International Business-ISBM
No: 1
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 BOP is Evalueserve, headquarterd in Bermuda and having main
operations near Delhi. It also has a US subsigiary 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, CIOs, and other so called C-level executives.
Evaluserve 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 BOP 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
ivory 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 resource planning among others. It has earmarket $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 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 centeres. As the market for
traditional IT services started wakening around mid-2000, ICICI Infotech repositioned
itself as a “Solutions” firm offering both products and services. Today , it offers
bundied packages of products and services in corporate and retail banking and 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 new boasts more than 700 customers in 30 countries, including Dow Jones,
Glazo-Smithkline, Panasonic and American Insurance Group.
The outsourcing industry is indeed growing form 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 BOP as a way to cut
costs and increase productivity.
Another potential area is ITES/BOP industry. According to A NASSCOM survey,
the global ITES/BOP 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/BOP 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 form $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-BOP industry is growing
at over 50 per cent.
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. 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 BOP 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 would 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 that in Switzerland.
Though going is good, the Indian BPO services providers cannot afford to be
complacent. Phillppines, Maxico 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 Affrica and even China
BOP 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 witching equipment to contract manufactures 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 know how. Outsourcing of maintenance services, date 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 core business and do
what it does best. Are Indian companies listening ? If they listen, BPO is a boon to 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.
No: 2
PERU
Peru is located on the west coast of 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, sparkling 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 $15 billion and per
capita income in recent years has been around $4,3000. In recent years the economy has
gained some relative strength and multinationals are now beginning to consider investing in
the country.
One of these potential investors is a large New York based bank 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
an influx of capital of 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
believes 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 an 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 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
theses 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 today?
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?
No: 3
RED BECOMING THICKER
The Backdrop
There seems to be no end to the troubles of the coloured – water giant Coca Cola. The cola
giant had entered India decades back but left the country in the late 1970s. It staged a
comeback in the early 1990s through the acquisitions route. The professional management
style of Coca Cola did not jell with the local bottlers. Four CEOs were changed in a span
of seven years. Coke could not capitalize on the popularity of Thums Up. Its arch rival
Pepsi is well ahead and has been able to penetrate deep into the Indian market. Red in the
balance sheet of Coke is becoming thicker and industry observers are of the opinion that it
would take at least two decades more before Coke could think of making profits in India.
The Story
It was in the early 1990s that India started liberalizing her economy. Seizing the
opportunity, Coca Cola wanted to stage a comeback in India. It chose Ramesh Chauhan of
Parle for entry into the market. Coke paid $100 million to Chauhan and acquired his well
established brands Thums Up, Goldspot and Limca. Coke also bagged 56 bottlers of Chauhan as
a part of the deal. Chauhan was made consultant and was also given the first right of
refusal to any large size bottling plants and bottling contracts, the former in the Pune –
Bangalore belt and the latter in the Delhi and Mumbai areas.
Jayadeva Raja, the flamboyant management expert was made the first CEO of Coke
India. It did not take much time for him to realize that Coke had inherited several
weaknesses from Chauhan along with the brands and bottlers. Many bottling plants were small
in capacity (200 bottlers per minute as against the world standard of 1600) and used
obsolete technology. The bottlers were in no mood to increase their capacities, nor were
they willing to upgrade the trucks used for transporting the bottle. Bottlers were more
used to the paternalistic approach of Chauhan and the new professional management styles of
Coke did not go down well with them. Chauhan also felt that he was alienated and was even
suspected to be supplying concentrate unofficially to the bottlers.
Raja was replaced by the hard – nosed Richard Niholas in 1995. The first thing
Nicholas did was to give an ultimatum to the bottlers to expand their plants or sell out.
Coke also demanded equity stakes in many of the bottling plants. The bottlers had their
own difficulties as well. They were running on low profit margins. Nor was Coke willing
to finance the bottlers on soft terms. The ultimatum backfired. Many bottlers switched
their loyalty and went to Pepsi. Chauhan allegedly supported the bottlers, of course, from
the sidelines.
Coke thought it had staged a coup over Pepsi when it (Coke) clamed the status
of official drink for the 1996 Cricket World Cup tournament. Pepsi took on Coke mightily
with the famous jingle “Nothing official about it”. Coke could have capitalized on the
sporty image of Thums Up to counter the campaign, but instead simply caved in.
Donald Short replaced Nicholas as CEO in 1997. Armed with heavy financial
powers, Short bought out 38 bottlers for about $700 million. This worked out to about Rs 7
per case, but the cost – effective figure was Rs 3 per case. Short also invested heavily in
manpower. By 1997, Coke’s workforce increased to 300. Three years later, the parent
company admitted that investment in India was a big mistake.
It is not in the culture of Coke to admit failure. It has decided to fight
back. Coke could not only sustain the loss, it could even spend more money on Indian
operations. It hiked the ad budget and appointed Chaitra Leo Burnett as its ad agency.
During 1998 – 99, Coke’s ad spend was almost three times that of Pepsi.
Coke is taking a look at its human resources and is taking initiatives to re –
orient the culture and inject an element of decentralization along with empowerment. Each
bottling plant is expected to meet predetermined profit, market share, and sales volumes.
For newly hired management trainees, a clearly defined career path has been drawn to enable
them to become profit centre heads shortly after completion of their probation. Such a
decentralized approach is something of a novelty in the Coke culture worldwide.
But Alezander “Von Behr, who replaced Short as Chef of Indian operations,
reiterated Coke’s commitment to decentralization and local responsiveness. Coke has
divided India into six regions, each with a business head. Change in the organization
structure has disappointed many employees, some of whom even quit the company.
Coke started cutting down its costs. Executives have been asked to shift from
farm houses to smaller houses and rentals of Gurgaon headquarters have been renegotiated.
Discount rates have been standardized and information systems are being upgraded to enable
the Indian headquarters to access online financial status of its outposts down to the depot
level.
not lose market share – forcing consumers to pay more for their goods.
Questions
1. “You can’t tell consumers that the low price they are paying for a particular fax
machine or automobile is somehow unfair. They’re not concerned with the profits of
companies. To them, it’s just a great bargain and they want it to continue.” Do you agree
with this statement? Do you think that people from different cultures would respond
differently to this statement? Explain your answers.
2. As we’ve seen, the WTO cannot currently get involved in punishing individual
companies for dumping – its actions can only be directed toward governments of countries.
Do you think this is a wise policy ? Why or why not? Why do you think the WTO was not given
the authority to charge individual companies with dumping? Explain.
3. Identify a recent antidumping case that was brought before the WTO. Locate as many
articles in the press as you can that discuss the case. Identify the nations, products (s),
and potential punitive measures involved. Supposing you were part of the WTO’s Dispute
Settlement Body, would you vote in favor of the measures taken by the retailing nation? Why
or why not?
No: 1
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 BOP is Evalueserve, headquarterd in Bermuda and having main
operations near Delhi. It also has a US subsigiary 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, CIOs, and other so called C-level executives.
Evaluserve 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 BOP 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
ivory 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 resource planning among others. It has earmarket $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 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 centeres. As the market for
traditional IT services started wakening around mid-2000, ICICI Infotech repositioned
itself as a “Solutions” firm offering both products and services. Today , it offers
bundied packages of products and services in corporate and retail banking and 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 new boasts more than 700 customers in 30 countries, including Dow Jones,
Glazo-Smithkline, Panasonic and American Insurance Group.
The outsourcing industry is indeed growing form 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 BOP as a way to cut
costs and increase productivity.
Another potential area is ITES/BOP industry. According to A NASSCOM survey,
the global ITES/BOP 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/BOP 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 form $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-BOP industry is growing
at over 50 per cent.
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. 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 BOP 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 would 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 that in Switzerland.
Though going is good, the Indian BPO services providers cannot afford to be
complacent. Phillppines, Maxico 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 Affrica and even China
BOP 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 witching equipment to contract manufactures 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 know how. Outsourcing of maintenance services, date 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 core business and do
what it does best. Are Indian companies listening ? If they listen, BPO is a boon to 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.
No: 2
PERU
Peru is located on the west coast of 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, sparkling 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 $15 billion and per
capita income in recent years has been around $4,3000. In recent years the economy has
gained some relative strength and multinationals are now beginning to consider investing in
the country.
One of these potential investors is a large New York based bank 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
an influx of capital of 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
believes 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 an 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 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
theses 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 today?
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?
No: 3
RED BECOMING THICKER
The Backdrop
There seems to be no end to the troubles of the coloured – water giant Coca Cola. The cola
giant had entered India decades back but left the country in the late 1970s. It staged a
comeback in the early 1990s through the acquisitions route. The professional management
style of Coca Cola did not jell with the local bottlers. Four CEOs were changed in a span
of seven years. Coke could not capitalize on the popularity of Thums Up. Its arch rival
Pepsi is well ahead and has been able to penetrate deep into the Indian market. Red in the
balance sheet of Coke is becoming thicker and industry observers are of the opinion that it
would take at least two decades more before Coke could think of making profits in India.
The Story
It was in the early 1990s that India started liberalizing her economy. Seizing the
opportunity, Coca Cola wanted to stage a comeback in India. It chose Ramesh Chauhan of
Parle for entry into the market. Coke paid $100 million to Chauhan and acquired his well
established brands Thums Up, Goldspot and Limca. Coke also bagged 56 bottlers of Chauhan as
a part of the deal. Chauhan was made consultant and was also given the first right of
refusal to any large size bottling plants and bottling contracts, the former in the Pune –
Bangalore belt and the latter in the Delhi and Mumbai areas.
Jayadeva Raja, the flamboyant management expert was made the first CEO of Coke
India. It did not take much time for him to realize that Coke had inherited several
weaknesses from Chauhan along with the brands and bottlers. Many bottling plants were small
in capacity (200 bottlers per minute as against the world standard of 1600) and used
obsolete technology. The bottlers were in no mood to increase their capacities, nor were
they willing to upgrade the trucks used for transporting the bottle. Bottlers were more
used to the paternalistic approach of Chauhan and the new professional management styles of
Coke did not go down well with them. Chauhan also felt that he was alienated and was even
suspected to be supplying concentrate unofficially to the bottlers.
Raja was replaced by the hard – nosed Richard Niholas in 1995. The first thing
Nicholas did was to give an ultimatum to the bottlers to expand their plants or sell out.
Coke also demanded equity stakes in many of the bottling plants. The bottlers had their
own difficulties as well. They were running on low profit margins. Nor was Coke willing
to finance the bottlers on soft terms. The ultimatum backfired. Many bottlers switched
their loyalty and went to Pepsi. Chauhan allegedly supported the bottlers, of course, from
the sidelines.
Coke thought it had staged a coup over Pepsi when it (Coke) clamed the status
of official drink for the 1996 Cricket World Cup tournament. Pepsi took on Coke mightily
with the famous jingle “Nothing official about it”. Coke could have capitalized on the
sporty image of Thums Up to counter the campaign, but instead simply caved in.
Donald Short replaced Nicholas as CEO in 1997. Armed with heavy financial
powers, Short bought out 38 bottlers for about $700 million. This worked out to about Rs 7
per case, but the cost – effective figure was Rs 3 per case. Short also invested heavily in
manpower. By 1997, Coke’s workforce increased to 300. Three years later, the parent
company admitted that investment in India was a big mistake.
It is not in the culture of Coke to admit failure. It has decided to fight
back. Coke could not only sustain the loss, it could even spend more money on Indian
operations. It hiked the ad budget and appointed Chaitra Leo Burnett as its ad agency.
During 1998 – 99, Coke’s ad spend was almost three times that of Pepsi.
Coke is taking a look at its human resources and is taking initiatives to re –
orient the culture and inject an element of decentralization along with empowerment. Each
bottling plant is expected to meet predetermined profit, market share, and sales volumes.
For newly hired management trainees, a clearly defined career path has been drawn to enable
them to become profit centre heads shortly after completion of their probation. Such a
decentralized approach is something of a novelty in the Coke culture worldwide.
But Alezander “Von Behr, who replaced Short as Chef of Indian operations,
reiterated Coke’s commitment to decentralization and local responsiveness. Coke has
divided India into six regions, each with a business head. Change in the organization
structure has disappointed many employees, some of whom even quit the company.
Coke started cutting down its costs. Executives have been asked to shift from
farm houses to smaller houses and rentals of Gurgaon headquarters have been renegotiated.
Discount rates have been standardized and information systems are being upgraded to enable
the Indian headquarters to access online financial status of its outposts down to the depot
level.
not lose market share – forcing consumers to pay more for their goods.
Questions
1. “You can’t tell consumers that the low price they are paying for a particular fax
machine or automobile is somehow unfair. They’re not concerned with the profits of
companies. To them, it’s just a great bargain and they want it to continue.” Do you agree
with this statement? Do you think that people from different cultures would respond
differently to this statement? Explain your answers.
2. As we’ve seen, the WTO cannot currently get involved in punishing individual
companies for dumping – its actions can only be directed toward governments of countries.
Do you think this is a wise policy ? Why or why not? Why do you think the WTO was not given
the authority to charge individual companies with dumping? Explain.
3. Identify a recent antidumping case that was brought before the WTO. Locate as many
articles in the press as you can that discuss the case. Identify the nations, products (s),
and potential punitive measures involved. Supposing you were part of the WTO’s Dispute
Settlement Body, would you vote in favor of the measures taken by the retailing nation? Why
or why not?
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