The Concept of International Business Environment - Essay Example

International Business Environment Various Business Model and Their Advantages and Disadvantages Introduction: Over the years, with the development of technology as well as to incorporate the effect of changes in the consumer behavior there are number of theories in place in the world of management. The concept associated with all those theories has changed along with the changing pattern of organizational operation. In a broader perspective, management theory delivers a comprehensivefoundationfor all the organizations to utilize the management process in order to do effective planning, organizing their entire business operations, leading and controlling the final process. (Koontz 1984) Gabor (1990) in his analysis has mentioned that the theory of management has developed over the past one-hundred years growing from the time and motion studies of engineers to get influenced by the social movements or events; from a decentralized operation to the concept of looking for the best or supremeoperative mode of an organization or Total Quality Management or TQM. (Gabor, 1990) There are various theories associated with the organizational management and those theories are developed based on functionality of various departments. Those theories are revised with the time depending on various real life examples (incidents of various departments in various organizations) over the world. All those theories have various advantages as well as some limitations. In this paper the focus is to analyze three of the following theories, their applications and most importantly what are their advantages and what are the limitations. The Three theories are: International Product Life cycle theory; Krugman’s First Mover Advantage Theory and Porter’s Diamond model. International Product Life cycle theory: The life cycle of any product can be divided into four distinct parts namely: introduction phase, growth phase, maturity and decline phase. When any particular product first introduce in the market then the demand for that product remains high as people wants to buy the new product. Soon after the introduction, the product often passes through the growth phase where the sales volume hit the top. Slowly it reaches the maturity phase when the demand and supply meets one point and the product is able to reach its ultimate high in terms of demand. This is the normal product life cycle associated with any product all over the globe. The IPLC or international product life cycle model was first designed by Vernon in the year of 1966. The main objective of this mode was to develop an advanced trade theory beyond David Ricardo’s static framework of comparative advantages which was designed in the year of 1817. The International PLC has three distinct stages and those are New Product; Maturing Product and Standardized Product. Under new product phase, organizations mainly from the developed nations (like USA, UK etc.) looking to develop new high end products and introduced the same in the developed market where consumers can afford to buy the same and production also done in those market where the organization can minimize the effect of risks. Export to other countries generally happen at the end part of this stage. Under Maturing Product phase, the production cost started to decrease with the help of FDI and increasing demand of the product in other countries. To boost profit, companies started to develop their offshore units as well which distributed the production cost and also reduce the labour cost as well as in some of the developing nations, labour cost is lower than the developed countries. In this phase organizations stared to receive export orders form the lower income countries as well so they need to focus on innovation and development. In last phase, that is the Standardized phase, the principal market or the home market started to become saturated and organization’s initial competitive advantage on the base of innovation started to demolish fast as competition started to increase. In this phase, organizations mainly emphasize on reducing the process cost rather than innovation new product or adding new features. So the process becomes more and more standardized. In this phase, organization mainly looking for capturing the low income market where they can increase the life of their product as the demand in the home market started to reduce with the innovation of new technologies and increasing price sensitivity (Vernon, 1966). Markgraf (nd) in his review has mentioned that “In international markets, the product life cycle accelerates due to the presence of "follower" economies that rarely introduce new innovations but quickly imitate the successes of others. They introduce low-cost versions of the new product and precipitate a faster market saturation and decline” (Markgraf, nd). For example, during first half of 2000, the Gillette Company of Boston, (USA), bring together the world’s first ball point pen with erasable ink. As it was first product in that group the demand was very high and soon they able to capture majority of the market and become the superpower not only in the USA but in abroad also. But after few years, Scripto Inc., a company based in Atlanta, has launched a second generation erasable ink pen with far lower price and most importantly with disposable characteristics. One of the key features of Scripto’s new erasable all point was it has no disposable ink cartridge like Gillette Company’s higher priced product. Soon the previous product’s demand started to decrease drastically and new players able to capture the market. (Rao, 2008). Strengths 1. The IPLC or international product life cycle theory is helpful to forecast the direction of any particular product in present market situation in a macro level. With the help of this theory, product managers can design their strategies in terms of promotion and marketing taking into consideration the moves from the competitors. 2. It is an important tool in developing business strategies for the future. Companies can take lessons by analyzing previous life cycle of any products under same sector so that they can able to avoid previous mistakes made by them or their competitors while marketing the product. 3. In a stable and growing economic and marketing condition, IPLC helped to plan out a long term offensive marketing strategies in various stages so that company can boost their profitability. (Allen, 2014). 4. The model is helpful for the organizations who are started to go global or developing products which requires extensive research to understand how the people will react, how the market will change in future and how they need to change their own model of working. 5. The IPLC model was broadly accepted as the clarification of the ways businesses migrated across borders over time and it is a great model to explain why the developed nations like USA able to exports more labour-intensive goods than other developing nations. Weaknesses: 1. It is not the fact that every product must follow this same product life cycle. For example, in the soft drinks industry, products which are at their maturity stage can able to give more revenues and often if the company try to experiment by replacing that old established brand with a new brand, the strategy can backfire as well. In pharma industry as well, the product can continue its better performance at the maturity stage also as is this sector the key factor is the level of efficiency rather than degree of innovation and better taste. So the above pattern discussed in PLC is not applicable for all industries. 2. Often companies artificially reduce the demand of any particular product to incorporate their new offering in the market. It can be seen that despite having a great response in the introduction phase, any particular goods may fail significantly from the middle part of its growth stage and entire maturity phase and soon can reach its decline. This is known as ‘planned obsolescence’ which is against the stated model. (Allen, 2014) 3. The concept of PLC is not applicable for brands, although brands also have a life cycle but the function if that life cycle is not as like the PLC. Likewise, various products belonging to a common brand do not follow same PLC. The stay of various products in various section of life cycle is different in different markets so the PLC is not common for all products and not even for any particular products in all markets. (Bhasin, 2014). 4. The model is entirely based on the idea that organizations need time to get associated with the new technology but from 1970 onwards the scenario changed completely as the organizations are able to get adapted faster with new technology and income differences among nations also started to reduce very fast. 5. The model is based on the idea that organization first set up their unit in one nation, develop their market, then start export and finally set up new unit outside. But this idea is no longer valid as there is more complex organizational structure in place and organizations are able to develop their business unit elsewhere based on supplier relation also. Krugman’s First Mover Advantage Theory: All over the globe, every organization always starts to take the advantage of tapping the large uncovered market first to boost more market profit and also to enjoy the market leader’s advantage. In every country, the need of any particular product or service increases as the people started to understand the need and requirement of the same. There are number of players in every sector and each one is always looking to outplay the others by innovation and advanced as well as innovative marketing style. As a first mover, company can enjoy a total untapped market, can reach out to entire customer base and most importantly there are no competitors in the market so the first mover can book the maximum possible profit from the potential market place. In an overall perspective, the basis of first movers’ advantage is very simple and that is to gain advantage over all of its potential as well as future rivals by entering the market first. The idea is true for all the companies who wanted to develop “geographical or demographic markets or segments for existing products, or whether it is seeking to introduce new products to its existing market segments.” (Pearson, 2014). All the players who are able to enter market first have advantages in facing the competition in the future by means of accustomed products, brand loyalty, the best retail channels, up-and-running distribution systems, and so on. To enjoy the first mover’s advantages, it is not only necessary to enter the market first, but at the same time organization needs to ensure that they have innovation, knowledge management in place so that they can strengthen their position in the market. There are number of experiences which suggest that the concept of theory of first mover’s advantage proposed by Krugman’s was true, and at the same there are some exceptions as well. For example, companies like Sony and Gillette able to enjoy the advantage of first mover in personal stereos and safety razors market where as some other well-known brands such as Xerox not able to enjoy the same kind of success in terms of fax machine and e toys segments. Sony as a company enjoys the first mover’s advantage but at the same time being the first mover in the video recorder market, their product Betamax Video recorder was driven out from the market by one of the late entrants VHS. (Pearson, 2014) Strengths: 1. Early entrants tend to make a great and permanent impression on customers, receiving robust brand acknowledgment, and consumers often face high substituting prices in shifting their choices. 2. First movers used to enjoy a greater cost advantage in comparison to others by “moving through the experience curve ahead of competitors, by gaining control over scarce inputs, and by establishing patents or other forms of technology leadership. (Boulding & Christen, 2001) 3. Easy to develop brand loyalty and customer base as there are no other players in the market to challenge the operation If one considers the example of Sony, then it is very clear that they have enjoyed a great success in case of introducing personal stereos in the world market. The success was not only due to their first entry in that segment but at the same time “its strong brand name, substantial financial resources, and excellent marketing skills allowed it to make the most of its first-mover status”. (Suarez & Lanzolla, 2005) Butthis is not the only key point associated with the success of the first mover and the case of Xerox is a great example of it. The brand name, promotional strategy or deep pockets-all were available with Xerox like Sony but still their products such as fax machines or e Toys were unable to capture the first mover’s advantage in those field. To describe this exception, Suarez & Lanzolla in their reviews has mentioned that “two factors that powerfully influence a first mover’s fate: the pace at which the technology of the product in question is evolving and the pace at which the market for that product is expanding.”(Suarez & Lanzolla,2005) Weaknesses: 1. The first movers in the consumer goods and industrial market used to enjoy significant sales advantages but at the same time they incurred higher cost disadvantages as well. If one considers both consumer and industrial goods sector the first movers used to face cost disadvantages. “Pioneers in consumer goods had an ROI of 3.78 percentage points lower than later entrants. And the ROI of first movers was 4.24 percentage points lower than followers in the industrial goods sector.” (Boulding & Christen, 2001). 2. One of the main disadvantages of this theory is the cost associated with the first movers. 3. Technologies, supply chain, distribution system all have to be developed from the scratch by the pioneer company so they need a large volume of investment. 4. To keep the first mover advantage organizations need knowledge management process of highest order as well as must have a great level of risk analysis skill. It is necessary for them to analyze the market potential as there are no other players to get some idea from-it is entirely based on their own market survey. If the same is not right them the company can incur great level of loss which again has a negative effect on the overall business process. (Pearson, 12014). Porter’s Diamond model: Porter (1990) has designed a demand framework which according to him controls the competitive advantage of any country. In his opinion there are 4 interrelated factors which control the productivity of the nation as well as companies in a particular sector. These four inter-related factors are strategy of the firm, structure and their rivalry; demand conditions, related and supporting industries, and factor conditions. (Porter, 1990). Factor Condition: These are some key characteristics of any particular industry in any nation which organizations can use for their own benefits. All these factors often strengthen the competitiveness of the organizations. Some of these factor conditions are: Extremely accomplished workforce; Language aptitudes of workforce; Rich amount of raw materials; Workforce shortage etc. Demand Condition: It has often been noticed that when any particular product has a great demand in the domestic market than the foreign one then the domestic companies give great emphasis on that market rather than the foreign ones. As a result the global competitiveness of all the local brands increased drastically. “Therefore a more demanding home market can thus be seen as a driver of growth, innovation and quality improvements.”(Porter, 2009). One of the great examples of this is the Japanese electrical and electronic companies, who on the basis of their domestic requirement now able to be leader of the world electronic goods market. Related and Supportive Industries: When the local supply from the related industry is more competitive and cost effective, then the local organization can grow even fasterwith the help of more innovative and cost effective parts and products. Porter (2009) mentioned the example of Italian she industry, which able to develop in to a great business unit on the basis of its highly skilled pool of linked businesses and industries in the home market. (Porter, 2009). Firm Strategy, Structure, and Rivalry: One of the key of success for any organization is the strategy adopted by the organization, its structure and the competition in the domestic market. Structure of the organization plays an important role in various industries. Generally, most of the German organizations are very hierarchical in nature which helped them to be a successful player in engineering industry, likewise companies from Denmark are more flat in terms of organizational structure which helpful for industry like biotechnology and design. Competition in the local market can help the organization to develop their product quality and services in a great way, which in long run helped the organization in the global market also. Porter (2009) in his review has clearly mentioned that “home markets with less rivalry may therefore be counterproductive, and act as a barrier in the generating of global competitive advantages such as innovation and development.”(Porter,2009). Strengths: 1. The main advantage of this model is this helps the organizations in every sector as well as the nation to understand the exact market conditions, what the demands of the customers are and what are factors that controlling the performance of various companies. 2. Another key point associated with this model is the points he considered as interrelated and mostly dependent on the overall economic conditions of the country as well. A in depth study can help to understand the country’s potential as the emerging market as well. 3. Another advantage is that the “diamond framework emphasize that all four factors have the similar weight that they support each other’s to generate new competitive advantages factors”(Sahata, 2012) This model is helpful for various countries as well as number of industries also to “create new advantages point and adapt with new challenging situations. In other words, country which has many disadvantages factors to collaborate with could transform its disadvantages to advantages factors through continuous innovations.”(Sahata, 2012) Weaknesses: There are some limitations associated with this theory as well. Lagrosen (2007) in his review has mentioned that this model unable to analyze the effect of multinational activities such as FDI on the industries as well as country’s own economy. (Lagrosen, 2007, p. 333) Another key limitation of this model is the application of this model across the globe. There is a strong belief that this model is more or less US specific and it cannot be equally implemented in other nations except USA. (Rugman & D’Cruz, 1993, p. 17) Conclusion: From the above discussion one may say that there are number of business models or business theories present in the world which helped the organization to develop their business model as well as make necessary changes over the time. All this business models or theories were developed base on the real life example of how the different organizations were functioning in the past, what are the factors controlling their performance etc. All these models or theories are not always applicable as there are number of exceptions present in the business world and at the same time there are number of changes happen over the years. But the basic ideas associated with all these theories are still remain true and organizations can develop their business model or business strategies based on those true assumptions. References 1. Allen. R. (2014). Advantages and Disadvantages of Product Life Cycles; eHow; retrieved on 31.7.2014 from http://www.ehow.com/info_8618550_advantages-disadvantages-product-life-cycles.html 2. Bhasin, H, (2014), Benefits and limitations of Product life cycle; Marketing 91; retrieved on 31.7.2014 from http://www.marketing91.com/benefits-and-limitations-of-product-life-cycle/ 3. Boulding, W. & Christen, M. (2001). First-Mover Disadvantage; Harvard Business review; retrieved on 31.7.2014 from http://hbr.org/2001/10/first-mover-disadvantage/ar/1 4. Pearson, (2014), First-Mover Advantage. retrieved on 9.8.2014 from http://www.pearsoned.co.uk/Bookshop/article.asp?item=312 5. Gabor, A. (1990), The Man Who Discovered Quality; New York: Random House. 6. Koontz, H. (1984). “Commentary on the management theory jungle – nearly two decades later; New York: McGraw-Hill. 7. Lagrosen, S. (2007). Quality Management and Environment: Exploring the Connections; The International Journal of Quality and Reliability Management; Vol. 24, No. 4. pp. 333-346. 8. Markgraf, B. (nd). The Three Stages of the International Product Life Cycle Theory; Chron; retrieved on 31.7.2014 from http://smallbusiness.chron.com/three-stages-international-product-life-cycle-theory-19364.html 9. Porter, M.E; (1990); The Competitive Advantage of Nations; New York: Free Press. 10. Porter, E.M. (2009). 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Suarez, F. & Lanzolla G; (2005); The Half-Truth of First-Mover Advantage; Harvard Business review; retrieved on 31.7.2014 from http://hbr.org/2005/04/the-half-truth-of-first-mover-advantage/ar/1 Read More