Strategies for International Business - Literature review Example

Strategies for International Business Strategies for International Business Introduction Strategies are designed by businesses in order to run efficiently in the industry they are involved in serving their customers. The internationalization strategies deal with how businesses should consider the market before actually choosing the entry mode option to proceed with their business activity. Every option is likely to have some amount of risk associated with it, but a company must decide, based on resources and management skills they have, how they could face the risk and achieve success in establishing their business in foreign countries. There might be some cultural, political, geographical and economical distances that the company might have to overcome. These are all factors that they must look into before establishing themselves in foreign lands to operate successfully. Discussion One of the most important parts of entrepreneurship is venturing into new business entities. This can be accomplished once a firm decides to enter a new or an existing market with new or existing products and services for its potential customers (Jones, 2009). Expanding business operations in foreign countries helps a firm to spread risk from one nation to another. This process of operating in foreign countries is called internationalization and is helpful for a company in several ways. In order to succeed some internationalization strategies have to be made. The three basic internationalization market entry strategies are timing of entry, entry mode and market selection (Suder, 2009). Timing of entry is the time, after considering the competition in the market, to enter the industry. There are different reasons why a firm may enter early or late in an industry. An early entrant does always have the advantage to penetrate the market and customers. This type of a strategy gives a company an advantage to lead from the front. They have the advantage over their new competitors who have joined the industry after being attracted to profit (Lavin, 2011) & (Wunker, 2011). The early entrant always has the advantage to block the barrier of entry for new entrepreneurs. Price could be reduced so that customers are attracted more towards the business and the value of the competitors business falls down. The first mover also has the advantage of forming an image so strong that it becomes impossible to replicate (Falkenreck, 2010). Other than this an early entrant in the market always has the advantage to brand loyalty. If a company is successful in getting people accustomed in using their products then it is very hard for the competitors to win over those customers (Seba, 2009). However, there are also a few reasons for a company to think before penetrating the market. When the company enters a completely new market for the first time then it has to spend a lot of money on R&D (Markman, 2011). There has not been much research made so a company needs to take the initiative. This raises the cost for them. Also they will have to be the first ones to bring expensive technology in the market and establish channels for distribution. The first entrant in the market is also the biggest risk taker as he or she invests and waits for the reaction of people. There is no prior success and failure and little response as to what will happen in future (Khanna, 2010). Stonehouse (2013) believes that first market entrants are the ones who maximize their risk when entering foreign lands. They come up with a product that might be very appealing for the audience and might be sold in large amounts until local companies enter the market. Foreign companies are mostly found to be expensive compared to local ones that can learn the skills and ability to produce in the same fashion as their foreign competition. Skills are easy to learn and technology becomes less expensive with innovativeness. Even the loyalty of customers can be doubted when similar products are available at a cheaper price. Normally the company that arrives late in the market to conduct business is on the advantageous side. The advantage it has is that it has seen the earlier companies go through the rough testing stage and learned from all their mistakes. They have the ability to capture market share as they try to improve the product or add added features in their products compared to their competitors. They also do not have to spend much on the marketing side of the business as the audience has already been educated about the type of industry they are in. They just have to present their product in their own way (Henry, 2011). One of the essential considerations in developing a strategy in foreign market is to decide which mode of entry to pursue with. Some of these types of entry mode have high risks while some of them have low risks. The indirect export is one of the entry modes that allow very little control with minimum risk. Under such technique the products are carried to foreign lands by certain individuals or group of people (European International Business Academy, 2009). The company that produces the product does not play any part in selling it in foreign countries. The third parties that are involved in selling the products might increase the prices at their own will. They could sell at a price without the producers getting to know of it. This could cause damage to the reputation of the manufacturer in the long run. One other risk is that the customer does not deal with the company, but only the broker. It is hard to get hold of the broker once a product is purchased from him (Koslow, 2009). The direct export is an example of entry mode strategy in which the producer of the goods and services is involved with its export in other countries. The company recognizes its clients and the clients also recognize who they are importing from. Customers also feel more satisfied as they know they can get in contact with the company any time they want. However, there are costs associated with all these advantages. There needs to be an investment made in foreign countries to make a base. There is always a risk in investing in foreign countries as future in unpredictable. Wars, cancellations of treaties or cold relationship between countries can cause great trouble to deal in foreign countries. The company has to take the blame if the products are delivered faulty from one country to another. Any damage done to the product will have to be replaced or ordered again for the customer. This is very common with products that are delicate (Silverman, 2013). There is a high amount of risk for companies that are not responsible in transporting their goods from one country to another. Also it might take a bit longer to respond to the needs and complains of the customer. So if something has to be replaced then a local producer could do it more quickly than a foreign exporter. This creates frustration for the customer who cannot wait to use his or her product (Peng, 2010). Franchising is another entry mode that has become very popular especially in Asian countries where there is a high demand of Western products and services Like Pizza Hut and KFC. Franchising simply gives the right to sell a product or service under a popular or established the company’s name. The licensor gives the rights of his name to be used for a fee, but more importantly the reputation of his company is at stake. The main risk involved in the business is the misuse of the company’s name that is being used by the local business . Some of the franchises are not as good as they are expected to be and fall below expectations of customers (Mathews, 2013). There are various examples of food chains like Dominos in Pakistan. Although the American pizza company is considered one of the world’s best it is still struggling in Pakistan. The reason is that it has not been able to make pizza according to the taste of people in the country. Dominos faces the problem of understanding the needs of the Pakistani people. In order to better understand the need, the company would have to spend more on marketing research to save the losses it has been incurring over the years (Alon, 2012). Franchisers have to participate with the marketing of the product and services in the markets where they offering their products. This needs time, energy and a lot of planning. Every country has its own distinct culture and the marketer has to penetrate and find out what appeals and persuade people to buy products (Hill, 2011). If a company is not known for its marketing strengths then it better stay away from foreign countries. To understand the culture of a country and to market the product based on that understanding is the trick to win customers (Massetti, 2012). A company also has no lack of control over operations on a foreign land under franchising. A company cannot make day to day decisions nor does it have the power to do so. It can just direct the people responsible for running their business just for a fraction of the fee. It is a big risk to trust people in foreign countries to run the franchise. A decrease in quality or any bad incident can damage the international reputation of the company (Spencer, 2010). Contract manufacturing is the kind of intermediate entry mode where the producer has more of a say. The producer under contract manufacturing provides research, marketing, sales and warranties while getting the products produced from a local manufacturer (Gopalaswamy, 2009). This also has a certain amount of risk. It is difficult to transfer skills in people. It is nearly impossible to produce identical products; for example, what is being produced in India and USA. There will always be a difference in the skills of people resulting in a slight change in quality. Expectations; for example, in India have to be low when compared to buying US products under contract manufacturing (Gopalaswamy, 2009). Extensive training has to be given to the employees based on foreign lands. This training is both very costly and time consuming. Moreover, the process of training never ends as more and more people leave and newer ones are recruited (Hill, 2011). Sometimes it becomes very hard for a company to find trainers that can train people in time so that the production order can start. Also, the contractor could turn up to be a competitor in some situations. If the agreement is cancelled then the contract manufacturing company can separate itself and function as a separate company acting as new competitors. There is thus high risk for a company to come into such types of agreements (Grewal, 2011). Joint venture is an example of joint ownership when a company with two or more separate owners comes into existence. When these owners decide to venture in countries abroad they become a part of joint venture intermediate mode. The risk in these ventures from international business point of view is that investors may be tied down to big spending and investment for a long time (Hill, 2011). There is no way out until both parties agree to mutually withdraw from the business. If one of them might not want to continue then he would need the consent of the other. If this does not happen then he might have to bear his partner until the agreement is not over (Campbell, 2009). The importance of the business may not be same to both the partners or it could change in time. One partner might not spend much time in business and it could greatly affect it. If the areas are left uncovered then the venture could face great setbacks. Commitment from all parties is required. There might also be a difference in leadership style or cultural differences between the two partners. If the partners do not tent to cooperate with each other a disaster is then certain. Joint ventures are a risk until all parties involved understand each other. All the points should be carefully discussed and added to the agreement before actually going along with it (Trost, 2011). Acquisition is an example of a company taking over a foreign company. Normally a bigger company takes over a smaller company to expand and add or introduce its products and services in a foreign company. However, the company that has been taken over continues in the same direction. The workers are same and if they are tried to be replaced then they could go against the company. The whole lot of workers cannot be changed and the company must look to do with the same employees before the takeover was made. This might not be very desirable, but it is something that the company will have to do with (Galpin, 2011). There is also a lot of paper work required in a takeover. When a company from a foreign land is taken over then there are a lot of visits made to the law enforcers to complete all the procedures. These procedures take time to be completed and sometimes a project may have to be kept in hold until the papers are not properly filed. This is very true in developing countries which have weak legal frameworks and social disorder is common.. In countries like Pakistan it could take up to a year to sanction a project or to get permission for a project to start that has been stopped by the government (Galpin, 2011). Considering all these factors it is a little bit of risk to go with this type of internationalization in developing countries. Until all the papers have not been cleared the company must look to stay away from mergers and acquisitions or it could face lengthy periods out of work in some projects (Galpin, 2011). Greenfield strategy is yet another entry mode internationalization that looks to start from scratch for the company in a foreign country. The company decides to operate in different countries by buying land and hiring labor and skilled employees in the foreign land. Example of this is Mercedes operating in India. This requires a lot of money to be spent on research because a new market is penetrated. Even if cars do exist in such markets it is unknown how a luxurious car like Mercedes will make sales and so a proper research to understand the need of the people have to be made (Jones, 2009). Market selection is one of the key market entry strategies for a company looking to operate in foreign countries. In order to select the market a company must need to understand the culture distance of the country. Culture tells more about the root of the people and what makes them unique. Every country has its own separate identity as discussed earlier the marketer must make full use in understanding that identity so to better serve the people of that country (Henry, 2011). Administrative or political distance is another factor that influences the decision of market selection. Administrative distance looks at the different policies of a country. The company will have to take a look at these policies in order to know the rules and regulation. For example, most of the American products are banned in Iran and so it is very hard for an American manufacturer to conduct business there. Sometimes special permission has to be taken in order to conduct business in foreign lands and it is risky to conduct business that could spoil the political relationship between the two countries (Henry, 2011). Economic distance refers to economic disparity when compared between two distinct countries. It is better when the two countries are par to one another meaning that their economic conditions are close to each other. This is because it helps them to share knowledge and skills with one another. Taste and fashions are close so it is easier to produce and market foot and clothing products and sell in these countries (Henry, 2011). Geographical distance is also one of the main advantages between two countries. As distance increases so does other problems like language, culture and an increase in transportation costs (Henry, 2011). Conclusion Each of three main market entry strategies is very important when deciding a country to expand operations in. These strategies make companies consider all the risks they are involved in. The timing of entry talks about the advantages and disadvantages of entering first and later in the industry. If a company thinks that it can handle the pressure and expense from entering first in the market then that leaves them in a position to lead in the market from front. Similarly an organization could also learn which mode of entry would suit those most. For example, if they are in business for long and need heavy investment then a joint venture could be a better option. Whatever decision a business makes must be very thoughtful and doable based on their resources and the need of customers. List of References Alon, I., 2012. Global Franchising Operations Management. London: FT Press. Campbell, D., 2009. International Joint Ventures, Volume 30. Bedfordshire: Kluwer Law International. European International Business Academy, 2009. Research on Knowledge, Innovation and Internationalization. Bingley: Emerald Group Publishing. Falkenreck, C., 2010. Reputation Transfer to Enter New B-to-B Markets. Monchebergstr: Springer. Galpin, T. J., 2011. The Complete Guide to Mergers and Acquisitions. 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