Final Exam in International Business - Assignment Example

International Business - Final Exam Q1. a. Economies of Scale: This refers to the opportunity to save in costas a consequence of expansion in production capacity of a company. The internal strategy of a company is to achieve maximum production capacity and reduce costs, hence cost leadership. Economies of scale provide a company with competitive advantage as a cost leader. b. Location Economies: this refers to cost saving resulting from strategic choice of production location. It guides the management of a company on where to locate production unit or facility. Q2. a. Letter of Credit: This refers to a document indicating a bank’s promise to pay an exporter in full the sum owed by a foreign buyer so long as the buyer has complied the credit letter’s terms and conditions. If the buyer in not capable of settling the payment of his purchases, he or she requests his or her bank to give a letter of credit to the seller (exporter). The buyer and the exporter are referred to as the applicant and the beneficiary respectively. A foreign bank usually issues a letter of credit, which a local bank confirms. In other words, the local bank promises to pay the issuing bank. A letter of credit may not be open to changes (irrevocable) unless there is agreement between the exporter and the buyer or revocable. However, the latter is usually inadvisable. b. Draft: A draft, also referred to as a bill of exchange, refers to a dealing in which the seller (exporter) delegates the collection and receipt of a sales payment to the remitting bank. The remitting bank then sends documents to the importer’s bank, including payment instructions. The exporter receives importer’s payments from the banks involved in the transaction process. Drafts require importers to make face payments either at sight or at a mentioned date. The draft contains instructions indicating required documents for transfer of goods ownership. Q3. a. Greenfield: This refers to a market entry strategy where the parent company establishes a new wholly owned branch subsidiary (builds its own facilities from scratch) in a foreign country, for example Nissan’s Mississippi Canton plant in automobile industry. The advantages of using this strategy include: economies of scale and scope, greater control over foreign business, effective implementation of long-term strategy, solid market commitment, control over brand, control over staff and proactive response to threats and opportunities. The risks involve: high costs, difficulty in overcoming competition, long duration of entry success and possible costly market entry barriers. b. Acquisition: This refers a company’s growth strategy whereby, a company wishing to expand internationally decides to purchase an already existing firm in a foreign market rather than establish its own new wholly owned enterprise. The advantages of this method include: an already existing market, availability of skilled workforce, immediate acquisition of target company’s technology and entire business system, instant branding and expansion of knowledge base. The risks involved with this strategy include: difficulty in blending corporate cultures, need for training corporate cultures, potential tax and legal issues and political and cultural impediments. Q4. a. Cost of production: A company should consider the relative costs of its manufacturing process in different locations. a company will prefer to locate its manufacturing facility in a country with cheap labor. Low cost of production translates to cheap final products for consumers and high sales/profit margin for the company. b. political and economic risks: High political risk dissuades a firm from committing its production resources in a given location. Consequently, a company will prefer a country with political stability for its manufacturing site. High political turmoil means high cost for the company because production will be impossible and economic volatility will make the location or country an unattractive place to set a manufacturing base. Q5. Describe and explain the impact on a company’s International Strategy a. Just in Time Inventory: This system also referred to as JIT, entails all the tasks involved in producing the final product. The method is crucial for time-oriented competition and focuses on reducing wastes, simplifying production process and improving the overall efficiency, which is the focus of the management. JIT improves internal strategy of the company by providing a platform for efficiency and cost reduction through waste elimination and hence high profits. b. Total Quality Management (TQM): This is a competitive approach to long-term success of a firm. This system strives to engage every member of the organization to product enhancement and culture that yield high customer experience. TQM focuses on continuous improvement of product quality. The internal strategy of the firm is often based on high customer experience and superior company performance, which is the main focus of TQM. Q6. International Business Strategies: Multi-domestic strategy: a. This is an approach in which companies attempt to achieve highest local responsiveness through product and marketing strategy customization to fit various national market conditions. The company commits huge funds in research and development to customize its products and marketing strategies to achieve high market responsiveness. Therefore, firms using the strategy experience local responsiveness pressure. b. Advantages: Possibility of establishment of numerous successful foreign subsidiaries, reduce the cost of international business management, high popularity of a company within the local market, standardized products and marketing processes leads to high differentiation in local market. Challenges: Possibility of lose of global learning, high research and development cost and existence of threat of competitors’ retaliation. c. Industry: Automobile. Brand: GM. Product: Vauxhall. International strategy: a. This strategy is one that involves transfer of certain core competencies by a firm to its foreign subsidiary with an aim of benefiting from differentiation advantage. However, major competencies are retained within the headquarters. There is moderate need for coordination. b. Benefits: High differentiation in foreign markets, establishes successful foreign subsidiaries and retention of core competencies at the headquarters. Challenges: High costs of conducting research, possibility of lose of learning on local market aspects. c. Industry: Beverage. Brand: Coca-Cola Product: Coca-Cola. Global strategy: a. This refers to strategic approach that a company uses to operate at global scale. Firms using this strategy are exposed to pressures of product and processes standardization and low cost achievement. b. Benefits: Low-cost production of standardized products, global economies of scale through product standardization, low priced final products to consumers, strong competitive advantage via low product pricing. Challenges: standardization pressures, different cultural and political pressures to the firm and varying human resource practices and legal requirements across the globe. c. Industry: communication. Brand: AT&T. Product: iPhone 6. Transnational strategy: a. This is an integration of multi-domestic, global, and international strategies. Firms using this strategy experience both global integration and local responsiveness pressures. b. Benefits: High differentiation in a global scale, high competitive advantage through low product-pricing, low cost of production. Challenges: high pressures of standardization and global integration, high research and development cost. c. Industry: Soap and Detergent. Brand: P&G Product: Tide. Q7. Exporting: a. It refers to a strategy used by a local firm to deliver goods or services in foreign markets. b. It is less risky because manufacturing is home-based, opportunity to study foreign markets before making investments reduce possible risks of operating in foreign markets. c. There is lack of direct participation in foreign market. d. Less risky because manufacturing is home-based, chance of learning foreign market, for example Automobile industry Brand: GM. Product examples: Vauxhall, and Cadillac. Licensing/Franchising: a. It refers to a strategy where a local firm buys leases a successful firm’s brand for a given period of time and pays periodic fees to the parent company. b. The advantages include: low-risk manufacturing relationships, does not tie up capital in foreign investments, options to buy foreign enterprise in future, parent company benefits from marketing services in foreign market. c. Some of the challenges include: here are limited chances for participation in foreign market, possible loss of manufacturing and marketing benefits requires intensive fact-finding. d. It is a cheap means of entry into foreign market for example Automobile industry Brand: GM. Product examples: Vauxhall. Joint Ventures: a. This is a strategy in which a local business entity agrees to enter into partnership to develop a new entity with where control, revenues and expenses are shared with the other business in the joint venture. b. High resultant financial strength, cheap means of market entry. c. The disadvantages of Joint ventures include: Lack of full management control of foreign business unit, it may be impossible to recover full capital cost, possible disagreement on third party markets coverage, and diverging views on probable benefits may cause management deadlock. d. The benefit of this strategy is that it involves less commitment of funds in foreign business for example Automobile industry Brand: GM. Product examples: Vauxhall, and Cadillac. Wholly owned Subsidiaries: a. This refers to a strategy that involves setting up a new branch in a foreign country from scratch rather than opting for an already established business. b. Control over foreign business, direct participation in foreign market. c. The main disadvantages of setting up wholly owned subsidiaries include: is high cost of set up, high entry barriers. d. It offers full control over foreign subsidiary management, for instance, automobile industry. Brand: GM. Product examples: Vauxhall, and Cadillac. Ikea Case Study Case Summary: Ikea is a successful global home-furnishing retailer. The company was founded in 1943 in Sweden and has achieved rapid growth since its incorporation. Currently, Ikea is amongst the most successful international global retailers, mainly distinguished by its Scandinavian styles. By 2012, the company’s net profits were extremely attractive, rated at 10 percent higher than a retailer’s. The company focuses on producing high quality and low-priced products. The company has about 590 million visitors annually in its stores across the globe. The company’s founder, Ingvar Kamprad, is supposedly among the wealthiest individuals in the world. This case provides Ikea’s competitive advantage in 1970’s, its growth strategy and success in Europe. Q1. Ikea’s Source of competitive advantage Ikea’s competitive advantage in 1970’s can be attributed to its low-priced products. After its establishment, the company was listed in Stockholm, a Swedish annual trade fair for furniture. Only Ikea had the permission to sell to customers directly, making it to develop strong ties with customers than its competitors. The Company’s founder, Kamprad, recruited autonomous Swedish furniture manufactures and other sources in Poland, reducing its overall production cost, thus leading to low-cost products for customers. The company’s wide coverage and direct link with customers complimented with low priced and high quality products that appealed to various customers contributed to its competitive advantage over its market rivals in 1970s. Q2. Why IKEA’s expansion into Europe went so well: The success of IKEA in Europe traces back to the fact that the fragmented furniture market in Europe was mainly served by high-cost retailers operating in luxurious downtown stores and selling costly furniture that were often unavailable for instant delivery to customers. IKEA entered the market with elegant, inexpensive designs, offering immediate availability of furniture for delivery to customers, which was a reprieve for consumers. Moreover, the company offered self-service for its customers. Why IKEA stumbled in North America: Between 1985 and 1990, IKEA opened about six stores in North America, but the initiative never yielded immediate profit. The reasons for initial staggering business in North America include: first, adverse exchange rates movement. In 1985, $1 was exchanged for 8.6 Swedish Kroner (SKr). By 1990, the exchange rate shifted to $1 = 5.8 SKr. As such, most imports from Sweden were not perceived as cheap in the American market. Second, IKEA’s Swedish products were at abrasion with American tastes. For examples, Swedish beds that IKEA sold never met American tastes as they were narrow and too drawers shallow for most American consumers. Lessons IKEA learn from this experience and how it is applying the lessons today: The company learnt that it needed to customize its products offered to North American consumers if it were to operate successfully in North American market. The management learnt that the company needed to redesign its product range to suit the North American consumer needs. The company redesigned its beds to fit American bedrooms and also adjusted drawers to suit customer tastes. Currently, the company is selling products customized to its markets, for example, it is selling American styled beds to its American customers. The company is currently designing kitchenware as well as furniture in a way that better appeals to American customers. The company also increased the quantity of product that it sources locally from 15 percent to 45 percent from 1990 to 1994 respectively. Q3. IKEA’s strategy prior to its missteps in North America was a standardized product for all markets (one-style-for-all strategy). Even though the company focused on providing its customers with low-priced quality products, it failed to customize the products to specific market needs and customers’ tastes and preferences. This strategy led to a stumble in North American market making the company to learn valuable lessons. In the past, IKEA assumed a uniform taste and preferences for all its customers and ignored cultural variations among its customers. It only supplied Swedish styled products, which was associated with its unsuccessful launch in North American market. However, the company learnt from its past mistakes and embraced the needed flexibility required for success in its foreign markets. Currently, IKEA designs products tailored to specific needs of different markets to match customers’ tastes and preferences. Each of the company’s products is tailored to specific needs of customers, which has greatly improved customer experience across its global markets. Q4. IKEA’s strategy toward its suppliers involves careful selection of the right suppliers for each of its products in various markets. The company sources some of its products from local suppliers to cut cost and ensure low-priced quality products are delivered by the chosen suppliers. The company fostered strong long-term relationship with all its suppliers. The company prefers to outsource the supply of some of its products in big markets so that it can maintain its low-cost dimension in all markets while supplying quality products that meet the needs of customers. The supplier strategy of the company remains a crucial element of its success because it is a sustainable source of competitive advantage for the company over its rivals. Q5. The source of IKEA’s success today revolves around its ability to understand the varying needs of customers. This lesson made the company realize the need to design products that are attuned to specific needs of each market. Consequently, the company now supplies products that meet the needs of its customers, yielding high customer experience. Moreover, IKEA has been able to maintain its high quality and low-priced products, which give customer the value for their money and appeal to the market, hence attracting high sales volume and revenue in different markets. Some of the weaknesses of the company include the inability to shake off Swedish style and adapt to local market values, extremely large business size, which may render quality management difficult, the need to balance quality and low cost in producing its products and limited understanding of cultural variations, thus customer needs in various markets. The company can overcome these challenges through strategic alliances, heavy investment in research and development, thinking globally while it acts locally and forming partnership with relevant companies in foreign markets to easily overcome probable obstacles in foreign markets. Read More