (the return you could reasonably expect if you used the money elsewhere) = 9%, Insurance =4%, Taxes= 6%. Hence, total= 19%
4. Add the percentages: 10% + 19% = 29%. The Inventory Carrying Rate = 29%
• Missed Deliveries per Million (MPM): Measures supplier on time delivery by part reference ordered using the same logic as the quality measure PPM.
Several missed categories are defined such as ; Missing part reference, undershipped, overshipped, delivery window missed etc.
MPM = (Total number of missed deliveries / Total number of part references ordered) x 1,000,000
• Delivery Schedule Adherence (DSA): Delivery Schedule adherence (DSA) is a business metric used to calculate the timeliness of deliveries from suppliers. Delivery schedule adherence is calculated by dividing the number of on time deliveries in a period by the total number of deliveries made. The result is then multiplied by 100 and expressed as a percentage.
• Customer order promised cycle time: The anticipated or agreed upon cycle time of a Purchase Order. It is gap between the Purchase Order Creation Date and the Requested Delivery Date. This tells you the cycle time that you should expect (NOT the actual).
• Inventory replenishment cycle time: Measure of the Manufacturing Cycle Time plus the time included to deploy the product to the appropriate distribution center.
• Material value add : Sell price minus material cost divided by material cost.
• Supply chain cycle time: The total time it would take to satisfy a customer order if all inventory levels were 0.
• Fill Rate: The number of items ordered compared with items shipped. Fill rate can be calculated on a line item, SKU, case or value basis.
• On time ship rate: What percent of orders where shipped on or before the requested ship date. On time ship rate can be calculated on a line item, SKU, case or value basis.
• Perfect Order Measure / Fulfillment: The error-free rate of each stage of an order. Error rates are captured at each stage (order entry, picking, delivery, shipped without damage, invoiced correctly) and multiplied together.
• Customer order cycle time: The average time it takes to fill a customer order.
• % of backorders: The number (or percentage) of unfulfilled orders.
Inventory: Inventory is a list for goods and materials, or those goods and materials themselves, held available in stock by a business. Inventory are held in order to manage and hide from the customer the fact that supply delay is longer than delivery delay, and also to ease the effect of imperfections in the manufacturing process that lower production efficiencies if production capacity stands idle for lack of materials.
• Independent demand ratio: For manufacturers that also supply replacement parts and consumables this metric helps to define the % mix of demand for an item from independent (outside sources) vs dependent (inside sources). The ratio is calculated by dividing the unit usage for customer orders by the total unit usage of the item from all sources (work orders, sales samples, destructive testing, inventory adjustments, etc.)
• Early receipts to MRP date (required date): Early receipts to MRP date - This is a measure on your Planning efficiencies. Some planners or warehouse personnel may request that the material be brought in long before the plant/operators need the parts. Reasons for doing so may be quality, lead time variance, buffer stock etc. Early receipts to MRP produce higher levels of inventory that are not required yet. In a way, this is at the other end of the scale than JIT. Measure: MRP due date vs Receive to Dock (stores) date.
• Early PO Receipts to PO due date: Early receipts to PO date - This is a measure on your suppliers and their diligence to supply per the contract date. Early receipts to PO produce unexpected deliveries turning up, congested goods inwards and of course higher that projected inventory levels. Measure: PO due date vs Receive to Dock (stores) date.
• Sell through %: A percentage of units sold during a period and is equal to Units sold divided by (units sold + on hand inventory). This can also be described as Units sold divided by Beginning Inventory Quantity.
• Inactive Stock: Products with Stock (in units or Rs), and without movement-sales in a given period of time (depending on movement of the market). Useful to define continuity of a specific product-size (SKU), or promotion campaigns. Most useful in companies with a big number of SKUs.
• Average age of inventory: The (average) age of each product in stock. For example, product received in Jan, but remains until Aug.
• Unit Cost per batch: Unit Cost per batch = (Cost/Quantity) for each batch Primarily used in FIFO (First In First Out) Method Assumes an inventory of non-unique goods (that is, every one is similar to every other one) Generally preferred inventory valuation method. Assumes inventory is sold in the order that it is stocked, with the oldest goods sold first and the newest goods sold last. Uses the unit cost per batch of acquired/produced goods, and counts the inventory backwards from the newest batch.
• Inventory Value: Inventory Value = (Average Unit Cost) x (Units of current Inventory)
• Stock cover: Stock cover is the length of time that inventory will last if current usage continues.
• Stockouts in period: Stockouts indicate where a demand cannot be met due to the absence of the required inventory.
• Inventory lead time: Lead time is the length of time it takes to obtain inventory from suppliers.
• Inventory Turnover: The number of times that a company’s inventory cycles or turns over per measurement period (month, quarter, year).
• Inventory months of supply: Inventory On Hand / Avg Monthly Usage
SCOR: The Supply-Chain Operations Reference-model (SCOR) is a process reference model that has been developed and endorsed by the Supply-Chain Council as the cross-industry standard diagnostic tool for supply-chain management. SCOR enables users to address, improve, and communicate supply-chain management practices within and between all interested parties.
• Order fulfillment cycle time: Order Fulfillment Cycle Time is a continuous measurement defined as the amount of time from customer authorization of a sales order to the customer receipt of product.
• Total supply chain management cost: Total Supply Chain Management Cost is a discrete measurement defined as the fixed and operational costs associated with the Plan, Source, Make, and Deliver supply chain processes.
• Upside supply chain flexibility: Upside Supply Chain Flexibility is a discrete measurement defined as the amount of time it takes a supply chain to respond to an unplanned 20% increase in demand without service or cost penalty.
• Direct Product Cost: Sum of costs associated with manufacturing a specific product.
• Direct Labor Cost: Sum of costs associated with payment of the employee insurances, taxes etc.
• Direct Material Cost: Sum of costs associated with acquisition of support material.
• Time needed to recruit/hire/train additional labor: Amount of time required to achieve a certain substantial improvement concerning the number of employees.
• Time needed to obtain additional capital: Amount of time required to achieve a certain substantial improvement concerning capital.
• Time needed to obtain additional equipment: Amount of time required to achieve a certain substantial improvement concerning equipment acquisition.
• Finished product cycle time: Average time associated with finalizing activities, such as: package, stock, etc.
• Test cycle time: Average time associated with testing and trying out activities.
• Cost of managing processes: Periodic costs of managing processes, usually based on the number of FTEs involved in management functions for processes.
• Cost of goods sold (COGS): Cost of Goods Sold includes all expenses directly associated with the production of goods or services the company sells (such as material, labor, overhead, and depreciation). It does not include SG&A.
• Perfect Order Measure / Fulfillment: The error-free rate of each stage of an order. Error rates are captured at each stage (order entry, picking, delivery, shipped without damage, invoiced correctly) and multiplied together.
Cash Conversion Cycle (CCC): A metric that expresses the length of time, in days, that it takes for a company to convert resource inputs into cash flows. The cash conversion cycle attempts to measure the amount of time each net input dollar is tied up in the production and sales process before it is converted into cash through sales to customers. This metric looks at the amount of time needed to sell inventory, the amount of time needed to collect receivables and the length of time the company is afforded to pay its bills without incurring penalties. Also known as “cash cycle”. Calculated as: CCC = DIO + DSO - DPO Where: DIO represents days inventory outstanding, DSO represents days sales outstanding, DPO represents days payable outstanding. Usually a company acquires inventory on credit, which results in accounts payable. A company can also sell products on credit, which results in accounts receivable. Cash, therefore, is not involved until the company pays the accounts payable and collects accounts receivable. So the cash conversion cycle measures the time between outlay of cash and cash recovery. This cycle is extremely important for retailers and similar businesses. This measure illustrates how quickly a company can convert its products into cash through sales. The shorter the cycle, the less time capital is tied up in the business process, and thus the better for the company’s bottom line.
Improvement Opportunities in Retail Logistics
In general, the logistic decisions taken by the retailer can be improved by increasing:
• the level of differentiation when controlling the operations;
• the level of sophistication in the Decision Support Systems;
• the level of integration of multiple decisions (made by the retailer company and/or its supply chain partners).
Below, several examples are given to illustrate how each of these general guidelines can be translated into specific solutions, taking into account the fact that different retailers and/or different products need different logistic solutions.
The Level of Differentiation when Controlling the Operations
Different types of items need different ways of replenishment. For example ABC-classification, based on the perception that items with large turnover (A-items) need to be treated differently compared to items with low turnover (C-items). While there is some value in this approach, we propose a different classification for retail-items. We distinguish the following five main product categories:
1. Phasing-in/out items (including items with a short Product Life Cycle)
2. Promotion items
3. Purchasing driven items
4. Capacity driven items
5. Regular items
Below, each of these five product categories is discussed in more detail.
The phasing-in/out items (including items with a short product life cycle) are different from other items since there is either very little demand history available, or it becomes very risky to carry inventory due to obsolescence. Thus, for these items, special attention is given to issues like demand forecasting and inventory management in an environment with high risk of obsolescence and/or markdown policies. Improvement opportunities reported in the literature are:
• Using similarity in forecasts made by different individual people as an indicator of forecast accuracy when no sales data are available yet;
• Using early sales data to improve demand forecasts in the case of style goods;
• Using repeat rate information from customer cards to improve demand forecasts when new products are introduced;
• Using optimal markdown policies to reduce the risk of obsolescence.
The demand forecasts for items with a short product life cycle (like style goods) can be improved substantially in two ways. The first improvement applies when an initial production or buy decision has to be made and no sales data are available yet for the new assortment. When each member of a buying committee makes an independent demand forecast for every product, the variance in these individual forecasts is an almost perfect predictor of the overall demand forecast accuracy. This allows the manufacturer and/or retailer to select the items with a high demand forecast accuracy, which can be manufactured at the beginning of the production season. The production of items with low demand forecast accuracy is postponed until a group of large retailers placed their first orders (called the Early Write program). These first orders typically make up approximately 20% of the total orders. While this procedure was first applied at a manufacturer, a similar procedure may also be used at a retailer, when he/she receives his/her first actual sales data in the new season. Fisher et al. (2001) report how the inventory replenishment of products with a short product lifecycle can be optimized for a retailer, when the retailer has two buying opportunities: an initial buy and a reorder opportunity.
Another tool to quickly evaluate the performance of items that are phasing in is applied by Dunnhumby at Tesco (Hill and Dowle, 2003). The strength of their approach is that they use detailed information on the buying behavior of individual customers. This is possible thanks to the retailer’s customer card, which is providing them with information for more than millions of customers. When a new product is introduced, they measure not only the sales rate, but also the repeat rate, which is defined as the proportion of customers who come back to the store for the new product. This information enables them to tell within weeks of the launch whether a product is successful or not. To forecast demand, they identify the 10 most similar product launches (in terms of how the repeat rate evolves over time) that have taken place in the same product category in the last 2.5 years.
The promotion items are items that are part of the regular assortment, but are either offered temporarily at a reduced price or offered at the regular price but with additional visibility (e.g. via advertisements or via a special location in the store).
Some of the possible Improvement opportunities are:
• Using marketing intelligence and/or econometric models to forecast demand for the promotion items and their substitutes
• Using a push-strategy with two waves
• Coordinating the promotion with the supplier
For these items, demand should no longer be forecasted based on extrapolation of time series (e.g. via methods like exponential smoothing or moving average, which are typically used when the item is not promoted), but based on marketing intelligence taking into account price-elasticities and/or the impact of promotions and advertising on consumer buying behavior. Since the sales during promotions may well be a (large) multiple of regular sales, promotions should be typically coordinated with external suppliers to make sure enough products are available in time in the retailers’ DC. For items in the same product category as the promoted item, substitution effects may occur, which have to be taken into account when forecasting their demand.
While regular items are typically pulled by the retail stores, promotion items are typically pushed by a central decision maker. For example, the shipments from the DC may typically be based on a so-called “alpha-policy”: the items are distributed in two waves, and, in the first wave, alpha % is pushed to the stores. Often, the optimal value for alpha is somewhere between 70 and 80%. A few days after the promotion started, the remaining 20 to 30% is distributed based on the early sales data.
The purchasing driven items are one-time-items that are not part of the regular assortment, but are bought by the Purchasing department. The reason might be that they spotted a special buying or selling opportunity. The purchasers buy a certain quantity of the product, and when this lot is sold-out, no replenishment from the supplier takes place.
The amount purchased is often determined by purchasing considerations (e.g. based on discount-opportunities) rather than by demand forecasting. For the distribution of the purchasing driven items to the stores, a push-strategy with two waves, like the alpha-policy, may be adopted.
The capacity driven items are items used by the Operations department to smooth handling and/or transportation capacities. If, for example, the demand for these capacities varies within the week, smoothing may lead to a reduction in the total assets needed.
To smooth handling-capacities in the DC and the stores, the review period for items with sufficient excess shelf space1 may be increased by decreasing the delivery frequency. For example, a store may order part of its assortment on a weekly basis, while another part of its assortment is ordered on a daily basis. The items ordered on a weekly basis can be ordered in the quiet part of the week, in order to smooth the handling capacity in the retail supply chain. Ordering with a lower frequency often leads to higher lot-sizes per item, implying also higher handling efficiency. Another way to benefit from reduced ordering frequencies is to redesign the retailer’s DC. If all items ordered on a weekly basis are stored in a separate part of the DC, the total walking distance for the order pickers per week can be reduced substantially. A pre-requisite for this is that all items in this part of the DC have excess shelf space in all stores.
To smooth transportation capacities, large volume/large sales items may be used. In groceries, these are typically items like soft drinks. On Tuesday and Wednesday, the regular replenishment quantities ordered by the stores may be low, while on Thursday and Friday these quantities may be high. By ordering these items in advance on Tuesday and Wednesday instead of on Thursday and Friday, the capacity load is smoothed. If the retail store has little storage space available, this option may not be feasible.
The regular items are all items that are not phasing in or out, are not on promotion, and are not purchasing or capacity driven. Before discussing the operational control of the regular items in the store, a few notes should be made on the trade-off between inventory holding costs and customer service, and its impact on the control of the entire supply chain. In several projects with retailers, it has been noted that at the operational level (where the size of the store and the assortments are given), the space in the retail store should be considered as a constraint rather than a cost factor. Moreover, handling costs at the retailer’s DC and particularly at the store level usually outweigh the relevant
1 The items with sufficient excess shelf space are often slow-moving items and/or (physically) small items.
inventory holding costs for regular items by far. In addition, the inventory contributes most to the service level of the final customer, if this inventory is stored mainly downstream in the supply chain. Therefore, the supply chain should often aim to handle goods as long as possible in the most efficient handling units (trucks or pallets (or even layers) when distributed from the manufacturer to the retailer’s DC), and accept the higher inventory levels in the retailer’s DC. The goods can be shipped as soon as they are produced. This concept is called Supply Driven Coordination or Chain Synchronization. Moreover, from the retailer’s DC one might ship inventory as soon as possible to the store, when it fits on the shelves (given the number of facings, determined at the tactical level in the planograms).
In current ASO systems, the regular items often follow a traditional (R,s,nQ)-policy2. This means that every review period (R), the inventory position is checked to see whether it is below the reorder level (s). If so, n times Q items are being ordered with Q being the case pack size and n the minimal integer number of case packs needed to make sure that, after reordering, the inventory position is equal to or higher than s. These parameters still leave a number of options open to further differentiate the inventory replenishment strategies within the regular items.
For example, the review period R may be different for different items. In a supermarket environment, we noted that perishables and non-perishables have clear distinct sales and logistic characteristics. By definition, perishables have a smaller Shelf Life than non-perishables. As a result, when controlling perishables’ inventories, the focus is more on reducing waste. For perishables with a very low Shelf Life, this reduction of waste may be achieved by decreasing the review period (i.e. by increasing the delivery frequency).
Not only the review period may be different for different items, but also the reorder level may be determined in a different way for different items. If we consider again the perishables with a very low Shelf Life, we note that apart from decreasing the review period, other options to reduce the waste are: reduction of the lead-time (e.g. by using cross-docking or direct delivery), keeping average sales per item relatively high (by keeping assortments limited) and/or using the customers’ willingness to substitute demand within a product category.
2 Note that a full-service concept (fill the shelves as soon as a new case pack fits in) is a special case of (R,s,nQ) with s equal to the maximum shelf capacity minus the case pack size plus one consumer unit.
Apparently, for these items, the reorder level should not only be based on small lead-times and high average demand, but also take into account the product substitution. Most ASO systems are primarily designed for non-perishables and do not take into account these substitution effects. For items with very high substitution rate (e.g. bread) this would lead to unrealistic reorder levels.
For vegetables and fruit, reduction of waste is also important, and this can be improved by increasing the quality of the demand forecast. Note that the demand forecast is a major factor in the reorder level. The demand forecast might be improved by taking into account price-elasticity, the quality of the inventory on hand and seasonal effects.
Finally, for perishables with multiple lots on the shelf, each lot having a different age, more complex models may be needed to determine the reorder level. There are numerous models in the literature dealing with perishable items.
The Level of Sophistication in Reorder Systems
Thanks to economies of scale and cheaper and better information technology, large retail chains are trying to distinguish themselves from other retailers by increasing the level of sophistication of their reorder systems. At this moment, the quality of reorder systems varies greatly between retail chains, and, even within retail chains, it may differ substantially per retailer. The level of sophistication of their reorder system may differ with respect to:
1. the level of automation;
2. the quality of the input data;
3. the intelligence in setting the logistic parameters in the reorder system;
4. the ability to visualize economic trade-offs;
5. the ability of the personnel to make decisions or to evaluate proposed decisions.
In some stores, the reorder decisions are still made manually, without any support from a computer. In other stores, the computer may give advice on the timing and the quantity to be ordered for most items. But even in those stores, part of the assortment may still be ordered without the help of a computer. At a grocer’s for example, we noted that the majority of non-perishables were ordered via an ASO system, while certain perishables were ordered manually, since they either required additional intelligence (like a judgment on the quality of the inventory for vegetables), or they had to be ordered via a separate ordering system (belonging to a particular supplier).
Even when automated store ordering is implemented, the data quality has a large impact on the success of the system. It is known from empirical research that inventory data are highly inaccurate. To increase the sales data accuracy retailers may either apply more strict rules on how to register sales, or they may attach an electronic identification device to each individual product, which is scanned automatically at the cash register.
The intelligence in setting the logistic parameters in the system (i.e. the reorder level and the order quantity) also differs a great deal. Sometimes, a fixed reorder level is applied, and sometimes the reorder level varies over time, taking into account weekly sales patterns, seasonality and/or trends in sales. In some cases, the determination of the reorder level depends on many different variables like the weather, substitution effects, the review period, the price, etc. These more complex situations are often not dealt with by the ASO systems, but are often handled by store clerks who have considerable experience in their product category.
Also the order quantity is determined in many different ways. The simplest case is when the supplier determines the order quantity by fixing the case pack size (typically for most items in the supermarket). If, however, the item is made for one particular retailer only, the retailer can optimize the case pack size. This optimization should not only include the minimization of the inventory holding costs and the fixed ordering costs, but also take into account operational constraints like the maximum shelf capacity. Ideally, the computer should not only calculate the optimal solution, but also offer insight to the decision maker on the economic trade-offs between important performances indicators. In the example of the case pack size, we can think of the following performance indicators: the number of orders per year, the total handling time needed, the expected total number of refills needed (if the case pack size is too big to put on the shelf), the total inventory and the resulting service level to the customers
To be able to make this trade-offs the personnel needs good training. Purchasers for example, who are often responsible for setting the case pack size in cooperation with the supplier, may be more focused on and trained in getting the lowest price than in making an overall evaluation of the impact of the case pack size on all performance indicators. In addition, at the store level, where store managers or store clerks are responsible for the determination of the order quantities, the level of education may differ greatly.
The Level of Integration of Multiple Decisions (Made by the Retail Company and/or Its Supply Chain Partners).
The decisions with respect to inventory and capacity management are often affecting many different performance indicators, organizational units and hierarchical levels within these organizational units at the same time. Often, in practice only partial effects are taken into account when decisions are being made. As a result, the quality of the decision-making can be improved by increasing the level of integration. We distinguish three types of integration:
1. Integration of all relevant performance indicators in the supply chain;
2. Integration of decisions made at different organizational units;
3. Integration or coordination of decisions made at different hierarchical levels.
Below some examples are given, which are related to inventory and capacity management and which were encountered in retail supply chains. Each example includes one or more types of integration.
Example 1
When deciding on the case pack size, a non-food-retailer used the classical Economic Order Quantity formula. This formula is almost a hundred years old and applied successfully at many companies in multiple industries. The formula is derived from a model, which only considers the inventory holding costs and the fixed ordering costs. Cost analysis in several retail supply chains (including this one) showed that, in fact, handling costs are often far more important than inventory holding costs, and should, therefore, be included in the decision-making. As a matter of fact, not only handling costs in the store, but also handling costs at the retailers’ DC and/or the supplier may be significant and affected by the decision on the case pack size. In this case, the handling at the retailer’s DC had to be taken into account as well, whereas the implications for the supplier were only minor. Finally, note that even a focus on total relevant costs in the entire supply chain may be too narrow-minded. The customer service level for example may also be affected by the case pack size.
Example 2
Within retail chains, Marketing and Operations are often separate departments. Marketing typically decides on issues like the marketing strategy, target customer service level, the store layout, depth and breadth of the assortment, pricing, promotions and shelf space allocation (via planograms). Operations typically decide on issues like (in) direct delivery, delivery frequencies, replenishment strategies (pull/push), reorder levels, minimum lot-sizes, etc.
Sometimes the decisions from both departments are interdependent, but this is not always taken into account when the actual decisions are being made. For example, planograms and reorder levels should be matched. If the space allocated to a product is less than the space required for operations (which is mainly based on the reorder level and the case pack size), inefficient handling may be the result: if an order arrives at the store, it may not fit on the shelves, leading to leftovers, which are sent to the backroom and have to be taken back to the shelves again later on.
Example 3
A retailer typically aims for a particular market segment and designs his logistics strategy to meet the requirements of this market segment. For example, some retailers aim for high customer service, while others primarily aim for low costs. To make their strategies work, the retail companies have to ensure that their long-term marketing and logistics strategies are in line with the replenishment strategies applied at the store level every day. If, e.g. at the shop floor, the replenishment strategy is to fill the shelves completely as soon as a new case pack fits in, this would be in line with a high customer service objective, but not with a low cost strategy. In case the inventory replenishment strategy is determined locally (at the store level) by individual people, there is a serious risk that either these people have different objectives, or they are simply not aware of the link between their decisions and the strategy of the retail chain.
Concluding Remarks
In this paper, we have shown that with the knowledge of the KPIs both customer service and the capacity utilization in retail chains can be increased by improving the logistic decisions taken by the retailer. New technologies allow the retailers to improve their logistic decisions by increasing either the level of differentiation, the level of sophistication and/or the level of integration in their decision-making.
We have described the KPIs by dividing it into different categories of its respective field: Supply Chain and Logistics, Inventory, SCOR (Supply-Chain Operations Reference-model), Cash Conversion Cycle (CCC). All these metrics aids in the supply chain management of the retail sector. In this paper, we described the meaning, formula and significance of each KPI.
In many retail chains, different items need different logistic solutions. In this paper, we distinguished five product categories: items that are phasing-in/out, items that are on promotion, items that are driving the utilization of capacities, and regular items. All these categories require a different way of controlling the operations. Most ASO systems currently applied are primarily developed for regular items. In this paper, we describe how these ASO systems can be improved to also support other products. All these findings are based on observations at the retailers in Kolkata.
A final remark can be made on the importance of the analysis of the KPIs in retail chains, and its impact on the focus of Retail Logistics and its decisions.
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