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Course Code:




15 DECEMBER 2010














Mr D Burke

Dr S Green



Write your Name, Course, Course Year and Class Group on your answer book.


Answer THREE (3)
questions only.


All questions carry equal marks.



Discuss three important factors that lead to the success
of a strategic alliance



is not working for
all who participate in the globalisation process.

Do you agree or disagree with this statement?



Discuss how major historical events have influenced the global
spread of business.



International businesses frequently face sourcing decisions, decisions about whether they
should make or buy the component parts that go into their final product.

Should the firm manufacture its
own component parts in
house or should the firm source the
parts from

an independent supplier?




countries are exposed to financial crises that can be both
detrimental to their own

and to international business activity.

Discuss the causes, consequences and lessons from recent financial crises.


Solutions to International Business

Terminal Examination


The students’ answers will be corrected in accordance with the Grading Scheme below.


Criteria relevant to assessing

Knowledge, Understanding, Application

( Bloom’s levels 1


Additional criteria relevant to assessing

Analysis, Synthesis,
Evaluati on

(Bloom’s levels 4




A comprehensive, highly structured, focused

and concise response to the assessment task, consistently

An extensive and detailed

knowledge of the subject matter.

developed ability

to apply this knowledge to the set task.

Evidence of extensive background reading.

Clear, fluent, stimulating and original expression.

Excellent presentation (spelling, grammar, graphical)
with minimal or no presentation

A deep and systematic engagement with the
assessment task, with consistently impressive

demonstration of a comprehensive mastery of the
subject matter, reflecting:

A deep and broad knowledge and critical insight
as well as extensive reading.


critical and comprehensive appreciation of the
relevant literature or theoretical, technical or
professional framework.

An exceptional ability to organise, analyse and
present arguments fluently and lucidly with a high
level of critical analysis, amply
supported by
evidence, citation or quotation.

A highly
developed capacity for original,
creative and logical thinking.




Very Good

A thorough and well
organised response to
the assessment task, demonstrating:

A broad knowledge of the
subject matter.

Considerable strength in applying that knowledge to
the task set.

Evidence of substantial background reading.

Clear and fluent expression.

Quality presentation with few presentation errors.

A substantial engagement with the as
sessment task,

A thorough familiarity with the relevant
literature or theoretical, technical or professional

developed capacity to analyse issues,
organise material, present arguments clearly and
cogently well supporte
d by evidence, citation or

Some original insights and capacity for creative
and logical thinking.




An adequate and competent response to the
assessment task, demonstrating:

Adequate but not complete knowledge of the subj

Omission of some important subject matter or the
appearance of several minor errors.

Capacity to apply knowledge appropriately to the task
albeit with some errors.

Evidence of some background reading.

Clear expression with few areas of confusion.

Writing of sufficient quality to convey meaning but
some lack of fluency and command of suitable

Good presentation with some presentation errors.

An intellectually competent and factually
answer with, marked by:

Evidence of a reasonable familiarity with the
relevant literature or theoretical, technical or
professional framework.

Good well developed arguments, but more
statements of ideas.

Arguments or statements adequately but not well
supported by evidence, citation or quotation.

Some critical awareness and

analytical qualities.

Some evidence of capacity for original and
logical thinking.


Criteria relevant to assessing K



( Bloom’s levels 1


Additional criteria relevant to assessing

Analysis, Synthesis, Evaluati on

(Bloom’s levels 4






An acceptable

response to the assessment task with:

Basic grasp of subject matter, but

somewhat lacking in
focus and

Main points covered but insufficient in detail.

Some effort to apply knowledge to the

task but only a
basic capacity

or understanding displayed.

Little or no evidence of ba
ckground reading.

Several minor errors or one or more major error.

Satisfactory presentation with an acceptable level of
presentation errors.

An acceptable level of intellectual

engagement with the assessment task showing:

theoretical, technical or professional framework.

development of argument


logical thinking.




A response to the assessment task that is
unacceptable, with:

A failure to address the question resulting in a largely
irrelevant answer or material of
marginal relevance

A display of some knowledge of material relative to
the question posed, but with very serious omissions /
errors and/or major inaccuracies included in the answer.

Solutions offered to a very limited portion of the
oblem set.

An answer unaccept ably incomplet e (e.g for lack of
t ime).

A random and undisciplined development of
argument, layout or present at ion.

Unaccept able st andards of present at ion, such as
grammar, spelling or graphical present at ion.

Evidence of subst ant ial plagiarism

An unaccept able level of int ellect ual

engagement wit h t he as s es s ment t as k, wit h:

t heoret ical, t echnical or profes s ional framework.


only part ially s ucces s ful.

original and logical t hinking.


(100 Marks)

The term strategic
alliance refers to cooperative agreements between potential or actual
competitors. We are looking at strategic alliances between firms from different countries.
Strategic alliances run from formal joint ventures, in which two or more firms have equity
es to short term contractual agreements in which two companies agree to cooperate on a
particular task such as developing a new product.

The student must address the following:

The success of an alliance seems to be a function of three main factors: partne
r selection,
alliance structure and the manner in which the alliance is managed. These three items need to
be addressed in turn.


Partner Selection

One key to making a strategic alliance work is to select the right ally.
A good ally or partner
has three

principal characterist ics.
First, a good partner helps the firm achieve its strategic
whether they are market access, sharing the costs and risks of new product
development, or gaining access to critical core competencies. Second, a good partner sha
the firm’s vision for the purpose of the alliance. Third, a good partner is unlikel y to try to
exploit the alliance for its own ends. IBM is involved in so many strategic alliances that it
would not pay the company to trample over individual alliance p
artners. To select a partner a
firm needs to study potential alliance candidates. To increase the probabilit y of selecting a
good partner, the firm should: (i) Collect as much pertinent, publicly available informat ion on
potential allies as possible. (ii)
Collect data from informed third parties. These include firms
that have had alliances with the potential partners, invest ment bankers who have had dealings
with them, and some of their former employees. (iii) Get to know the potential partner as well
as po
ssible before committing to an alliance.

Firms ally themselves with actual or potential competitors for various strategic purposes.

First, strategic alliances may facilitate entry into a foreign market.

Motorola found it very difficult to gain access to th
e Japanese cellular telephone market.

In the mid 1980s the firm complained about formal and informal Japanese trade barriers.

The turning point came in 1987 when it allied itself with Toshiba to build microprocessors.

As part of the deal, Toshiba provided
Motorola with marketing help
including some of its
best managers. This helped Motorola in the political game of securing government approval
to enter the Japanese market. Second, strategic alliances also allow firms to share the fixed
costs and associated
risks of developing new products or processes. Motorola’s alliance with
Toshiba was partly motivated by a desire to share the high fixed costs of setting up an
operation to manufacture microprocessors. The microprocessor business is so capital
intensive, M
otorola and Toshiba each contributed close to $1 billion to set up their facility.
Few firms can afford the costs and risks by themselves. Third, an alliance is a way to bring
together complementary skills and assets that neither company could easily devel
op on its

An example is the alliance between France’s Thomson and Japan’s JVC to manufacture
videocassette recorders.

JVC and Thomson are trading core competencies; Thomson needs product technology and
manufacturing skills, while JVC needs to learn ho
w to succeed in the European market. An
alliance here helps both companies.

Students should discuss the Management Focus handout that was delivered in class on
General Motors and the Daewoo group which highlights what happens when an alliance fails.


lliance Structure

Having selected a partner, an alliance should be structured so that the firm’s risks of giving
too much away to the partner are reduced to an acceptable level. Alliances can be designed to
make it difficult to transfer technology not mean
t to be transferred. The design, development,
manufacture and service of a product manufactured by an alliance can be structured so as to
‘wall off’ sensitive technologies to prevent their leakage to the other participant. Contractual
safeguards can be wr
itten into alliance agreement to guard against the risk of opportunism by
a partner. Both parties can agree in advance to swap skills and technologies. Cross licensing
agreements are one way to achieve this goal.

For example, in the alliance between Motoro
la and Toshiba, Motorola has licensed some of
its microprocessor technology to Toshiba, and in return Toshiba has licensed some of its
memory chip technology to Motorola.


Managing the Alliance

Once a partner has been selected and an appropriate struct
ure has been agreed on, the task
facing the firm is to maximize its benefits from the alliance. Maximising the benefits from an
alliance involves building trust between partners and learning from partners. The building of
good interpersonal relationships b
etween the firms can lead to a successful alliance. After a
five year study of 15 strategic alliances between major multinationals, Gary Hamel, Yves
Doz, and C. Prahalad concluded that a major determinant of how much a company gains
from an alliance is its

ability to learn from its alliance partner. They focused on a number of
alliances between Japanese companies and Western partners. In every case in which a
Japanese company emerged from an alliance stronger than its Western partner, the Japanese
company h
ad made a greater effort to learn. They tended to regard the alliance purely as a
cost sharing or risk sharing device, rather than as an opportunity to learn how a potential
competitor does business. Consider the 10 year alliance between General Motors and

to build the Chevrolet Nova. This alliance, constituted in 1985, was structured as a formal
joint venture, called New United Motor Manufacturing Inc. and each party had a 50 percent
equity stake. The venture owned an auto plant in Fremont, Californ
ia. According to one
Japanese manager, Toyota quickly achieved most of its objectives from the alliance. We
learned about US supply and transportation and we got the confidence to manage US
workers’. All that knowledge was then transferred to Georgetown, K
entucky, where Toyota
opened its own plant in 1988. All that GM got from the alliance was a new product, the
Chevrolet Nova. Some GM managers complained that the knowledge they gained from
Toyota had never been put to good use inside GM. They believe they
should have been kept
together as team to educate GM’s engineers and workers about the Japanese system. Instead
they were dispersed to various GM subsidiaries. To maximise the learning benefits of an
alliance, a firm must try to learn from its partner and
then apply the knowledge within its own
organisation. It has been suggested that all operating employees should be briefed on the
partner’s strengths and weaknesses and should understand how acquiring particular skills will
bolster their firm’s competitive
ness. Hamel, Doz and Prahalad note that this is standard
practice among Japanese companies. For example, they made this observation: “We
accompanied a Japanese development engineer on a tour through a partner’s factory. This
engineer dutifully took notes o
n plant layout, the number of production stages, the rate at
which the line was running, and the number of employees. He recorded all this despite the
fact he had no manufacturing responsibility in his own company, and that the alliance did not
encompass j
oint manufacturing. Such dedication greatly enhances learning”. For such
learning to be of value, it must be diffused throughout the organisation. To achieve this, the
managers involved in the alliance should be explicitly used to educate their colleagues
in the
firm about the skills of the alliance partner.


(100 Marks)

This question sets out to test the student’s knowledge of the whole area of globalisation. The
student is being encouraged to debat
e on the positives

surrounding globalisation. What I want
to see is a good discussion on globalisation with lots of opinion thrown in. If opinion is given
I wish to see it backed up
From the start the student must address whether they
agree or disagree with t
he statement on globalisation. Of course the student can tackle the
question by agreeing and disagreeing with the statement.

The word ‘all’ appears in the question deliberately as I want the student to refer to how:


dividuals/consumers benefit

from glo


Companies benefit

from globalisation,




from globalisation.


For the individual/consumer we benefit from cheaper prices because there exists more
competition among firms in the various markets and produc
ts can now be bought in cheaper
from lower cost economies.
However, t
he individual may lose out if a company decides to
move to a cheaper cost economy and makes people unemployed.


Companies can benefit by finding cheaper cost economies to manufacture t
products and can buy in component parts at cheaper prices. They can engage in off
and outsourcing. They also benefit from having a larger market to sell their products into,
consider China. These two main components of globalisation should be

addressed. They are
the globalisation of markets and the globalisation of production. Under the globalisation of
production reference should be made to the Boeing 777 jet airliner and Swan
examples. These examples show how firms benefit. Companies

can lose out by the increasing
amount of competition in the marketplace.



benefit from increases in Foreign Direct
Investment which leads to higher economic growth, more employment and higher standards
of living. On the
negative side economies can leak jobs to cheaper cost economies and go
into reverse.

The debate should use the following headings as


Prosperity or impoverishment


Jobs and incomes (Reference should be made to the Bartlett and Steele


Labour policies and the environment


National sovereignty

Reference should also be made to the book "The case against the global economy" which sets
out arguments against globalisation and for a turn towards localisation. Students own opinion
s very important here.


(100 Marks)

This question allows the student to look back historically and report on the four major events
that have impacted on the global spread of business. The student is encouraged to address the
lessons tha
t we have learnt from all of this. Below are the following events that must be


Trade plays an important role in the development of global business.

As trade expands over the period 1450 to 1640 this new world economy emerges. Trade has a
huge impact on business activity and economic development. Trade is enhanced by the
emergence and expansion of the maritime nations, what the world witnesses is the
development of a world trading system. The student must write about the importance of trade

to international business


Industrial Revolution

and its impact on the spreading of business.

New inventions are created and the factory system emerges.

Trade is further enhanced by the industrial revolution. From this two roles emerge:


Role of t
he core nation


Role of the periphery.

Mention should be given to countries such as the U.K. Germany and the U.S. and their
importance in this economic expansion. These led to increased international investment and
the development of the multinational


Setting up of Global Institutions

to enable business to spread globally.

An important point to note is what effect did the world wars have on the world economy?
The economic order built after 1945 reflected the economic and political
domination of the
United States.

This country instigated economic change as in 1944 both the International
Monetary Fund and the World Bank were formed. Students should mention their respective
roles in the new world order. A third institution (GATT) now t
he World Trade Organisation
was established in 1947. Together these three organisations set out to promote trade and
investment worldwide.


Emergence of the new economies who are open for international business.

he world economy has witnessed a truly fu
ndamental transformation. This transformation
has been achieved through the advent of freer trade, stable financial systems and capital
markets, technological advances and increased labour mobility.
In answering the

students should mention

the cou
ntries that they ha
ve studied throughout this topic
, for
example the Asian economies
the Transition economies
of Central & Eastern Europe
what is happening to them. Both these sets of economies have undergone and are undergoing
economic change that

impacts on the rest of the world.

These countries are now open to
international business and they pose an opportunity and a threat to the older established
economies in the West.


(100 Marks)

In this question the student is being as
ked to discuss whether a firm should make component
parts in

house or source them from an independent supplier. The student must therefore
address the advantages of making the components in
house and the advantages of buying the
parts and discuss which is

more beneficial from the firm’s point of view. The answer is that
firms are engaging in a mixture of both.
In answering this question the student is encouraged
to bring in the ‘Management Focus’ handouts that were discussed in class. These gave
of true life companies and their experiences of global sourcing. The following
companies were addressed: Boeing, Cognizant Technology Solutions and Johnson Controls.
The student’s answers should incorporate these into their discussions. The student should
address the following seven headings when answering the question.

Consider the advantages of making the components in


Lower Costs

It may pay a firm to manufacture a product or component part in
house, as opposed to
outsourcing it to an
independent manufacturer, if the firm is more efficient at that production
activity than any other enterprise.


Facilitating Specialised Investments

Imagine Ford of Europe has developed a high performance, high quality, and uniquely
designed carburetor.

The carburetor’s increased fuel efficiency will help sell Ford cars.

Ford must decide whether to make the carburetor in house or contract out the manufacturing
to an independent supplier.

Manufacturing these uniquely designed carburetors requires investme
nts in equipment that
can be used only for this purpose; it cannot be used to make carburetors for any other auto

This constitutes an investment in specialised assets.

Consider the scenario from the perspective of an independent supplier who has bee
n asked by
Ford to make this investment.

The supplier might reason that once it has made the investment it will become dependent on
Ford for business because Ford is the only possible customer for the output of this equipment.

The supplier perceives that a
s putting Ford in a strong bargaining position and worries that
once the specialised investment has been made, Ford might cut prices for the carburetors.

Given this risk, the supplier declines to make the investment in specilaised equipment.

Now take the
position of Ford.

Ford might reason that if it contracts out production of the carburetors to an independent
supplier, it might become too dependent on that supplier for a vital input.

Because specialised equipment is required to produce carburetors, Ford
cannot easily switch
its orders to other suppliers who lack that equipment, as it would encounter high switching

Ford perceives this as increasing the bargaining power of the supplier and worries that the
supplier might use its bargaining strength
to demand higher prices.

The mutual dependency that outsourcing would create make Ford nervous and scares away
potential suppliers.

The problem is lack of trust.

Neither party completely trusts the other to play fair.

Ford might reason that the only safe
way to get the new carburetors is to manufacture them

Ford decides to make rather than buy.


Proprietary Product Technology Protection

Proprietary product technology is unique to a firm.

If it enables the firm to produce a product containing su
perior features, it can give the firm
competitive advantage.

The firm would not want this technology to fall into the hands of competitors.

If the firm contracts out the manufacture of components containing proprietary technology, it
runs the risk that th
ose suppliers will expropriate the technology for their own use or that they
will sell it to the firm’s competitors.

Thus, to maintain control over its technology, the firm might make such component parts in


Improved Scheduling

international businesses that source worldwide, scheduling problems can be increased by
the time and distance between the firm and its suppliers.

This is true whether the firms use their own subunits as suppliers or independent suppliers.

To overcome sched
uling problems, many businesses will produce in house.

Next consider the advantages of sourcing the component parts from independent


Strategic flexibility

The great advantage of buying component parts from independent suppliers is that the
can maintain its flexibility, switching orders between suppliers as circumstances dictate.

is particularly important in the international context, where changes in exchange rates and
trade barriers can alter the attractiveness of supply sources.

One year Hong Kong might be the lowest cost source for a particular component, and the
next year Mexico may be.

Sourcing component parts from independent suppliers can also be advantageous when the
optimal location for manufacturing a product is beset by p
olitical risks.

Under such circumstances, foreign direct investment to establish a component manufacturing
operation in that country would expose the firm to political risks.

The firm can avoid many of these risks by buying from an independent supplier in
country, maintaining the flexibility to switch sourcing to another country if a war, revolution,
or other political change alters that county’s attractiveness as a supply source.

However, maintaining strategic flexibility has its downside.

f a suppli
er perceives the firm will change suppliers in response to changes in exchanges,
trade barriers then the supplier may not be willing to make investments in specialised assets.


Lower costs

Firms have to assess whether it is cheaper to produce in their own
company or to source from
another company.

If the cost of buying in a product with high quality is less than the cost of producing that
product internally, then the firm should buy in the good.

As firms continue to enter global markets, global competition


This forces
management of both international and domestic companies to search for ways to lower costs
while improving their products or services in order to remain competitive.



Another reason for outsourcing some manufacturing to in
dependent suppliers in other
countries is that it may help the firm capture more orders from that country.

For example, before Air India places a large order with Boeing, the Indian government might
ask Boeing to push some contracting work to Indian manufa

This is not unusual in international business and it affects far more than just the aerospace

Representatives of the U.S. government have repeatedly urged Japanese automakers
to purchase more component parts from U.S. suppliers to partia
lly offset the large volume of
automobile exports from Japan to the United States.


(100 Marks)

In answering this question the student has to discuss the causes, consequences and lessons
from recent financial crises. The student must
address the Mexican, Russian and East Asian
Crises and the lessons that were learned from them before moving on to discuss the current
financial crisis. What the student must discuss is that the lessons that were learned from the
East Asian crisis particul
arly were not adhered to. They have to consider the problems today
from reckless lending and its impact on the business activity. The causes of all crises stem
from reckless lending, over borrowing and too much government spending. This point has to
be ad
dressed in all four crises. The consequences from these crises include firms going
bankrupt and governments curtailing spending. A consequence of a financial crisis is the
introduction of the International Monetary Fund to help stabilise the economy. The s
should address the role of the IMF in each of these crises. The main lesson to be learned from
these crises is to have more regulation of the banking industry. The student must address the


Mexican Currency Crisis

Taking the Mexican cri
sis first the student must link this to the car industry and show how the
crisis impacted on that industry. The Mexican government engaged in huge spending and the
economy boomed as Mexico joined the North American Free Trade Agreement. Foreign
Direct Inve
stment flowed in large quantities into Mexico. This growth path was unsustainable
and the bubble burst causing the currency to depreciate. It became more expensive for
Mexican business to buy in from other countries. The IMF had to intervene to address the

problems of this crisis and inject money into the economy and stabilise the exchange rate.

By allowing the IMF into the country the government had to abide by what they wanted

The lessons learned from this crisis were that it is important for a coun
try to maintain a stable
economy and currency because if they don’t then a currency crisis can take hold in the
country. From the global car industry perspective what they learned was that it is very
beneficial for these car companies such as Ford, Mercede
s Benz and Nissan to have located
in a country before the currency crisis. Why? Because after the crisis and the depreciation of
the Mexican peso, cars that were produced in Mexico and sold to the rest of the world were
been sold at a cheaper price and the
refore were more competitive.

Consider the following example using dollars and the peso:

For example, take a product been bought into the U.S. from Mexico before the currency
crisis. The exchange rate stood at $1 = 3.5 Pesos. A product costing 100,000 pes
os would
cost 100,000/3.5 = $28,571. After the currency crisis the peso depreciated to $1 = 5.6 peso.
The same product been bought now cost 100,000/5.6 = $17857. A saving of $10714. Now
say you were buying 10,000 of these products then you make a saving o
f 10,000 x $10,714 =
$10,714,000. A nice return from a currency crisis. So global companies gained from this
particular crisis.


Russian Rouble Crisis

Again the main cause of the crisis was over spending by the government and too much credit
causing high
inflation which also led to the bursting of the economy. The IMF were again
called in to sort out the mess, however they found it difficult to deal with the Russian

The main lesson learned from this crisis was that it was foolish of Western

banks and
businesses to have lent roubles to the Russians because after the crisis Western banks and
businesses found a huge hole in their financial assets.

Consider the following example:

Say for example that an American bank had lent 900,000,000 roubles

to the Russian banking
sector. In dollars going at the exchange rate of $1 = R125, this was worth $7,200,000.
Because the American bank lent money in roubles, it had to be paid back in roubles. After the
currency crisis the new exchange rate stood at $1 =


Converting roubles into dollars at the new exchange rate gives us $175,439.

In dollar terms this bank had made a $7,024,561 loss on that transaction.

This represents a very big mistake incurred by the American bank.


The East Asian crisis of

This financial crisis was the biggest challenge for the global financial system and it took the
International Monetary Fund to repair the damage. The cause of the crisis was the increase in
borrowings in the whole region. Governments, banks, busi
nesses and consumers all borrowed
too heavily and as the economies downturned no one was able to repay their debts.

This crisis could have led to a collapse of the whole global monetary system even though it
started in the South
East Asia region. The IMF
yet again had to intervene to address the mess
and through their actions they stemmed the crisis and brought the economies of that region
back on a sustainable level of growth. What lesson did the business world learn from this
crisis? The most important
lesson to be learned from this whole experience was that it is a top
priority for every economy to have a regulated banking system.

Without a regulated banking system the banking sector can engage in reckless lending and
this can lead to the financial cris
is. The banking and business sector of the countries involved
were too highly indebted and had borrowed huge amounts of U.S. dollars in short term loans
which as we are going to see led them into further difficulties.

Consider the example of Thailand: Con
sider a Thai Bank borrowing $10,000,000 in say
1996. Note in 1996 the exchange rate stood at $1 = Bt 25.

So converting the dollars into Baht leaves the bank with Bt 250,000,000.

Now in 1998 after the currency had depreciated to $1 = Bt 55 what happened to
the debt of
the Thai bank. In local currency their debt went up.

In order for the Thai bank to pay off the $10,000,000 debt they would now have to come up
with Bt 550,000,000. This is Bt 300,000,000 more.

This was happening to all currencies in the area an
d it left the debts of banks and businesses
rising. Another important lesson is that it can be dangerous for a country to have its
government liked too closely with the business sector.


The Current Financial Crisis of 2008/2009

The lessons of the As
ian crisis were not heeded as the global financial system still engaged in
reckless lending and this became quite apparent starting from the problems in the sub prime
mortgage business in the United States and spreading to the global economy. Investment
nks have fallen and governments worldwide have intervened in the banking industry.
Interest rates have fallen so as to encourage the business and consumer sectors to start
borrowing again. There has been a call for greater regulation of the global banking
The International Monetary Fund has had to intervene to protect countries from going
bankrupt, namely Hungary and Iceland.