INTERNATIONAL BUSINESS

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CASE I: BPO-BANE OR BOON?

Several MNCs are increasingly unbundling or vertical disintegrating their activities. Put in simple language, they have begun outsourcing (also called business process outsourcing) activities formerly performed in-house and concentrating their energies on a few functions. Outsourcing involves withdrawing from certain stages/activities and relaying on outside vendors to supply the needed products, support services, or functional activities.

Take Infosys, its 250 engineers develop IT applications for BO/FA (Bank of America). Elsewhere, Infosys staffers process home loans for green point mortgage of Novato, California. At Wipro, five radiologists interpret 30 CT scans a day for Massachusetts General Hospital.

2500 college educated men and women are buzzing at midnight at Wipro Spectramind at Delhi. They are busy processing claims for a major US insurance company and providing help-desk support for a big US Internet service provider – all at a cost upto 60 percent lower than in the US. Seven Wipro Spectramind staff with Ph.Ds in molecular biology sift through scientific research for western pharmaceutical companies.

Another activist in BPO is Evalueserve, headquartered in Bermuda and having main operations near Delhi. It also has a US subsidiary based in New York and a marketing office in Australia to cover the European market. As Alok Aggarwal (co-founder and chairman) says, his company supplies a range of value – added services to clients that include a dozen Fortune 500 companies and seven global consulting firms, besides market research and venture capital firms. Much of its work involves dealing with CEOs, CFOs, CTOs, CLOs and other so-called C-level executives.

Evalueserve provides services like patent writing, evaluation and assessment of their commercialization potential for law firms and entrepreneurs. Its market research services are aimed at top-rung financial service  firms, to which it provides analysis of investment opportunities and business plans. Another major offering is multilingual services. Evalueserve trains and qualifies employees to communicate in Chinese, Spanish, German, Japanese and Italian, among other languages. That skill set has opened market opportunities in Europe and elsewhere, especially with global corporations.

ICICI Infotech Services in Edison, New Jersey, is another BPO services provider that is offering marketing software products and diversifying into markets outside the US. The firm has been promoted by $2-billion ICICI Bank, a large financial institution in Mumbai that is listed on the New York Stock Exchange.   

In its first year after setting up shop in March 1999, ICICI Infotech spent $33 million acquiring two information technology services firms in New Jersy – Object Experts and lvory Consulting – and Command Systems in Connecticut. These acquisitions were to help ICICI Infotech hit the ground in the US with a ready book of contracts. But it soon found US companies increasingly outsourcing their requirements to offshore locations, instead of hiring foreign employees to work onsite at their offices. The company found other native modes for growth. It has started marketing its products in banking, insurance and enterprise source planning among others. It has ear------- $10 million for its next US market offensive, which would go towards R & D and back-end infrastructure support, and creating new versions of its products to comply with US market requirements. It also has a joint venture – Semantik Solutions GmbH in Berlin, Germany with the Fraunhofer Institute for Software and Systems Engineering, which is based in Berlin, Germany with the Fraunhofer Institute for Software and Systems Engineering, which is based in Berlin and Dortmund, Germany, Fraunhofer is a leading institute in applied research and development with 200 experts in software engineering and evolutionary information.

A relatively late entrant to the US market, ICICI Infotech started out with plain vanilla IT services, including operating call centers. As the market for traditional IT services started weakening around mid-2000, ICICI Infotech repositioned itself as a “Solutions” firm offering both products and services. Today, it offers bundled packages of products and services in corporate and retail banking and insurance, among other areas. The new offerings include data center and disaster recovery management and value chain management services.

ICICI Infotech’s expansion into new overseas markets has paid off. Its $50 million revenue for its latest financial year ending March 2003 has the US operations generating some $15 million, while the Middle East and Far East markets brought in another $9 million. It now boasts more than 700 customers in 30 countries, including Dow Jones,  Glaxo – Smithkline, Panasonic and American Insurance Group.

The outsourcing industry is indeed growing from strength. Though technical support and financial services have dominated India’s outsourcing industry, newer fields are emerging which are expected to boost the industry many times over.

Outsourcing of human resource services or HR BPO is emerging as big opportunity for Indian BPOs with global market in this segment estimated at $40-60 billion per annum. HR BPO comes to about 33 percent of the outsourcing revenue and India has immense potential as more than 80 percent of Fortune 1000 companies discuss offshore BPO as a way to out costs and increase productivity.

Another potential area is ITES/BPO industry. According to a NASSCOM Survey, the global ITES/BPO industry was valued at around $773 billion during 2002 and it is expected to grow at a compounded annual growth rate of nine percent during the period 2002-06. NASSCOM lists the major indicators of the high growth potential of ITES/BPO industry in India as the following :

During 2003-04, The ITES/BPO segment is estimated to have achieved a 54 percent growth in revenues as compared to the previous year. ITES exports accounted for $3.6 billion in revenues, up from $2.5 billion in 2002-03. The ITES-BPO segment also proved to be a major opportunity for job seekers, creating employment for around 74,400 additional personnel in India during 2003-04. The number of Indians working for this sector jumped to 245,500 by March 2004. By the year 2008, the segment is expected to employ over 1.1 million Indians, according to studies conducted by NASSCOM and McKinsey & Co. Market research shows that in terms of job creation, the ITES-BPO industry is growing at over 50 percent.

Legal outsourcing sector is another area India can look for Legal transcription involves conversion of interviews with clients or witnesses by lawyers into documents which can be presented in courts. It is no different from any other transcription work carried out in India. The bottom-line here is again cheap service. There is a strong reason why India can prove to be a big legal outsourcing industry.

India, like the US, is a common-law jurisdiction rooted in the British legal tradition. Indian legal training is conducted solely in English. Appellate and Supreme Court proceedings in India take place exclusively in English. Indian legal opinions are written exclusively in English. Due to the time-zone differences, night time in the US is daytime in India which means that clients get 24 hour attention, and some projects can be completed overnight. Small and mid-sized business offices can solve staff problems as the outsourced lawyers from India take on the time consuming labour intensive legal research and writing projects. Large law firms also can solve problems of overstaffing by using the on-call lawyers.

Research firms such as Forrester Research, predict that by 2015, more than 489,000 US lawyer jobs, nearly eight percent of the field, will shift abroad.

Many more new avenues are opening up for BPO services providers. Patent writing and evaluation services are markets set to boom. Some 200,000 patent applications are written in the western world annually, making for a market size of between $5 billion and $7 billion. Outsourcing patent writing service could significantly lower the cost of each patent application, now anywhere between $12,000 and $15,000 apiece – which help expand the market.                    

            Offshoring of equity research is another major growth area. Translation services are also becoming a big Indian plus. India produces some 3,000 graduates in German each year, which is more than in Switzerland.

            Though going is good, the Indian BPO services providers cannot afford to be complacent, Phillippines, Mexico and Hungary are emerging as potential offshore locations. Likely competitor is Russia, although the absence of English speaking people there holds the country back. But the dark horse could be South Africa and even China.

            BPO is based on sound economic reasons. Outsourcing helps gain cost advantage. If an activity can be performed better or more cheaply by an outside supplier, why not outsource it ? Many PC makers, for example, have shifted from in-house assembly to utilizing contract assemblers to make their PCs. CISCO outsources all productions and assembly of its routers and switching equipment to contract manufacturers that operate 37 factories, all linked via the Internet.

            Secondly, the activity (outsourced) is not crucial to the firm’s ability to gain sustainable competitive advantage and won’t hollow out its core competence, capabilities, or technical knowhow. Outsourcing of maintenance services, data processing, accounting, and other administrative support activities to companies specializing in these services has become common place. Thirdly, outsourcing reduces the company’s risk exposure to changing technology and / or changing buyer preferences.

            Fourthly, BPO streamlines company operations in ways that improve organizational flexibility, cut cycle time, speedup decision making and reduce coordination costs. Finally, outsourcing allows a company to concentrate on its crore business and do what it does best. Are Indian companies listening? If they listen, BPO is a boon them and not a bane.

Questions:

1. Which of the theories of International trade can help Indian services providers gain competitive edge over their competitors?

2. Pick up some Indian services providers. With the help of Michael Porter’s diamond, analyze their strengths and weaknesses as active players in BPO.

3. Compare this case with the case given at the beginning of this chapter. What similarities and dissimilarities do you notice? Your analysis should be based on the theories explained in this chapter.

CASE II: PERU

Peru is located on the west coast South America. It is the third largest nation of the continent (after Brazil and Argentina), and covers almost 500,000 square miles (about 14 per cent of the size of the United States). The land has enormous contrasts, with a desert (drier than the Sahara), the towering snow-capped Andes mountains, sparking grass-covered plateaus, and thick rain forests. Peru has approximately 27 million people, of which about 20 per cent live in Lima, the capital. More Indians (one half of the population) live in Peru than in any other country in the western hemisphere. The ancestors of Peru’s Indians were the famous Incas, who built a great empire. The rest of the population is mixed and a small percentage is white. The economy depends heavily on agriculture, fishing, mining, and services. GDP is approximately $115 billion and per capita income in recent years has been around $4, 300. In recent years the economy has gained some relative and multinationals are now beginning to consider investing in the country.

            One of these potential investors is a large New York based that is considering a $25 million loan to the owner of a Peruvian fishing fleet. The owner wants to refurbish the fleet and add one more ship.

            During the 1970s, the Peruvian government nationalized a number of industries and factories and began running them for the profit of the state. In most cases, these state-run ventures became disasters. In the late 1970s, the fishing fleet owner was given back his ships and allowed to operate his business as before. Since then, he has managed to remain profitable, but the biggest problem is that his ships are getting old and he needs and influx of capital to make repairs and add new technology. As he explained it to the New York banker: “Fishing is no longer just an art. There is a great deal of technology involved. And to keep costs low and be competitive on the world market, you have to have the latest equipment for both locating as well as catching and then loading and unloading the fish.”

            Having reviewed the fleet owner’s operation, the large multinational bank believers that the loan is justified. The financial institution is concerned, however, that the Peruvian government might step in during the next couple of years and again take over the business. If this were to happen it might take and additional decade for the loan to be repaid. If the government were to allow the fleet owner to operate the fleet the way he has over the last decade, the loan could be repaid within seven years.

            Right now, the bank is deciding on the specific terms of the agreement. Once these have been worked out, either a loan officer will fly down to Lima and close the deal or the owner will be asked to come to New York for the signing. Whichever approach is used, the bank realizes that final adjustments in the agreement will have to be made on the spot. Therefore, if the bank sends a representative to Lima, the individual will have to have the authority to commit the bank to specific terms. These final matters should be worked out within the next ten days.

Questions:

1. What are some current issues facing Peru? What is the climate for doing business in Peru toda

2. What type of political risks does this fishing company need to evaluate? Identify and describe them.

3. What types of integrative and protective and defensive techniques can the bank use?

4. Would the bank be better off negotiating the loan in New York or in Lima? Why?

CASE 3: LATE MOVER ADVANTAGE?

Though a late entrant, Toyota is planning to conquer the Indian car market. The Japanese auto major wants to dispel the notion that the first mover enjoys an edge over the rivals who arrive late into a market.

Toyota entered the Indian market through the joint venture route, the partner being the Bangalore based Kirloskar Electric Co. Know as Toyota Kirloskar Motor (TKM), the plant was set up in 1998 at Bidadi near Bangalore.

To start with, TKM released its maiden offer—Qualis. Qualis is not a newly conceived, designed, and brought out vehicle. Rather it is the new avatar of Kijang under which brand the vehicle was sold in markets like Indonesia.

Qualis virtually had no competition. Telco’s Sumo was not a multi-utility vehicle like Qualis. Rather, it was mini-truck converted into a rugged all-purpose van. More importantly, Toyota proved that even its old offering, but decked up for India, could offer better quality than its competitor. Backed by a carefully thought out advertising campaign that communicated Toyota’s formidable global reputation, Qualis went on a roll and overtook Tata Sumo within two years of launch.

Sumo sold 25,706 vehicles during 2000-2001, compared to a 3 per cent growth over the previous year, compared to 25,373 of Qualis. But during 2001-2002, it was a different story. Qualis had been clocking more than 40 per cent share of the market. At the end of Sept 2001, Qualis had sold over 25,000 units, compared to Sumo’s 18000 plus.

The heady initial success has made TKM think of the future with robust confidence. By 2010, TKM wants to make and sell one million vehicles per year and garner one-third share of the Indian market.

The firm is planning to introduce a wide range of vehicle—a sub-compact, a sedan, a luxury car and a new multi-utility vehicle to replace Qualis. A significant percentage of the vehicles will be exported.

But Toyota is not as lucky in China. Its strategy of ‘late entry’ in China seems to have back fired. In 2005, it sold just 1,83,000 cars in China, the fastest growing auto market in the world. Toyota ranks ninth in the market, far behind Volkswagen, General Motors, Hyundai and Honda.

Toyota delayed producing cars in China until 2002, when it entered a joint venture with a local company, the First Auto Works Group (FAW). The first car manufactured by Toyota-FAW, the Vios, failed to attract much of a market, as, despite its unremarkable design, it was three times as expensive as most cars sold in China.

Late start was not the only problem. There were other lapses too. Toyota assumed the Chinese market would be similar to the Japanese market. But Chinese market, in reality, resembled the American market.

Sales personnel in Japan are paid salaries. They succeeded in building a loyal clientele for Toyota by providing first-class service to them. Likewise, most Japanese auto dealers sell a single brand, thereby ensuring their loyalty to it. Japan is a relatively a well-knit country with an ethnically homogeneous population. Accordingly, Toyota used nationwide advertising to market its products in its home country.

But China is different. Sales people are paid commissions and most dealers sell multiple brands. Obviously, loyalty plays little role in motivating either the sales staff or the dealers, who will ignore a slow selling product should a more profitable one turn up. Besides, China is a large, diverse country. A standardised ad campaign will not do. Luckily, Toyota is learning its lessons.

Competition in the Chinese market is tough, and Toyota’s success in reaching its goal of selling a million cars a year, by 2010, is uncertain. But, its chances are brighter as the company is able to transfer lessons learned in the American market to its operations in China.

Questions:

1. Why has the ‘late corner’s strategy’ of Toyota failed in China, though it succeeded in India?

2. Why has Toyota failed to capture the Chinese market? Why is it trailing behind its rivals?

Case 4: McDonald's Global HR

One of the best known companies worldwide is McDonald's Corporation. The fast food chain, with its symbol of the golden arches, has spread from the United States into 91 countries. With over 18,000 restaurants worldwide, McDonald's serves 33 million people each day. International sales are an important part of McDonald's business, and over 50 per cent of the company’s operating income results from sales outside the United States. To generate these sales, McDonald's employs over one million people, and by 2000, McDonald's had grown to over two million employees.

Operating in so many different countries means that McDonald's has had to adapt its products, services and HR practices to legal, political, economic, and cultural factors in each one of those countries. A few examples illustrate how adaptations have been made. In some countries, such as India, beef is not acceptable as a food to a major part of the population, so McDonald's uses lamb or mutton. To appeal to Japanese customers, McDonald's has developed teriyaki burgers. Separate dining rooms for men and women have been constructed in McDonald's restaurants in some Middle East countries.

HR practices also have had to be adapted. Before beginning operations in a different country, HR professionals at McDonald's research centre determine how HR activities must be adjusted. One method of obtaining information is to contact HR professionals from other US firms operating in the country and ask them questions about laws, political factors, and cultural issues. In addition, the firm conducts an analysis using a detailed outline to ensure that all relevant information has been gathered. Data gathered might include what employment restrictions exist on ages of employees and hours of work, what benefits must be offered to full-time and part–time  employees (if part-time work is allowed), and other operational requirements. For instance, in some of the former communist countries in Eastern Europe, employers provide locker rooms and showers for their employees. These facilities are necessary because shower facilities, and even consistent water supplies, are unavailable in many homes, particularly in rural areas around major cities. Also, public transportation must be evaluated to ensure that employees have adequate means to travel to work.

Once a decision has been made to begin operations in a new country, the employment process must begin. Often, McDonald's is seen as a desirable employer, particularly, when its first restaurant is being opened in a country. For instance, in Russia, 27,000 people initially applied to work at the first Moscow McDonald's, which currently had over 1,500 employees. Because customer service is so important to McDonald's, recruiting and selection activities focus on obtaining employees with customer service skills. For worker positions such as counter representative and cashier, the focus is to identify individuals who will be friendly, customer service-oriented employees. A “trial” process whereby some applicants work for a few days on a conditional basis may be used to ensure that these individuals will represent McDonald's appropriately and will work well with other employees.

For store managers, the company uses a selection profile emphasising leadership skills, high work expectations, and management abilities appropriate to a fast-paced restaurant environment. Once applicant screening and interviews have been completed, individuals are asked to work for upto a week in a restaurant. During that time both the applicants and the company representatives evaluate one another to see if the job “fit” is appropriate. After the first group of store managers and assistant managers are selected, future managers and assistant managers are chosen using international promotions based on job performance.

Once the restaurants are staffed, training becomes crucial to acquaint new employees with their jobs and the McDonald's philosophy of customer service and quality. McDonald's has taken its Hamburger University curriculum from the United States and translated it into 22 different languages to use in training centres throughout the world. Once training has been done for trainers and managers, they then conduct training for all employees selected to work at McDonald's locations in the foreign countries.

Questions:

Identify cultural factors that might be important in a training programme for food handlers at McDonald's in Saudi Arabia.

Rather than focusing on the differences, what similarities do you expect exist among McDonald's customers and employees in both the United States and abroad?

CASE 5:  GATT’s LEGACIES

It was so asymmetric that the poorest countries were actually worse off; sub-Saharan Africa, the poorest region with an average income of just over $500 per capita per year, lost some $1.2 billion a year.

Seventy per cent of the gains went to the developed countries—some $350 billion annually. Although the developing world has 85 per cent of the world’s population and almost half of the total global income, it received only 30 per cent of the benefits—and these benefits went mostly to middle-income countries like Brazil.

The Uruguay Round made an unlevel playing field less level. Developed countries impose far higher—on average four times higher—tariffs against developing countries than against developed ones. A poor country like Angola pays as much in tariffs to the United States as does rich Belgium; Guatemala pays as much as New Zealand. And this discrimination exists even after the developed countries have granted so-called preferences to developing countries. Rich countries have cost poor countries three times more in trade restrictions than they give in total development aid.

The focus was on liberalisation of capital flows (which developed countries wanted) and investment rather than on liberalisation of labour flows (which would have benefited the developing countries), even though the latter would have led to a far greater increase in global output.

By the same token, liberalisation of unskilled labour services would have led to a far greater increase in global efficiency than liberalisation of skilled labour services (like financial services), the comparative advantage of the advanced industrial countries. Yet negotiators focused in liberalising skill-intensive services.

The strengthening of intellectual property rights largely benefited the developed countries, and only later did the costs to developing countries become apparent, as lifesaving generic medicines were taken off the market and developed-world companies began to patent traditional and indigenous knowledge.

Question:

1. Do you think that the ghost of GATT is still haunting WTO? If years, how? If no, prove.