International Business: Sunglass Company - Case Study Example

International Business: Sunglass Company Introduction In a globalized economy businesses are striving to achieve competitiveness by reduction of business operating cost and increasing operating efficiency. Starting a business require careful considerations of all factors that might affect the efficiency of operating a business. Some challenges depend on the nature of business while others are caused by the business environment (KPMG, 2014). However, customer outlet is not a very important factor to consider in globalized economy because companies focus on selling products and services across the globe. However, the factors of production such raw materials, cost labor auxiliary services as well as political, social and economic risks merits considerations when establishing a business (Forsgren & Johanson, 2014). This document examines various factors that can influence the location of a sunglass company intending to relocate from developed to developing countries with a focus to reduce the cost of production. It is worth noting different countries provide varying business environment, and no single country can present a perfect business environment. The document will make an analysis of factors that affects the production cost of Sunglass Company and suggest a suitable location that can minimize the cost. Prospective Country for Business Location Selecting the location of an international sunglass company require consideration of several factors related to the industry and those related to specific countries. The cost of factors of production, social, economic and political risks is some of the factors that can influence the business activities operating internationally (KPMG, 2014. The cost of production in developed countries is quite high because of the cost of factors of production such as high wage rate and land. Malaysia would be a better option for locating the sunglass manufacturing firm because of the ease of doing business and attractive business environment and few regulations (KPMG, 2014). Elements of National Business Environment to Consider Cost and availability of labor The cost of labor differs across countries and is dependent on the living standards and prevailing labor laws. Developed countries such as the United States (US) and United Kingdom (UK) have a high cost of labor because of high living standards and stringent labor laws (Forsgren & Johanson, 2014). Workers demand high wage rate that pushes the cost of production thus reducing the business profit margin. On the other hand, developing countries such as Singapore and India have relatively low wage rate compared to developed countries. Countries such as China and India (Asian Countries) with growing wage rate will inflate the wage bill resulting to a reduction in profit margins (Forsgren & Johanson, 2014). Therefore, setting up a sunglass production firm in developing countries can help the business to enjoy low cost of production ceteris paribus. However, production of sunglasses requires specialized or skilled labor and equipment that may not be available in the developing countries. Malaysia is rapidly growing world economy with attractive business environment that promotes growth of technology in production thus offering adequate supply of specialized and cheap labor (World Bank Group, 2014). Moreover, different countries have a labor law that affects the cost and availability of labor. For example, some countries have strict laws prohibiting employment of children below a certain age (KPMG, 2014). Others require minimum wage rate for the workers, employees’ protection over dismissal, statutory time off, health and safety regulations, etc. Thus, employers have little power to control the cost of labor. Countries such as Malaysia, Singapore, China, India, Vietnam, etc. have low cost of labor and workers are readily available thus setting a business in those countries can lower the cost of production (World Bank Group, 2014 ). On the other hand, countries like UK and Germany have additional cost of labor the employers such as national insurance, welfare and pension payment. Investors should take into consideration the productivity of labor in particular countries because it will influence the overall production cost (KPMG, 2014). For example, Turkey has very low productivity of labor compared to UK. Therefore, investors should balance between wage rate and productivity of labor when determining the cost of labor. Political Risks When establishing a business, it is important to consider the political stability of the country where the investor wants to set up a business (Forsgren & Johanson, 2014). For example, developed countries are politically stable while most of the developing countries have high political risks. Countries marred with political instabilities have additional cost of operating business since workers require compensation or managers may be abducted for ransom (World Bank Group, 2014). In countries such as Russia business owners may be required to pay protection fee or their business could be destroyed by thugs and burglary (KPMG, 2014). Furthermore, newly established economies have risk to businesses because the government may decide to nationalize private properties as it happened to US businesses in Iran in 1979. On the other hand, countries with stable political economies such as Singapore, china, Malaysia, UK, etc. encourage foreign investors by giving them tax incentives and protection (KPMG, 2014). Therefore, investors should make sufficient investigation understand the nature of political risks involved in particular countries before they establish any business. Legislations Requirements Different countries have various legislation requirements for investors setting up new businesses. It takes several days and a labyrinth of regulations to register a company and set it in operation in some countries such as India (ranked position 134 globally) (World Bank Group, 2014). Investors may have to pay some fees in the form of bribe in order to gain breakthrough when setting up a new business. According to KPMG (2014), countries such as Singapore, US, Malaysia and UK are easiest to start a business. Complicated regulations increase the cost of operating a business and reduce the revenue of the business due to lost time. For example, the cost of starting a business ranked as a percentage of in income per capita reveals that "New Zealand has lowest cost (0.3%), followed by Canada (0.4%), Singapore (0.6%), China (2%)while countries like India has 47.3%" (KPMG, 2014). Investors should consider the ease of starting a business alongside other costs when planning on business location. Therefore, in terms of ease of starting business countries such as New Zealand, Canada, Singapore, etc. can offer appropriate location. Customer Prospects In less developed countries the value of products is low compared to developed countries because consumers in developed countries are willing to spend more on sunglasses than consumers in developing countries (KPMG, 2014. The market for products will be influenced by consumer‘s lifestyle and taste as well as competition from other business rivals. For example, the middle-income class has a strong taste for products manufactured in western countries. On the other hand, some countries such as China, India, Indonesia, etc. have large populations that can influence the size of the market (KPMG, 2014). The cost of shipping finished products to the customers will increase operation cost and reduce profit margins. However, in the modern society most businesses are operating online in order to reach clients from across the globe cost effectively (World Bank Group, 2014). Therefore, a company focusing on customers across the globe may not have to consider customers are a very essential factor to influence location. Infrastructures and Supply Chain Network The business linkages to the suppliers and service providers are crucial for the success of the business. The raw materials for the production of sunglasses include limestone, sand, and soda ash (Devetag & Coppola, 2012). Producers of sunglasses should establish a stable and reliable source of raw materials for the business in order to ensure continuous production and reduction in cost of shipping the raw materials (Devetag & Coppola, 2012). Establishing a business in a country with other businesses offers an opportunity of well-established infrastructures such as transport network, power supply, etc. The equipment required for manufacturing sunglasses are quite expensive, and shipping from the market to the manufacturing firm will add cost to the production expenditure. Therefore, investors should consider the cost of shipping the raw materials and equipment to the manufacturers’ premises and establish how appropriate the entire process will be (World Bank Group, 2014). Furthermore, the other factors of production and services such as land, utilities, etc. will increase the cost of production. The plant layout will determine the cost of running a business. Therefore, investors should ensure the place where they intend to set up the production firm is well designed to minimize the wastage of space that may otherwise increase the cost of production. The layout of the plant should be well designed to allow for smooth flow of materials and labor in the manufacturing plant. Financial and Government Incentives Some countries have business culture that favors foreign investors in order to promote domestic economic growth through creation of employment for the citizens, infrastructure development and promotion of technological advancement (Devetag & Coppola, 2012). In order for the government to attract foreign investors, they provide incentives to the investors through tax exemptions, low-interest rates, smooth business registration process, etc. For example, UK offers grant to regional investors, Malaysia offer tax incentives to foreign investors, Ireland offer special tax arrangement with foreign investors in order to reduce the cost of taxation, etc. (World Bank Group, 2014 ). Financial incentives to the business reduce the cost of operating business in a foreign land thus increasing profit margins of the business. Obstacles Facing International Business There are various obstacles that an investor may face in an international business environment. For example, inability to comply with host countries tax policies, labor laws such as minimum wage rate requirements, etc. (Forsgren & Johanson, 2014). Also, the financing requirements for international business may become a hindrance in case the investor lack capacity to raise the required capital. Furthermore, the business management may lack capacity or competence to operate an international business requiring specialized skills. In addition, the issue variations of currency exchange rates can cause substantial challenges to the business managers (Forsgren & Johanson, 2014). This is because the currencies of the developing countries are weak compared to developed countries and businesses lose when they acquire stronger currency using weaker currency. Another issue is that of inflation. A company operation in the international market may not avoid the effects of inflation in other countries that can weaken business performance of force it to close down. Finally, the source of raw materials and business infrastructures may not be available in the location where the business intends to establish its operations (Forsgren & Johanson, 2014). Management Activities When operating an international business, the manager should be prepared to cope with a diversity of the workforce. Various countries have varying culture that affects believes and values of the workforce (Forsgren & Johanson, 2014). Therefore, managers must understand the cultural values of different workers and manage them in a way that will deliver value to them. For example, the American culture is business oriented, and individuals get recognition for their performance. On the other hand, Japan culture promotes collective responsibility in the success or failure of the business cannot be attributed to an individual, but to the group (World Bank Group, 2014). Also, different countries have varying policy regulations that affect the business operations. Therefore, managing international business will require the managers to understand specific countries regulations requirements and operate within the confines of the countries business norms (Devetag & Coppola, 2012). For example, in China the government regulations require businesses to employ as many people as possible while the American culture is profit oriented and focus on maximizing profits and cost reduction (KPMG, 2014). Furthermore, international companies are exposed to various legal issues such as the issue of trade mark and intellectual property right. Managers should protect the intellectual property right and observe all legal requirements in order to avoid conflicts with competitors, lose their right to operate a business or face legal suits for breach of intellectual law. An international company operates in countries with different taxation and interest rate policies. The company may have to pay taxes to the host country as well as domestic country thus resulting to the high cost of running a business (World Bank Group, 2014). Therefore, managers should ensure they understand the policies of taxation and interest rate and should comply with the requirements. Finally, taking business globally exposes the business to stiff competition and requires a lot of competence (Devetag & Coppola, 2012). Therefore, managers should ensure the business is up to date by investing in technology through research and development and attracting competent and innovative workers from various nationalities. However, the managers should comply with host country labor laws in order to reduce friction with the law enforcing bodies. Obstacles in Managing Employees Availability of cheap labor and raw materials are crucial factors the investor should consider when establishing sunglass manufacturing business (Forsgren & Johanson, 2014). However, in the international businesses the management workforce diversity poses a significant challenge to the business managers. Since workers have varying values and attitudes, the manager should be able to understand the workers and treat them according to their cultural background. For example, in some cultures workers may keep quiet when they are not happy while others may smile even when they are not happy (Devetag & Coppola, 2012). Therefore, cultural diversity may hinder effective management of workforce. There are obstacles relating to equality of workers and dealing with people with disability. Since various workers have varying needs, it is a great challenge to ensure the needs of the workers are effectively achieved with fairness (Devetag & Coppola, 2012). Another issue is the quantifying the productivity of the workers to achieve desired performance. An international business attracts workers from diversified background with varying expertise. Therefore, it is a challenge to quantify the productivity of all workers for performance appraisal (World Bank Group, 2014). Conclusion Moving business operations from developed to developing countries can create opportunities for the business to reduce the operating cost, enjoy cheap labor, wider market, technological competence and so on. However, the manager of the sunglass company should establish the accessibility of raw materials and political risk of the business. The business should have the capacity to manage various obstacles such as diversity of the workforce, legal business matters such as intellectual property right, and so on. Apart from assessing the managerial capacity the business should ensure the business environment is favorable for the business. Singapore, New Zealand and Malaysia have been ranked among the best countries in ease of starting a business. References Devetag, M. G. & Coppola, E. (2012). The Eyewear Market Luxottica’s Leadership, Strategy and Acquisitions. LUISS: 1-45. Retrieved on 3rd November 2014 from Forsgren, M. & Johanson, J. (Ed.) (2014). Managing Networks in International Business. Routledge: 168-272. KPMG, (2014). Ease of Doing Business in India. Confederation of Indian Industry Http://www.kpmg.com/IN/en/IssuesAndInsights/ArticlesPublications/Documents/KPMG -CII-Ease-of-doing-business-in-India.pdf World Bank Group, (2014). Ease of doing business index (1=most business-friendly regulations). Retrieved on 3rd November 2014 from Read More