MIB NOTES

UNIT-2

Michael Porter Diamond Model of Diamond Theory of National Advantage:

Porter Diamond Theory of National Advantage is a model that is designed to help understand
the competitive advantage that nations or groups possess due to certain factors available to them,
and to explain how governments can act as catalysts to improve a country's position in a globally
competitive economic environment. 

 Porter's Diamond model explains the factors that can drive competitive advantage for one
national market or economy over another.
 It can be used both to describe the sources of a nation's competitive advantage and path to
obtaining such advantage.
 The model can also be used by businesses to help guide and shape strategy regarding how
to approach investing and operating in different national markets.
The determinants that Michael Porter distinguishes are:

1. Factor Conditions

This is the situation in a country relating to production factors like knowledge and infrastructure.
These are relevant factors for competitiveness in particular industries. These factors can be
grouped into material resources- human resources (labour costs, qualifications and commitment)
– knowledge resources and infrastructure. But they also include factors like quality of research or
liquidity on stock markets and natural resources like climate, minerals, oil and these could be
reasons for creating an international competitive position.

2. Related and supporting Industries

The success of a market also depends on the presence of suppliers and related industries within a
region. Competitive suppliers reinforce innovation and internationalization. Besides suppliers,
related organizations are of importance too. If an organization is successful this could be
beneficial for related or supporting organizations. They can benefit from each other’s know-how
and encourage each other by producing complementary products.

3. Home Demand Conditions

In this determinant the key question is: What reasons are there for a successful market? What is
the nature of the market and what is the market size? There always exists an interaction between
economies of scale, transportation costs and the size of the home market. If a producer can
realize sufficient economies of scale, this will offer advantages to other companies to service the
market from a single location. In addition the question can be asked: what impact does this have
on the pace and direction of innovation and product development?

4. Strategy, Structure and Rivalry

This factor is related to the way in which an organization is organized and managed, its corporate
objectives and the measure of rivalry within its own organizational culture. The Furthermore, it
focuses on the conditions in a country that determine where a company will be established.
Cultural aspects play an important role in this. Regions, provinces and countries may differ
greatly from one another and factors like management, working morale and interactions between
companies are shaped differently in different cultures.

5. Government

Governments can play a powerful role in encouraging the development of industries and
companies both at home and abroad. Governments finance and construct infrastructure (roads,
airports) and invest in education and healthcare. Moreover, they can encourage companies to use
alternative energy or alternative environmental systems that affect production. This can be
effected by granting subsidies or other financial incentives.
6. Chance events

Michael Porter also indicates that in most markets chance plays an important role. This provides
opportunities for innovative companies that are not afraid to start up new operations.
Entrepreneurs usually start their companies in their homeland, without this having any economic
advantages, whereas a similar start abroad would provide more opportunities.

Strategy: the framework that managers apply to determine the competitive moves and
business approaches that guide a firm, i.e., the means used to achieve objectives
Strategy represents management’s idea on how to best:
 Attract Customers
 Stake Out A Market Position
 Conduct Operations
 Compete Effectively
 Create Value
 Achieve Goals

Competitive Advantage
Competitive advantages are conditions that allow a company or country to produce a good or
service of equal value at a lower price or in a more desirable fashion. These conditions allow the
productive entity to generate more sales or superior margins compared to its market rivals.
Competitive advantages are attributed to a variety of factors including cost structure, branding,
the quality of product offerings, the distribution network, intellectual property, and customer
service.

Porter's 5 Forces Model

Porter's Five Forces is a model that identifies and analyzes five competitive forces that shape
every industry, and helps determine an industry's weaknesses and strengths. Frequently used to
identify an industry's structure to determine corporate strategy, Porter's model can be applied to
any segment of the economy to search for profitability and attractiveness.
The model is named after Michael E. Porter.
Porter's Five Forces is a framework for analyzing a company's competitive environment.
The number and power of a company's competitive rivals, potential new market entrants,
suppliers, customers, and substitute products influence a company's profitability.
Analyzing these elements can be used to guide business strategy to increase competitive
advantage. The forces are frequently used to measure competition intensity, attractiveness, and
profitability of an industry or market. These forces are:
1. Competition in the industry
2. Potential of new entrants into the industry
3. Power of suppliers
4. Power of customers
5. Threat of substitute products
1. Competition in the Industry: This force refers to the number of competitors and
their ability to undercut a company. The larger the number of competitors, along with the
number of equivalent products and services they offer, the lesser the power of a company.
Suppliers and buyers seek out a company's competition if they can offer a better deal or
lower prices. Conversely, when competitive rivalry is low, a company has greater power
to charge higher prices and set the terms of deals to achieve higher sales and profits.

2. Potential of New Entrants into an Industry: A company's power is also

affected by the force of new entrants into its market. The less time and money it cost for a
competitor to enter a company's market and be an effective competitor, the more a
company's position may be significantly weakened. An industry with strong barriers to
entry is an attractive feature for companies that allows them to charge higher prices and
negotiate better terms.

3. Threat of Bargaining Power of Suppliers: This force addresses how easily

suppliers can drive up the cost of inputs. It is affected by the number of suppliers of key
inputs of a good or service, how unique these inputs are, and how much it would cost a
 company to switch from one supplier to another. The fewer the number of suppliers, and
the more a company depends upon a supplier, the more power a supplier holds to drive
up input costs and push for advantage in trade. On the other hand, when there are many
suppliers or low switching costs between rival suppliers a company can keep input costs
lower increasing profits.

4. Threat of Bargaining Power of Customers: This specifically deals with the

ability that customers have to drive prices down. It is affected by how many buyers or
customers a company has, how significant each customer is, and how much it would cost
a company to find new customers or markets for its output. A smaller and more powerful
client base means that each customer has more power to negotiate for lower prices and
better deals. A company that has many, smaller, independent customers will have an
easier time charging higher prices to increase profitability.

5. Threat of Substitutes: Substitute goods or services that can be used in place of a

company's products or services pose a threat. Companies that produce goods or services
for which there are no close substitutes will have more power to increase prices and lock
in favorable terms. When close substitutes are available, customers will have the option
to forgo buying a company's product, and a company's power can be weakened.
Understanding Porter's Five Forces and how they apply to an industry, can enable a company to
adjust its business strategy to better use its resources to generate higher earnings for its investors.

Porter's Generic Strategies

Porter suggested four "generic" business strategies that could be adopted in order to gain
competitive advantage. The strategies relate to the extent to which the scope of a business'
activities are narrow versus broad and the extent to which a business seeks to differentiate its
products.
The key strategic challenge for most businesses is to find a way of achieving a sustainable
competitive advantage over the other competing products and firms in a market.
A competitive advantage is an advantage over competitors gained by offering consumers greater
value, either by means of lower prices or by providing greater benefits and service that justifies
higher prices.
The four strategies are summarized in the figure below:

The Cost Leadership Strategy

Porter's generic strategies are ways of gaining competitive advantage – in other words,
developing the "edge" that gets you the sale and takes it away from your competitors. There are
two main ways of achieving this within a Cost Leadership strategy:
 Increasing profits by reducing costs, while charging industry-average prices.
 Increasing market share by charging lower prices, while still making a reasonable profit
on each sale because you've reduced costs.

The Differentiation Strategy

Differentiation involves making your products or services different from and more attractive than
those of your competitors. How you do this depends on the exact nature of your industry and of
the products and services themselves, but will typically involve features, functionality,
durability, support, and also brand image that your customers value.
To make a success of a Differentiation strategy, organizations need:
 Good research, development and innovation.
 The ability to deliver high-quality products or services.
  Effective sales and marketing, so that the market understands the benefits offered by the
differentiated offerings.
 Large organizations pursuing a differentiation strategy need to stay agile with their new
product development processes. Otherwise, they risk attack on several fronts by
competitors pursuing Focus Differentiation strategies in different market segments.

The Cost Focus Strategy

Here a business seeks a lower-cost advantage in just one or a small number of market segments.
The product will be basic - perhaps a similar product to the higher-priced and featured market
leader, but acceptable to sufficient consumers. Such products are often called "me-too's".

Differentiation Focus
In the differentiation focus strategy, a business aims to differentiate within just one or a small
number of target market segments.
The special customer needs of the segment mean that there are opportunities to provide products
that are clearly different from competitors who may be targeting a broader group of customers.
The important issue for any business adopting this strategy is to ensure that customers really do
have different needs and wants - in other words that there is a valid basis for differentiation - and
that existing competitor products are not meeting those needs and wants.
Differentiation focus is the classic niche marketing strategy. Many small businesses are able to
establish themselves in a niche market segment using this strategy, achieving higher prices than
un-differentiated products through specialist expertise or other ways to add value for customers.
Strategic Alliances
Strategic alliances are partnerships between two or more firms which decide they can better
pursue their mutual goals by combining their resources – financial, managerial, technological –
as well as their existing distinctive competitive advantages
International strategic alliance is typically defined as a collaborative arrangement between firms
headquartered in different countries. Partnering firms remain legally independent after the
formation of alliance and the alliance relationship is relatively enduring. International strategic
alliances can be categorized along multiple dimensions.
First, based on the type of activities of collaboration, international strategic alliances can be
categorized into licensing, franchising, management service, supply, research and development,
manufacturing, marketing, and others. An international strategic alliance can engage in one
activity or a combination of activities. Second, based on the number of partners involved, an
international strategic alliance can be bilateral or multilateral; the existing body of literature on
international strategic alliances has largely focused on bilateral alliances. Third, based on the
nationalities involved, an international strategic alliance can be broadly defined as a
collaborative arrangement between firms one of which is headquartered outside the country of
alliance; therefore an international strategic alliance can be categorized as home-home, home-
host, or home-third country alliance.
Global strategic alliances are working partnerships between companies (often more than two)
across national boundaries and increasingly across industries.

Challenges in Implementing Global Alliances

 In a highly competitive environment, alliances present a faster and less risky route to
globalization. It is extremely complex to fashion such linkages, however, especially
where many interconnecting systems are involved, forming intricate networks. Many
alliances fail or end up in a takeover in which one partner swallows the other.
 Often, form of governance chosen for multinational firm alliances greatly influences their
success, particularly in technologically-intense fields-pharmaceuticals, computers, and
semiconductors. Cross-border partnerships, in particular, often become a “race to
learn”—with the faster learner later dominating the alliance and rewriting its terms. In a
real sense, an alliance becomes a new form of competition
 All too often, cross-border allies have difficulty in collaborating effectively, especially in
competitively sensitive areas, creating mistrust and secrecy, which then undermine the
purpose of the alliance. The difficulty that they are dealing with is the dual nature of
strategic alliances-the benefits of cooperation versus the dangers of introducing new
competition through sharing their knowledge and technological skills about their mutual
product or the manufacturing process.
 The enticing benefits of cross-border alliances often mask their many pitfalls. In addition
to potential loss of technology and knowledge-skill base, other areas of incompatibility
 often arise, such as conflicting strategic goals and objectives, cultural clashes, and
disputes over management and control systems.

A typical strategic alliance formation process involves these steps:

1. Strategy Development: Strategy development involves studying the alliance’s feasibility,
objectives and rationale, focusing on the major issues and challenges and development of
resource strategies for production, technology, and people. It requires aligning alliance
objectives with the overall corporate strategy.

2. Partner Assessment: Partner assessment involves analyzing a potential partner’s strengths

and weaknesses, creating strategies for accommodating all partners’ management styles,
preparing appropriate partner selection criteria, understanding a partner’s motives for
joining the alliance and addressing resource capability gaps that may exist for a partner.

3. Contract Negotiation: Contract negotiations involves determining whether all parties

have realistic objectives, forming high calibre negotiating teams, defining each partner’s
contributions and rewards as well as protect any proprietary information, addressing
termination clauses, penalties for poor performance, and highlighting the degree to which
arbitration procedures are clearly stated and understood.

4. Alliance Operation: Alliance operations involves addressing senior management’s

commitment, finding the calibre of resources devoted to the alliance, linking of budgets
and resources with strategic priorities, measuring and rewarding alliance performance,
and assessing the performance and results of the alliance.

5. Alliance Termination: Alliance termination involves winding down the alliance, for
instance when its objectives have been met or cannot be met, or when a partner adjusts
priorities or re-allocates resources elsewhere.

There are four types of strategic alliances:

1. Joint Venture
2. Equity Strategic Alliance
3. Non-Equity Strategic Alliance
4. Global Strategic Alliances.
 Joint venture: It is a strategic alliance in which two or more firms create a legally
independent company to share some of their resources and capabilities to develop a
competitive advantage.
 Equity strategic alliance: It is an alliance in which two or more firms own different
percentages of the company they have formed by combining some of their resources and
capabilities to create a competitive advantage.
 Non-equity strategic alliance: It is an alliance in which two or more firms develop a
contractual-relationship to share some of their unique resources and capabilities to create
a competitive advantage.
 Global Strategic Alliances: working partnerships between companies (often more than
two) across national boundaries and increasingly across industries, sometimes formed
between company and a foreign government, or among companies and governments.
Merger
Merger refers to the mutual consolidation of two or more entities to form a new legal enterprise
with a new name. In a merger, multiple companies of similar size agree to integrate their
operations into a single entity, in which there is shared ownership, control, and profit. It is a type
of amalgamation. For example M Ltd. and N Ltd. Joined together to form a new company

The types of Mergers are as under:

 Horizontal
 Vertical
 Reverse
 Conglomerate

Horizontal Merger:
A merger occurring between companies in the same industry. Horizontal merger is a business
consolidation that occurs between firms who operate in the same space, often as competitors
offering the same good or service.
Horizontal mergers are common in industries with fewer firms, as competition tends to be higher
and the synergies and potential gains in market share are much greater for merging firms in such
an industry.
Example: A merger between Coca-Cola and the Pepsi beverage division, for example, would be
horizontal in nature. The goal of a horizontal merger is to create a new, larger organization with
more market share. Because the merging companies' business operations may be very similar,
there may be opportunities to join certain operations, such as manufacturing, and reduce costs.
Vertical Merger
A merger between two companies producing different goods or services for one specific finished
product. A vertical merger occurs when two or more firms, operating at different levels within an
industry's supply chain, merge operations. Most often the logic behind the merger is to increase
synergies created by merging firms that would be more efficient operating as one.
Example: A vertical merger joins two companies that may not compete with each other but exist
in the same supply chain.
An automobile company joining with a parts supplier would be an example of a vertical merger.
Such a deal would allow the automobile division to obtain better pricing on parts and have better
control over the manufacturing process. The parts division, in turn, would be guaranteed a steady
stream of business.
Reverse Takeover or Reverse Merger
The acquisition of a private company by a public company so that the private company can
bypass the lengthy and complex process of going public. The transaction typically requires
reorganization of capitalization of the acquiring company. Reverse mergers are typically through
a simpler, shorter, and less expensive process than that of a conventional initial public offering
(IPO), in which private companies hire an investment bank to underwrite and issue shares of the
new soon-to-be public entity. They are also commonly referred to as reverse takeovers or reverse
IPOs.
A conglomerate merger
Merger between firms that are involved in totally unrelated business activities. These mergers
typically occur between firms within different industries or firms located in different
geographical locations. There are two types of conglomerate mergers: pure and mixed. Pure
conglomerate mergers involve firms with nothing in common, while mixed conglomerate
mergers involve firms that are looking for product extensions or market extensions.
Acquisition: The purchase of the business of an enterprise by another enterprise is known as
Acquisition. This can be done either by the purchase of the assets of the company or by the
acquiring ownership over 51% of its paid-up share capital.
An acquisition is when one company purchases most or all of another company's shares to gain
control of that company. Purchasing more than 50% of a target firm's stock and other assets
allows the acquirer to make decisions about the newly acquired assets without the approval of
the company’s shareholders. Acquisitions, which are very common in business, may occur with
the target company's approval, or in spite of its disapproval. With approval, there is often a no-
shop clause during the process.

Evaluating Acquisition Candidates

Before making an acquisition, it is imperative for a company to evaluate whether its target
company is a good candidate.

 Is the price right? The metrics investors use to value an acquisition candidate vary by
industry. When acquisitions fail, it's often because the asking price for the target
company exceeds these metrics.
 Examine the debt load. A target company with an unusually high level of liabilities
should be viewed as a warning of potential problems ahead.
 Undue litigation. Although lawsuits are common in business, a good acquisition
candidate is not dealing with a level of litigation that exceeds what is reasonable and
normal for its size and industry.
 Scrutinize the financials. A good acquisition target will have clear, well-organized
financial statements, which allows the acquirer to exercise due diligence smoothly.
Complete and transparent financials also help to prevent unwanted surprises after the
acquisition is complete.

Reasons for Acquisition

Companies acquire other companies for various reasons. They may seek economies of scale,
diversification, greater market share, increased synergy, cost reductions, or new niche offerings.
Other reasons for acquisitions include those listed below.

1. As a Way to Enter a Foreign Market

If a company wants to expand its operations to another country, buying an existing company in
that country could be the easiest way to enter a foreign market. The purchased business will
already have its own personnel, a brand name, and other intangible assets, which could help to
ensure that the acquiring company will start off in a new market with a solid base.

2. As a Growth Strategy
Perhaps a company met with physical or logistical constraints or depleted its resources. If a
company is encumbered in this way, then it's often sounder to acquire another firm than to
expand its own. Such a company might look for promising young companies to acquire and
incorporate into its revenue stream as a new way to profit.

3. To Reduce Excess Capacity and Decrease Competition

If there is too much competition or supply, companies may look to acquisitions to reduce excess
capacity, eliminate the competition, and focus on the most productive providers.

4. To Gain New Technology

Sometimes it can be more cost-efficient for a company to purchase another company that already
has implemented a new technology successfully than to spend the time and money to develop the
new technology itself.

Organizational Structure for an International Organization

Organizational structure is the fundamental design of a company. A company's structure

establishes lines of authority and decision making while describing where employees from
different functional groups are located within the company. Organizational structure takes on
an added level of complexity in international businesses, as employees from vastly different
cultures, performing completely different tasks, are all part of the same organization.
The four major types of international organizational structures are: 1. Expo-documents
against acceptancert Department 2. International division structure 3. Global
Organizational Structures 4. Evolution of Global Organizational Structures.

International Organizational Structures: Type #  1.

Expo-documents against acceptancert Department: Exports are often looked after by a
company’s marketing or sales department in the initial stages when the volume of exports sales
is low. However, with increase in exports turnover, an independent exports department is often
setup and separated from domestic marketing
Exports activities are controlled by a company’s home-based office through a designated head of
export department, i.e. Vice President, Director, or Manager (Exports). The role of the HR
department is primarily confined to planning and recruiting staff for exports, training and
development, and compensation.

Sometimes, some HR activities, such as recruiting foreign sales or agency personnel are carried
out by the exports or marketing department with or without consultation with the HR
department.

International Organizational Structures: Type #  2.

International division structure: As the foreign operations of a company grow, businesses
often realize the overseas growth opportunities and an independent international division is
created which handles all of a company’s international operations (Fig. 17.3). The head of
international division, who directly reports to the chief executive officer, coordinates and
monitors all foreign activities.
The in-charge of subsidiaries reports to the head of the international division. Some parallel but
less formal reporting also takes place directly to various functional heads at the corporate
headquarters.

The corporate human resource department coordinates and implements staffing, expatriate
management, and training and development at the corporate level for international assignments.
Further, it also interacts with the HR divisions of individual subsidiaries.

The international structure ensures the attention of the top management towards developing a
holistic and unified approach to international operations. Such a structure facilitates cross-
product and cross-geographic co-ordination, and reduces resource duplication.

Although an international structure provides much greater autonomy in decision-making, it is

often used during the early stages of internationalization with relatively low ratio of foreign to
domestic sales, and limited foreign product and geographic diversity.

International Organizational Structures: Type #  3.

Global Organizational Structures: Rise in a company’s overseas operations necessitates
integration of its activities across the world and building up a worldwide organizational structure.
While conceptualizing organizational structure, the internationalizing firm often has to
resolve the following conflicting issues:
i. Extent or type of control exerted by the parent company headquarters over subsidiaries

ii. Extent of autonomy in making key decisions to be provided by the parent company
headquarters to subsidiaries (centralization vs. decentralization)

It leads to re-organization and amalgamation of hitherto fragmented organizational interests into

a globally integrated organizational structure which may either be based on functional,
geographic, or product divisions. Depending upon the firm strategy and demands of the external
business environment, it may further be graduated to a global matrix or trans-national network
structure.

Global functional division structure: It aims to focus the attention of key functions of a firm,
as shown in Fig. 17.4, wherein each functional department or division is responsible for its
activities around the world. For instance, the operations department controls and monitors all
production and operational activities; similarly, marketing, finance, and human resource
divisions co-ordinate and control their respective activities across the world.
Such an organizational structure takes advantage of the expertise of each functional division and
facilitates centralized control. MNEs with narrow and integrated product lines, such as
Caterpillar, usually adopt the functional organizational structure.

Such organizational structures were also adopted by automobile MNEs but have now been
replaced by geographic and product structures during recent years due to their global expansion.

The major advantages of global functional division structure include:

i. Greater emphasis on functional expertise

ii. Relatively lean managerial staff

iii. High level of centralized control

iv. Higher international orientation of all functional managers

The disadvantages of such divisional structure include:

i. Difficulty in cross-functional coordination

ii. Challenge in managing multiple product lines due to separation of operations and marketing in
different departments

iii. Since only the chief executive officer is responsible for profits, such a structure is favoured
only when centralized coordination and control of various activities is required.

Global product structure:

Under global product structure, the corporate product division, as depicted in Fig. 17.5, is given
worldwide responsibility for the product growth.
The heads of product divisions do receive internal functional support associated with the product
from all other divisions, such as operations, finance, marketing, and human resources. They also
enjoy considerable autonomy with authority to take important decisions and operate as profit
centres.

The global product structure is effective in managing diversified product lines.

Such a structure is extremely effective in carrying out product modifications so as to meet

rapidly changing customer needs in diverse markets. It enables close coordination between the
technological and marketing aspects of various markets in view of the differences in product life
cycles in these markets, for instance, in case of consumer electronics, such as TV, music players,
etc.

However, creating exclusive product divisions tends to replicate various functional activities and
multiplicity of staff. Besides, little attention is paid to worldwide market demand and strategy.
Lack of cooperation among various product lines may also result into sales loss. Product
managers often pursue currently attractive markets neglecting those with better long-term
potential.

Global geographic structure: Under the global geographic structure, a firm’s global operations
are organized on the basis of geographic regions, as depicted in Fig. 17.6. It is generally used by
companies with mature businesses and narrow product lines. It allows the independent heads of
various geographical subsidiaries to focus on the local market requirements, monitor
environmental changes, and respond quickly and effectively.
The corporate headquarter is responsible for transferring excess resources from one country to
another, as and when required. The corporate human resource division also coordinates and
provides synergy to achieve company’s overall strategic goals between various subsidiaries
based in different countries.

Such structure is effective when the product lines are not too diverse and resources can be
shared. Under such organizational structure, subsidiaries in each country are deeply embedded
with nationalistic biases that prohibit them from cooperating among each other.

Global matrix structure: It is an integrated organizational structure, which super-imposes on

each other more than one dimension. The global matrix structure might consist of product
divisions intersecting with various geographical areas or functional divisions (Fig. 17.7). Unlike
functional, geographical, or product division structures, the matrix structure shares joint control
over firm’s various functional activities.
Such an integrated organizational structure facilitates greater interaction and flow of information
throughout the organization. Since the matrix structure has an in-built concept of interaction
between intersecting perspectives, it tends to balance the MNE’s prospective, taking cross-
functional aspects into consideration.

It facilitates ease of technology transfer to foreign operations and of new products to different
markets leading to higher economies of scale and better foreign sales performance. Matrix
structure is used successfully by a large number of MNEs, such as Royal Dutch/Shell, Dow
Chemical, etc.

In an effort to bring together divergent perspectives within the organization, the matrix structure
may also lead to conflicting situations. It inhibits a firm’s ability to respond quickly to
environmental changes in case an effective conflict resolution mechanism is not in place.

Since the structure requires most managers to report to two or multiple bosses, Fayol’s basic
principle of unity of command is violated and conflicting directives from multiple authorities
may compel employees to compromise with sub-optimal alternatives so as to avoid conflict
which may not be the most appropriate strategy for an organization as a whole.

Transnational network structure: Such a globally integrated structure represents the ultimate
form of an earth-spanning organization, which eliminates the meaning of two or three matrix
dimensions. It encompasses elements of function, product, and geographic designs while relying
upon a network arrangement to link worldwide subsidiaries (Fig. 17.8).

 
This form of organization is not defined by its formal structure but by how its processes are
linked with each other, which may be characterized by an overall integrated system of various
inter-related sub-systems.

The trans-national network structure is designed around ‘nodes’, which are the units responsible
for coordinating with product, functional and geographic aspects of an MNE. Thus, trans-
national network structures build-up multidimensional organizations which are fully networked.

The conceptual framework of a trans-national network structure primarily consists of

three components:
Disperse sub-units: These are subsidiaries located anywhere in the world where they can benefit
the organization either to take advantage of low-factor costs or provide information on new
technologies or market trends
Specialized operations: These are the activities carried out by sub-units focusing upon
particular product lines, research areas, and marketing areas design to tap specialized expertise or
other resources in the company’s worldwide subsidiaries.
Inter-dependent relationships: It is used to share information and resources throughout the
dispersed and specialized subsidiaries.
Organizational structure of N.V. Philips which operates in more than 50 countries with diverse
range of product lines provides a good illustration of a trans-national network structure.
International Organizational Structures: Type #  4.
Evolution of Global Organizational Structures: Organizational structures often exhibit
evolutionary patterns, as shown in Fig. 17.9, depending upon their strategic globalization. The
historical evolution of organizational patterns indicates that in the early phase of
internationalization, most firms separate their exports departments from domestic marketing or
have separate international divisions.

Companies with emphasis on global business strategies move towards global product structures
whereas those with emphasis on location base strategies move towards global geographic
structures.

Subsequently, a large number of companies graduate to a matrix or trans-national network

structure due to dual demands of local adaptations pressures and globalization. In practice, most
companies hardly adopt either pure matrix or trans-national structures; rather they opt for hybrid
structures incorporating both.

International Trade Law Theories

With time, economists have established theories that explain global trade. These theories explain
what exactly happens in International Trade. There are 6 economic theories under International
Trade Law which are classified in four: (I) Mercantilist Theory of trade (II) Classical Theory of
trade (III) Modern Theory of trade (IV) New Theories of trade. Both of these categories,
classical and modern, consist of several international theories.

1. Mercantilism: This theory was popular in the 16th and 18th Century. During that time the
wealth of the nation only consisted of gold or other kinds of precious metals so the
theorists suggested that the countries should start accumulating gold and other kinds of
metals more and more. The European Nations started doing so. Mercantilists, during this
period stated that all these precious stones denoted the wealth of a nation, they believed
 that a country will strengthen only if the nation imports less and exports more. They said
that this is the favorable balance of trade and that this will help a nation to progress more.

Mercantilism thrived during the 1500's because there was a rise in new nation-states and the
rulers of these states wanted to strengthen their nations. The only way to do so was by increasing
exports and trade, because of which these rulers were able to collect more capital for their
nations. These rulers encouraged exports by putting limitations on imports. This approach is
called protectionism and it is still used today.

Though, Mercantilism is one the most old-fashioned theory, it still remains a part of
contemporary thinking. Countries like China, Taiwan, Japan, etcetera still favor Protectionism.
Almost every country, has implemented protectionist policy in one way or another, to protect
their economy. Countries that are export oriented prefer protectionist policies as it favors them.
Import restrictions lead to higher prices of good and services. Free-trade benefits everyone,
whereas, mercantilism's protectionist policies only profit select industries.

2. Absolute Cost Advantage: This theory was developed by Adam Smith, he was the father
of Modern Economics. This theory came out as a strong reaction against the protectionist
mercantilist views on international trade. Adam Smith supported the necessity of free
trade as the only assurance for expansion of trade. He said that a country should only
produce those products in which they have an absolute advantage. According to Smith,
free trade promoted international division of labour. By specialization and division of
labour producers with different absolute advantages can always gain over producing in
remoteness. He emphasised on producing what a country specializes in so that it can
produce more at a lower cost than other countries. This theory says that a country should
export a product in which it has a cost advantage. Adam's theory specified that a
country's prosperity should not be premeditated by how much gold and other precious
metals it has, but rather by the living standards of its citizens.

3. Comparative Cost Advantage Theory: The comparative cost theory was first given by
David Ricardo. It was later polished by J. S. Mill, Marshall, Taussig and others. Ricardo
said absolute advantage is not necessary. He also said a country will produce where there
is comparative advantage.

The theory suggests that each country should concentrate in the production of those
products in which it has the utmost advantage or the least disadvantage. Hence, a state
will export those supplies in which it has the most benefit and import those supplies in
which it has the least drawback.
Comparative advantage arises when a country is not able to yield a commodity more
competently than another country; however, it has the resources to manufacture that commodity
more proficiently than it does other commodities.

4. Hecksher 0hlin Theory (H-0 Theory): Smith and Ricardo's theories didn't help the
countries figure out which products would give better returns to the country. In 1900s,
two economists, Eli Hecksher and Bertil Ohlin, fixated on how a country could profit by
making goods that utilized factors that were in abundance in the country. They found out
that the factors that were in abundance in relation to the demand would be cheaper and
that the factors in great demand comparatively to its supply would be more expensive.

The H-0 Theory is also known as the Modern Theory or the General Equilibrium Theory. This
theory focused on factor endowments and factor prices as the most important determinants of
international trade. The H - 0 is divided in two theorems: The H - 0 theorem, and the Factor Price
Equalization Theorem. The H - 0 theorem predicts the pattern of trade while the factor-price
equalization theorem deals with the effect of international trade on factor prices. H - 0 theorem is
further divided in two parts: factor intensity and factor abundance. Factor Abundance can be
explained in terms of physical units and relative factor prices. Physical units include capital and
labor, whereas, relative factor price includes the adjoining expenses like rent, labor cost, etcetera.
On the other hand, factor intensity means capital, labor or technology, etcetera, any factor that a
country has.

5. National Competitive Theory or Porter's diamond: The diamond theory was given by
Micheal Porter. This theory states that the qualities of the home country are vital for the
triumph of a corporation. This theory was given its name because it is in the shape of a
diamond. It describes the factors that influence the success of an organization. There are
Six Model Factors in this theory which are also known as the determinants.

The following are the determinants:

 Factor Condition;

 Demand Conditions;

 Related and Supporting Industries;

 Firm Strategy, Structure, and Rivalry;

  Chance; and

 Government.

6. Product Life Cycle Theory:

This theory was developed by Raymond Vernon in the Mid 1960's, he was a Harvard Business
School professor. This theory was developed after the failure of Hecksher Ohlin's Theory. The
theory, detailed that a product goes through various stages in the course of its progress. These
stages are: (1) new product stage, (2) maturing product stage, and (3) standardized product stage.
This theory assumed that the production of a new product would take place in the nation where it
was innovated.

In the 1960's this was a very useful theory. At that time, United States of America was
dominating the whole globe in terms of manufacturing after the World War II.

Stage I: New Product

The stage begins with introducing a new product in the market. A corporation will begin from
developing a new good. The market for which will be small and sales will be comparatively low.
Vernon assumed that innovation or invention of products will mostly be done in developed
nations, because of the economy of the nation. To balance the effect of less sales, corporations
would keep the manufacturing local. As the sales would increase, the corporations would start to
export the goods to different nations in order to increase the revenue and sales.

Stage II: Mature Product Stage

The product enters this stage when it has established demand in developed nations. The
manufacturer, would need to open manufacturing plants in each nation where the product has
demand. Due to local production, labour costs and export costs will decline which will in result
reduce the per unit cost and increase the revenue.

This stage may include product development. Demand for the product will continue to rise in this
stage. demand can also be expected from less developed nations. Local competition with other
cooperation's will begin.

Stage III: Standardized Product Stage

In this stage exports to nations various developed and under developed nations will begin.
Foreign product competition will reach its peak due to which the product will start losing its
market. The demand in the nation from where the product originated will start declining and
eventually diminishes as a new product grabs the attention of the people. The market for the
product is now completely finished.

Then, the cycle of a new product begins.

Four Basic Levels of International Business

All businesses experience the effects of foreign markets and competition in today's global
economy. Because of this, some small businesses are taking steps to exploit not only a
domestic market but also markets in other parts of the world. A first step in deciding whether
or not to adopt a global perspective is gaining an understanding of the differences between the
domestic, international, multinational and global levels of business activity.
 1. Domestic Business Operations: A domestic small business conducts all company
operations, from acquiring supplies to selling products or services, within its
country of origin.
A domestic business operates within one country, buying its resources and selling its products
and services in the national or local market. Most small businesses are examples of domestic
businesses, including hair salons, restaurants and grocery stores. There also are a few large
businesses that operate exclusively in domestic markets.

2. International Business Operations: A small business may be an international

company that conducts its primary business operations within its country of
origin but also imports some products or manufacturing resources from other
countries or exports some products or services to foreign markets. The volume or
dollar value of imported and exported goods depends on the business, its product
line and its customers. For example, a small toy manufacturer and retailer in
Texas might import building blocks and other wooden toys in its product line
from Honduras, which the company then might sell to European department
stores. In turn, a small-business government contractor who builds city
auditoriums might award a foreign business a percentage of the contract for
supplying the auditorium seating, screens and audio and video equipment.

3. Multinational and Transnational Business: A multinational business typically has

its national headquarters in its country of origin but operates worldwide through
several subsidiaries. It buys its resources, manufactures and sells its products,
and borrows money from and invests in foreign markets. An example of a
multinational business is Coca-Cola. Corporate experts differentiate between a
multinational and a transnational business. Transnational businesses have
independently operated centers around the world. An example of this is Nestle.

4. Global Business: The highest level of international business activities is global

business. A global business has operations worldwide, and it does not identify
any home country. Not many companies have achieved this level of international
activity, but more and more multinational companies are heading in this
direction. A good example of a global business is Philip Morris International.