International Business

Review the chapter 16 closing case: Avon Call on Foreign Markets. Fully answer at least two of the six questions at the end of the case:

1.The chapter describes different marketing orientations. Discuss the applicability of each to Avon’s international operations.

2.Why is Avon so much more dependent on its foreign operations than on its home (U.S.) operations?

3.Discuss socioeconomic and demographic changes that could affect Avon.

4.How might a global recession, such as the one that began in 2008, impact Avon’s operations?

5.What are the major competitive advantages that Avon has? How easily might other companies duplicate these advantages?

6.Avon does not sell within the United States in retail establishments (with the exception of kiosks handled by some of its reps). What are the pros and cons of distributing that way?

Avon Call on Foreign Markets:

Avon, founded in 1886, is one of the world’s oldest and largest manufacturers and marketers of beauty and related products.92 Many are most familiar with Avon through its long-standing ad, “Ding dong, Avon calling,” but the company has recently switched to “Hello Tomorrow” to change its image and better reflect the company’s new marketing approaches.

However, Avon was 28 years old (an adult by human standards) before it ever ventured abroad, and then only to nearby Canada. Forty years later, a geriatric in human terms, it moved into its second foreign market, Venezuela. Map 16.1 shows how Avon now divides the world regionally and the portion of its business in each region.

Why Avon Went Global

So why has Avon put so much emphasis on international expansion in recent years? First, Avon forecast a slow growth potential in the U.S. market, because there is virtually no remaining untapped market for cosmetics, fragrances, and toiletries. To grow rapidly in the United States would mean taking sales from competitors, and the U.S. beauty market is very competitive. If you doubt this, just try weaving through a large U.S. department store without being accosted and sprayed on.

Avon has preferred to put emphasis on less-competitive markets, and its latest annual report even states that it expects U.S. “growth to be in line with that of the overall beauty market”—which means its domestic sales will depend primarily on the population growth of women in the cosmetics-using age group. Even if there were a considerable untapped U.S. market, less than 5 percent of the world’s population lives in the United States.

Second, you need to understand Avon’s distribution system to appreciate why Avon worried about U.S. sales in the latter part of the twentieth century. Avon has always depended on direct selling by contracted independent salespersons (almost always women working part time and known as “Avon ladies” or “Avon representatives”), who sell to households by demonstrating products and giving beauty advice. These reps place sales orders with Avon and deliver orders to the customers once they receive them.

Where Avon Sells (and How Much)

Avon sells on every continent (except Antarctica) and derives most of its sales outside its home country. The labeled countries are where Avon has operations.

Source: Lists of countries and geographic segments of operations are taken from Avon Products Inc., Avon 2006–2008 Annual Reports.

Note: Given that this is a Mercator projection, the scale approximates east-west distance at the equator; however, the farther you move from the equator, the more the east-west distance is distorted.

Historically, these direct sales have been the backbone of Avon’s success. To begin with, direct selling offers Avon a cost-savings advantage by enabling the company to maintain a 621622smaller number of employees, keep its advertising budget low (the Avon ladies do much of the promotion), and avoid having to pay for shelf space in stores. The lower costs have facilitated Avon’s maintenance of generally lower prices than those that competitors charge in department stores. Thus Avon has consistently maintained an image of good value for the money.

Where Opportunity Currently Knocks

Avon is headquartered in the United States, but over three-quarters of its sales and employees are outside its North American division. It seems to be selling everywhere—moisturizer to Inuits above the Arctic Circle and makeup delivered by canoe to residents of Brazil’s Amazon region. It has its own sales operations in 66 countries and territories, and it distributes to another 44. Altogether, there are about 5.8 million independent representatives selling Avon products.

Review the chapter 20 closing case: Tel-Comm-Tek (TCT). Fully answer at least two of the five questions at the end of the case:

1.Which candidate should the committee nominate for the assignment? Why?

2.What challenges might each candidate encounter in the position?

3.How might TCT go about minimizing the challenges facing each candidate?

4.Should TCT offer all candidates the same compensation package? If not, what factors should influence the features of each package?

5.Returning the material covered in Chapter 15, specifically that dealing with the idea of a matrix organization, do you see any benefit to appointing two of the individuals described here to the post? Operationally, one individual would be in charge of internal affairs, and the other would manage external affairs. What might be the benefits and problems with this arrangement?

Tel-Comm-Tek (TCT)

In May 2010, Mark Hopkins of Tel-Comm-Tek (TCT) India, a company headquartered in the United States, announced his resignation and intention to return to his home in Vermont.116 At the time, he was the managing director of the Indian subsidiary of TCT. During his tenure, Hopkins oversaw steady growth in market share and profitability of the Indian operation. Upon his announcement, TCT began searching for his replacement.

TCT: A Brief Introduction

TCT manufactures a variety of small office equipment in nine different countries. It distributes and sells products such as copying machines, dictation units, laser printers, and paper shredders worldwide. TCT reported sales in more than 70 countries. TCT has sold and serviced products in India since the early 1980s even though it lacked its own in-country manufacturing facility. Originally, it hired independent importers to sell its products. It soon realized that generating higher sales required setting up its own operations. In 1992, it opened a sales office in New Delhi. Map 20.1 profiles features of India.

Today, TCT is poised to expand its Indian operations. Local sales have been increasing at double-digit rates, powered by a boom in the Indian information-technology sector. Forecasts saw this trend accelerating over the next decade. Headquarters projected TCT India evolving into a key element of its global value chain and, ultimately, the center point of its Asian operations.

India: The Next Economic Juggernaut?

Some see India developing into the world’s next big industrial power. This projection has led global companies to increase their local operations. For example, IBM, a longtime customer of TCT, increased its Indian staff from a handful to more than 100,000 employees between the mid-1990s and 2010 through a series of acquisitions and investments. Moreover, internal company analysis indicates that the economic growth rate for the overall economy, along with the sectors that TCT serves, could move total sales of the Indian subsidiary past those in the company’s home market.

Expansion: Pros

Improving Infrastructure Shaping TCT India’s expansion plans is the ongoing improvement in India’s transportation infrastructure. Improvements in highways, railways, and seaports increase the efficiency of product movement both in and out of the country. Management envisions making the local subsidiary a vital link in TCT’s increasingly sophisticated supply chain. Presently, TCT’s supply chain integrates input suppliers, production, and wholesalers in the United States and Europe. Long-term plans outlined integrating supply points throughout Asia.

U.S.-based Tel-Comm-Tek (TCT), which makes small office equipment in nine countries and sells in more than 70, opened an Indian sales office in the capital of New Delhi in 1992 and broke ground on a manufacturing plant in Bengaluru in 2009. India is a competitive location from which TCT can supply markets locations throughout Asia. The company expects that total sales through its Indian subsidiary will eventually surpass total sales in the United States.

Source: Central Intelligence Agency, “India,” The World Factbook 2009, www.cia.gov (accessed October 23, 2009).

Democratic Norms India’s independence in 1947 institutionalized strong democratic norms of accountability, transparency, and freedom. Progress on the economic front had been even more dynamic. From 1947 through 1990, India’s decision to have a centrally planned economy led to the infamous “License Raj,” a situation marked by elaborate licenses, regulations, and bureaucracy that were required to open and run a business. In 1991, India began a transition toward a free market economy with the intended demise of the License Raj. This transition, an ongoing process, has helped stabilize the economic environment and boost India’s attractiveness as a manufacturing site. Still, India’s business environment poses problems.

Expansion: Cons

Problematic Legal Environment The Indian legal environment, although endorsing the principles of the rule of law, struggles with corruption. The primary driver of corruption, in many observers’ eyes, is the country’s vast bureaucracy, a legacy of the previous centrally planned economy. Partial success in dismantling the License Raj has resulted in a civil administration that influences many aspects of economic life. Notably, Western high-tech companies run into problems with intellectual property violation. Patent infringement and business-process piracy are not uncommon.

Outmoded Labor Laws The legal system creates other complications. For example, India’s labor laws, little changed since they were enacted after independence in 1947, make it difficult to lay off employees even if a company’s fortunes hit hard times or the economy slows. Companies are reluctant to hire workers, given the risk of being unable to fire them if circumstances change. Necessary terminations are difficult to execute and often involve extensive negotiations and settlements. “[C]ompanies think twice, 10 times, before they hire new people,” said Sunil Kant Munjal, the chair of the Hero Group, one of the world’s largest manufacturers of inexpensive motorcycles.

Anticompetitive Legislation In addition, Indian laws bar companies with more than 100 employees from competing in many industries. These laws protect small enterprises operating in many villages scattered throughout India, often at the expense of larger-scale operations. Another challenge is high tariffs. These had been put in place to promote domestic production and still apply to many classes of imports, including some that are inputs into products manufactured by TCT. Some of India’s labor laws discourage flexibility; for example, some prohibit companies from allowing workers to clock more than 54 hours of overtime in any three-month period, even if workers are willing to do so.

Managerial Accounting in Business