Factors Influencing International Business - Assignment Example

International Business 26th May 2007 Factors Influencing International Business Most of the times, for a company to survive in an international company, it has to combat numerous political, legal, cultural, market, trade, monetary, governmental, and institutional forces. These factors operate outside the boundary of business, but are a great influence for any business.  In this chapter, we will look at how the managers devise strategies to make sure that their company is able to survive and boost profitability in the global environment. Industry, Strategy, and Firm Performance In general, the forces in the MNE’s environment that routinely have the greatest impact on its strategy are in its immediate industry and competitive environment. This thesis is covered by a prominent model of strategy known as JO model. The Idea of Industry Structure-Often managers anchor analysis of industry structure by modeling the strength and importance of the so-called ¡§five fundamental forces. This model develops a picture of the structure and competition in an industry that prepares managers to figure out what fundamental forces shape strategic conduct, how strong each force is, what forces are driving changes in the industry, what strategic moves rivals are likely to make next, and what the key factors are for future competitive success. Industry Change-The structure of industries is continually in flux. Often these developments change a minor feature of the industry, thereby leaving industry members the option of continuing to operate as they had. Occasionally, though, a change redefines one or more of the five fundamental forces in an industry. Strategy and Value-For an international company, Strategy defines the efforts of managers to build and strengthen the company’s competitive position within its industry in order to create value. Creating value-Operationally, companies create value either by making their products for a lower cost than any other firm in their industry (the strategy of low-cost leadership) or making those products that consumers are willing to pay a premium price for (the strategy of differentiation). The Firm As a Value Chain-A value chain has four organizing dimensions- primary activities, support activities, profit margins, upstream and downstream. Value chain of a company is multi-dimensional concept that encompasses many factors influencing the manager’s decisions and strategies. The important ones are Configuration, Cost factors, Cluster effects, Logistics, Economies of Scale, Customer Needs, Coordination, Operational obstacles, National cultures, and Subsidiary networks. Value chains and change- Once built, a firm’s value chain is not fixed in stone. Because the features and functions of products that consumers judge most critical change over time-as we see in financial services, clothing, entertainment, electronics, and so on the basis of value creation in an industry evolves. Strategy Types-When defining their strategy, MNEs looks to international markets for growth opportunities, cost reductions, and risk diversification within a context of satisfying the competing demands of global integration and local responsiveness. International Strategy-Companies adopt the international strategy when they aim to leverage their core competencies by expanding opportunistically into foreign markets. The international model relies on local subsidiaries in each country to administer business as instructed by headquarters. Multidomestic Strategy -A multidomestic company, sometimes called a locally responsive company, follows a strategy that allows each of its foreign-country operations to act fairly independently. Global Strategy-The company adopting a global strategy chooses to respond directly to pressure to maximize integration. The global strategy pushes companies to think in terms of creating products for a world market, manufacturing them on a global scale in a few highly efficient plants, and marketing them through a few, focused distribution channels. Transnational Strategy-The transnational strategy holds that today’s environment of interconnected consumers, industries, and markets requires that an MNE find ways to configure a value chain that exploits location economies, coordinate value activities to effectively leverage core competencies, and throughout it all, ensure that the value chain directly deals with pressures for local responsiveness. Chapter12 As indicated in the preceding chapter, a company’s strategy should be to create value through selling what it makes for more than the costs it incurs. This strategy ties directly to the reasons or a company to engage in international business- to expand sales, to acquire resources, and to minimize risk .When resource needs are great, such as to establish a network of retail outlets, the delay for moving into countries may be many years. Further, even if companies are well established in most countries, they still need to allocate resources by emphasizing some countries more than others. The choice of where to operate is a big part of carrying out a business strategy. A company should look to those countries with economic, political, cultural, and geographic conditions that mesh with its objectives and capabilities. A company needs to determine the order of entry into potential countries and to set the allocation of resources and rate of expansion among them. The process of determining an overall location strategy must be flexible because country and competitive conditions change. A plan must let a company both respond to new opportunities in different locations and withdraw from less profitable ones. A company may expand its sales by marketing more of its existing product line, by adding products to its line, or by some combination of these two. In essence, a company needs to decide where to operate and what portion of operations to place within each location. Figure 12.3 shows the major steps international business managers must take in making these decisions. The following discussion examines these steps in depth. Scanning And Detailed Examination Compared To compare countries, managers use scanning techniques based on broad variables that indicate opportunities and risks. Scanning is like weeding out-it is useful insofar as a company might otherwise consider too few or too many possibilities. What information is important? Managers should consider the environmental climate external conditions in a host country that could significantly affect an enterprise’s success or failure. The environmental climate reveals both opportunities and risks, whose combination should determine what actions to take. The factors that have the most influence on the placement of marketing and production emphasis are market size, ease, and compatibility of operations, costs, resource availability, and red tape. Market Size Sales potential is probably the most important variable managers use when determining where to place market-seeking operations. Ease and Compatibility of Operations Managers prefer to go where they perceive it¡¦s easier to operate. Managers should also try to assure that countries¡¦ policies and norms allow them their competitive advantages effectively. Companies may limit consideration of proposals to locales that will permit them to operate with product types and plant sizes familiar to their managers. Companies also consider local availability of resources in relation to their needs. Cost and Resource Availability companies also go abroad to secure resources that are either unavailable or expensive in their home countries. Of course, where they go depends on the kind of resource that is important to them. Red Tape and Corruption Usually markets where there is low legal transparency and high corruption cost and uncertainty of operating, are avoided. Risks- Should a company calculates return on investment (ROl) on the entire earnings of a foreign subsidiary or just on the earnings that can be remitted to the parent? Does it make sense for a company to accept a low return in one country if doing so will help the company’s competitive position elsewhere? Is it ever rational for a company to operate in a country that has an uncertain political and economic future? These are but a few of the unresolved questions that companies must consider when making international capital-investment decisions. Liability of Foreignness When a company operates abroad, it usually has higher uncertainty than at home because the foreign operations are in environments with which it is less familiar. This helps to explain why companies prefer to operate in environments they perceive as being easier for them. Competitive Risk- Even when a company has a substantial competitive lead time, the time may vary among markets. One strategy for exploiting temporary innovative advantages is known as the imitation lag. Monetary Risk If a company’s expansion occurs through direct investment abroad, exchange rates on and access to the invested capital and earnings are key considerations. Political Risk- It may occur due to changes in political leaders¡¦ opinions and policies, civil disorder, and animosity between the host and other countries particularly the home country. Collect and Analyze Date-Companies undertake business research to reduce uncertainties in their decision process, to expand or narrow the alternatives they consider, and to assess the merits of their existing programs. Problems with Research results and data-The lack, obsolescence, and inaccuracy of data on many countries make much research difficult and expensive to undertake. Data discrepancies sometimes create uncertainties about location decisions. Using samples based on available information, a company can draw fairly accurate inferences concerning market-segment sizes and locations, at least within broad categories. Reasons for Inaccuracies For the most part, incomplete or inaccurate published data result from the inability of many governments to collect the needed information. Poor countries may have such limited resources that other projects necessarily receive priority in the national budget. Comparability problems Countries publish censuses, output figures, trade statistics, and base-year calculations for different time periods. So companies need to compare country figures by extrapolating from those different periods. External Sources of Information- Some of the external sources of information that can be used for making locational decisions are- Individualized reports, Specialized reports, Service Companies, Government agencies, International organizations and agencies, Trade Associations. Allocating Among Locations The scanning tools we have just discussed are useful for narrowing alternatives among countries. They are also useful in allocating operational emphasis among countries, but there are other factors companies need to consider. The three important ones are- reinvestment versus harvesting, the interdependence of locations, and diversification versus concentration. Thus we see that in an International business scenario, you not only deal with domestic business and values but you have to work from global perspective keeping in mind the various cultural, environmental, financial, and political factors. Increasing internationalization of business is requiring managers to have a global business perspective and an understanding of the differences in the environmental forces of the markets in which they operate. Read More