The Strategy of International Business - Coursework Example

Executive Summary This paper is based on the impact of liberalization on overseas trading and internationalization of firms across the border. It highlights how entry of new foreign firms creates new opportunities to develop the economic infrastructure of the host nation and offer the customers to have a better lifestyle. However, the entry of new firms also creates a steep competition for the local firms. This as a result makes it difficult for them to survive amidst the well established industry giants. This paper focuses on different defensive strategies that the local firms can adopt in order to strengthen their competitive advantage and ensure their sustainability in the industry. Table of Contents Introduction 3 Liberalization 3 Influence of Liberalization on Internationalization of Business 3 Impact of liberalization on domestic firms 4 Internationalization 5 Role of Local firms in their survival 5 Conclusion 10 Reference List 11 Introduction The concept of liberalization involves the easing of trade regulations and relaxing any restrictions related to overseas trading. The government often intervenes with the trading policies of nation and makes necessary changes on the grounds of economic, political and social policies. Such intervention is mostly taken by the government to improve the national economy and to facilitate free trade (Danbolt, 2004). This paper is focused on the liberalization and how it has impacted the domestic firms by increasing the competition in the industry. It also discusses about different ways in which the domestic firms can face the competitiveness posed by the global firms. Liberalization In several cases, in order for an industry to be fully liberalized, it takes several years to complete the process or in some cases may take decades. The liberalization virtually shortens the national boundaries and enables free trade between nations. This as a result allows several private firms from overseas locations to expand their business in the host countries which in turn helps the government to earn revenue through taxes paid by the foreign companies. Moreover, entry of foreign firms also increases the employment condition of the host economy along with infrastructure of the nation in certain cases. Liberalization in the UK allowed privatization of several sectors such as oil and energy sector, telecommunication, etc. The privatization has facilitated to reduce the monopoly business that was being conducted without the presence of any competition. Liberalization also allows the firm to improve the product and service quality and engage in innovative products. Liberalization creates a competitive environment and as WTO (2001) stated that competition is necessary to ensure that the firms are trying to achieve competitive advantage and in the process generates higher value for the customers. Blair (2005) has also stated that a competitive environment also encourages innovation and new product and service development. This as a result leads to infrastructural improvement of the nation. Better products lead to better lifestyle and security for the people. Moreover, as more multinational firms enter in a particular nation, it also increases the demand for both skilled and unskilled labor; this as a result improves the employment condition of the country, thereby improving the overall performance of the national economy. Liberalization has also facilitated the advent of globalization. The liberalization of overseas trading has opened up the global business environment and as a result it has brought several multinational companies together to form business alliance. This as a result has improved the financial condition and growth aspects of several countries. It has also initiated the concept of free trade, which suggests that the countries that are involved in free trade practices can easily engage in trading activities across borders. Even under free trading, the cross border business activities are dependent on certain regulations set by the government. These regulations are being set in order to protect the domestic business operation of the nation (Spickernell, 2014). Influence of Liberalization on Internationalization of Business Owing to the advent of liberalization, the foreign multinationals have been able to enter into several host nations to expand their operations. The decision to internationalize the business operations is mostly dependent on the level of saturation and the current status of the industry in the home country. If the industry is in its maturity stage with no visible prospect of growth and is likely to move towards its decline, then the firms often move to a new geographic location where it has future growth opportunities and the attractiveness of the industry is high (Kobrin, 2005). Reduction of entry barriers due to liberalization has improved the attractiveness of several industries and has come under the radar of several multinational companies. Thus, the firms which find it quite difficult to run its business in the home country often shift its operations to other nations depending on its comparative advantage. Beattie (2014) has mentioned that the concept of comparative advantage of a nation is a set of competencies or resources possessed by the country which is exclusive in nature. For example, China is known for its cheap skilled labor where as Africa is known for its natural resources. The multinational firms are often attracted to these comparative advantages and decide to expand their operations in those countries. Impact of liberalization on domestic firms It have been stated that the concept of liberalization allows the firms to improve the economic condition of the host country by attracting the multinational firms. Contrarily, authors like Eaton, Kortum and Kramarz (2011), Alguacil, Cuadros and Orts (2011), Doole and Lowe (2012) and have mentioned that the liberalization has also put several adverse effect on the domestic firms. The impact of internationalization has been a discussion with several possible outcomes. Beside the positive impacts of the internationalization, it also degrades the growth of local firms. The foreign firms that opt for internationalization are often known for their financial prowess to control the market or even the entire industry. Those firms may possess the necessary financial power to shift the tide of competitiveness in the market. Thus, the entry of well established firms increases the competition for the local firms by manifold. The foreign firms have the necessary tools to implement new marketing strategies to gain customer preference and achieve competitive advantage over the domestic firms. Quite naturally the domestic firms cannot compete with the high product quality of the foreign firms and as a result loose customer footfall. In order to gain customer preference and expand its presence in the host market, the foreign firms often undertake several strategies; one of the most common of them is the predatory pricing. By implementing predatory pricing strategies, the foreign companies list their high quality products at below average pricing to attract the customers and at the same time cripple the existing local competitors. After weakening them, the foreign firms often go for a hostile takeover of the local firms. This clearly suggests that the internationalization often leads to adverse effects on the local firms (Dawar and Frost, 1999). However, in certain nations, the government regulations prevent a firm from implementing predatory pricing. In such cases, the firms compete on the basis of product quality and branding. The foreign firms often leverages in their financial power to implement several aggressive marketing communication strategies which as a result creates a high strong brand image in the minds of the consumers. The high brand image along with the high product quality creates even higher perceived value for the customers. This competition based on perceived value creates a severe challenge for the existing companies. The financially strong foreign firms often create unique value proposition owing to their strong innovative capability, and research and development to create new products that makes the existing products obsolete. This is also responsible to throw the local firms out of their business (Kaplinsky, 2013). One of the counter options for the local firms is to also go for overseas expansion. However, overseas expansion may not be a viable option for the firms who do not have enough financial power. Engaging in internationalization also requires the company to have good relationship with the host countries. Thus, for the local firms it becomes quite challenging to survive in their own home market among the presence of new foreign entrants. Internationalization Spickernell (2014) have mentioned that UK has always attracted a large number of international firms and is the largest recipient of inward FDI among all the European countries in 2013. UK has ranked only second place after US. It has been estimated that around 1773 new projects were financed in the UK from capital sourcing from overseas locations. More than half of the projects are in the energy and infrastructure sector. This clearly suggests that the Liberalization has increased the rate of inward FDI. It has been mentioned that most of infrastructural projects like the road, energy, rail, digital technology, fuels growth, etc. have received a significant amount investments from foreign locations. This as a result has although may have improved the living condition of the people, but has increased the competitiveness of local firms. In order to measure the level of foreign entry through FDI, one must measure the FDI stocks. It clearly reflects the interest of the foreign nations in another country’s economy. UK has reached a total of $1,606 billion in the year of 2011 in terms of FDI stocks, which clearly reflects an 8.3% rise from the previous year. More than half of the FDI stocks of the UK have arrived from several other European countries. Out of the total amount of $1533 billion invested in UK, the European nations have invested around $890 billion. The retail industry has always been quite attractive in the past decades. The low entry barrier and the high demand for quality products have attracted several retailers like Walmart and Target Corporation to the country. Walmart entered in the UK with the acquisition of a UK based retailer called Asda. After its entry in the UK market, it has been stated that the retail giant may literally change the retailing industrial scenario of the country and it may also put devastating impact on the local players (Maria-Lenuţa, George and Alin, 2013). It has been alleged that the large retailers are always focused on making money and are less concerned for the community and its peers. This may be the reflection of the concerns of the local retailer who are worried about their existence in the steep market competition owing the entry of Walmart. Role of Local firms in their survival It has been clearly stated that the liberalization of overseas trading operation has posed serious challenges for the local firm for example in countries like the UK. These firms need to develop defensive strategies for them to pacify the competition posed by the foreign firms. Owing to the reduction of barriers of entry in the emerging markets all over the world, the well established multinational firms are seeking new opportunities to make geographical expansions. This as a result has proved to be quite advantageous for the local customers as their demand for new products and services are constantly increasing. However, on the other hand, the arrival of the new firms can prove to be catastrophic for the local firms (Ackah, Agboyi and Gyamfi, 2015). The local firms are quite accustomed to their home market environment and enjoy their leadership position. Moreover, threat marketing strategies are mostly based on market penetration and product development (Dawar and Frost, 1999). Thus when a new firm with a strong financial background and good global brand awareness enters in a host nation, then those local firms can hardly find any defensive strategies against the well established foreign players. The local firms suddenly find that their once protected market is being dominated by rivals of foreign origin and who bear a significant array of advantages mostly in the grounds of advanced technology, financial resources, higher quality products, improved management and marketing skills and with ownership of powerful brands. This as a result, challenges the survival of the local firms (Bianchi, Winch and Cosenz, 2014). Moreover, the multinational firms have their own strategists to advise them on how to enter into a foreign emerging market and win over the customer by their marketing strategies. However, the local firms lack any such strategic advice that can help them to cope up with the foreign entrants. In most cases, the local players adopt one the following three ways to cope up with the challenge, seeking help from the government to redesign the entry barriers and overseas trade laws to protect the local firms, becoming a business partner with the multinational firms or thirdly just sell out their business and leave the industry. These three strategies may seem to be the only way to cope up with the foreign market giants but there are certainly other ways that the local firms can adopt (Dawar and Frost, 1999). There are several firms who have successfully managed to protect their business in their home country among the presence of the foreign multinationals. In order to face the foreign multinationals in one’s home country, it needs to assess its own competitive advantage and how it can add more value to the customers. Thus the local payer in the UK needs to improve their competitive position by finding out the difference of value proposition between them and that of the new entrants. The new entrants may have advantage of technological advancements but it is most likely that they do not have the overall insight of what the customers want. The local players on the other hand can possess an in-depth knowledge of the consumer behavior and have access to several distribution channels, owing to their years of operations in the local market. These factors can be utilized by the local players in order to create a strong competitive advantage against the foreign firms. The example of Bajaj Auto of India sets a perfect example in this scenario. Bajaj faced a significant competition from Honda which decided to enter in the scooter market (Dawar and Frost, 1999). Instead of going into business collaboration, Bajaj decided to use their years of market expertise into good use. The company was able to provide exactly what the consumers wanted, cheap and robust scooters with easy access to service centers. Moreover, Bajaj has access to a wide distribution network which allowed it to sell their products to both big and small cities all over the country. On contrary, Honda could only sell via major outlets in large cities and apart from that it also did not have the large number of service centers like Bajaj. This in turn gave Bajaj a strong competitive advantage that allowed it to face the challenges posed by a foreign entrant like Honda. This case study of Bajaj clearly states every business owners in the emerging markets which are most likely to get threatened by foreign entrants need to create address two key aspects. Firstly, it needs to assess the pressure to globalize in that particular industry. Secondly, it also needs to assess if its competitive assets and competencies are internationally transferable or not. The key strengths of the foreign rivals can be better understood by having a clear insight on the basis of competitive advantage in that industry. At the same time, assessing the internal strengths of the local firms will give them a clear idea as to where their own competitive assets are most effective. This as a result will give them higher competitive advantage and prospective business opportunities to generate unique value proposition for the customers (Keyes, 2012). The concept of globalization states that all the multinational firms has come closer and owing to the advent of liberalization overseas trading has become easier than ever. However, the pressure to globalize a firm’s business operations varies from industry to industry. There are industries such as electronic equipments, aircraft engines, telecommunication equipments, etc. which requires huge amount of capital investments for product and service development, distribution and branding. So, in order to break even with the invested money, the companies are bound to sell on several overseas markets in order to gain access to a wider customer base (Boomsma, 2013). On the other hand, the industries such as fast food, retailing, specialty food or retail banking are focused on local needs. In these cases, the customers’ choice varies enormously across the nations. Thus the multinational companies cannot easily compete by selling standardized products at low prices. The new entrants need to make drastic changes in their product or service portfolio in order to attract the customers in the host country, which may be a viable option for all of them. Moreover, high transportation cost for selling customized products barely bring the desired profit margin for the foreign firms, which discourages them to enter into overseas market. Therefore, the companies which constantly fear of being dominated by foreign markets may shift or expand its business to other industries where the foreign firms are less likely to enter (Dawar and Frost, 1999). The above mentioned aspects reflect the two extreme cases; however, most of the industries lie in between the two extreme ends. Selling products or services in an international market may allow the multinational firms to have an access to a huge customer base thereby giving it the advantage of economies of scale. However, in order to succeed it also needs to adapt to the local needs and preferences. By assessing the position of a particular industry, a local player can easily measure the strengths and weaknesses of the new foreign entrants. The global business market spectrum consists of innumerable products and service offerings and each of them belongs to a particular industry and serves certain set of needs for the customers. Thus, the local firms must evaluate and place their respective industries carefully in order to properly evaluate its advantages. Evaluating the industry will help them to identify their competitive advantage in their home market, which may be hard for the foreign rivals to replicate. Therefore, it is recommended for the local firms to ensure that it is capable of developing and strengthening its competitive positioning in its home market. This is mostly on the grounds of long term business relationships with distributors, access to wide distribution channel and easily available service offerings. It may take several years for the foreign rivals to achieve them (Hufbauer and Suominen, 2012). Moreover, the local firms also need to have a long term good working relationships with the government so that they can have an added advantage in their business operations. Formation of lobbying with the government officials also increases the entry barrier for the new entrants and helps the local players to easily overcome any local disputes. Such advantages may be unavailable for any firms that are of foreign origin (Finger and Künneke, 2011). In certain industries such as the food and restaurant industry, the local players may be able to produce certain products which are made of secret ingredients or secret family recipes. In such cases it is almost impossible for the new entrants to enter into the industry and pose as a threat to the local players. Thus, it can be stated that all the local firms which operate in the emerging markets which are most likely to be invaded by foreign firms, should create certain inimitable competencies or resources which will create a distinguishable feature that will act as a defense against the foreign entrants (Finger and Künneke, 2011). In order to face the new entrants, the local firms can choose to expand their business within the nation into other untapped markets. This will result in increase of their financial prowess and brand preference. The local firms can also leverage the comparative advantage of their home country by gaining access to exclusive resources and competencies. By seeking out markets of identical nature, they can easily transfer their competitive assets to other markets so that they can also establish their strong business operations. Close business relationships among the firms within a particular industry can also prove to be a good defense against the foreign firms. The local firms often engage in rivalry among themselves which as a result makes them isolated and more vulnerable to attacks from foreign entrants. This can be avoided by maintaining a good business relationship with each other by forming an industrial union. This as a result will create a strong barrier to entry for the new entrants (Thelen, 2012). In order to achieve this, all the local firms in a particular industry must operate harmoniously and seek out for mutual collaboration. The firms can take part in an integrated supply chain management where they can all procure raw materials together in huge bulk, thereby leveraging the advantage of economies of scale. This as a result will allow them to reduce their operating cost as compared to that of the new entrants and will also allow them to offer their products at a lower price without compromising on the profit margin (Dawar and Frost, 1999). Thus it has been witnessed that in order to face the steep competition posed by the foreign entrants, the local firms in the UK need to assess two key factors, first is the strength of globalization pressure existing in a particular industry and secondly it is the level to a firms competitive assets and competencies are transferable to overseas locations and how much they are relevant in the host market. These two factors can help to guide the defensive strategies of the firms. If the globalization pressure in a particular industry is low and the assets are not easily transferable then the company needs to focus on defending its local business against foreign firms by leveraging its own competitive advantages in the home market, thereby being a defender. However, if the assets are transferable then the firms may be able to extend its operations and may be called an extender. However, if the globalization pressure is quite powerful and the company’s assets are not transferable or are irrelevant outside the home country then it needs to dodge its new foreign rivals by modifying its existing value propositions. The company will then be called a dodger. Finally, if the assets are internationally transferable and the firm has the ability to compete with the foreign firms head on, then it will be considered as a “contender”. Thus depending on the nature of business and its competitive assets, a firm can choose to be any one of the four types. The defenders mainly seek out for different ways to blunt the attacking force of the foreign entrants by adopting the inimitable comparative advantage of their home country. The dodger chooses to make certain modifications in their product portfolio so as to avoid any direct collision with the new entrants. The extender extends its business operations in different markets by leveraging its transferable nature of the competitive assets. In this case, the local firms, in order to avoid any direct onslaught of competitive forces decides to take its business operations elsewhere, particularly where the competition is not to severe. By following these strategies, the local firms can select the right transferable assets and take their business elsewhere. Finally, the contenders are the ones who are mostly aggressive in nature and decide to take on the foreign competition by matching its value proposition to that of the foreign firms. The above mentioned defensive strategies can only be successful against the new entrants if the local players maintain a certain level of flexibility in their business approach. This flexibility should mostly be on the grounds of product development and marketing strategies. This aspect is mostly important for the dodgers whose advantage lies in quick reaction to changes in the competitive environment of the market. Thus, if a new foreign entrant decides to enter in a particular market then the local players can choose to make immediate modifications in the marketing mix which having to compromise on their profitability. The transition management is quite important for the local firms for surviving the overseas competition (Keyes, 2012). It has been evidenced that the mangers of the local firms often overlook this fact and are highly dependent on the existing industrial boundaries, which may not be sufficient enough to hold back the foreign entrants. The impact of liberalization on the suppression of trade barriers are often avoided by the local firms which as a result makes them completely exposed to any competitive threats posed by the new entrants (Dawar and Frost, 1999). The flexibility of marketing strategies can be achieved by ensuring that they have the clear insight regarding the relationship between certain industrial characteristics and the firm’s assets. This as a result will allow the local firms to anticipate on how the future strategies will take shape. Overtime, several firms will learn to compete with foreign entrants thereby increasing the number of contenders in the industry. However, strength of globalization of a particular industry may be either dynamic and change over time or it may be static and show minimal changes. Depending on the changing globalization strength, a local firm can either choose to stick to its exiting marketing strategies or may become flexible to cope up with the new entrants. It has been argued that in certain industries which cater to the local preferences, the strength of globalization may remain weak, in such cases the local players may choose to focus on the home market only. On the other hand, the rest of the firms who suspect an immediate onslaught of the competitive forces may decide to strengthen their competitive position or formulate some evasive maneuvers (Haber, 2015). It is most likely that the defensive strategies will change over time as the foreign entrants will also adopt different market entry strategies, which will nullify the exiting defensive strategies. However, no matter how the competitive environment may change in the near future, the firms may never be complacent about its current leadership position in the local market, as the globalization pressure and attractiveness of the industry can change any moment. This as a result may attract new entrants in the industry and will pose a strong competitiveness to the local firms. Thus the local firms should always need to be vigilant about the changing market environment and maintain its flexibility in terms of its marketing strategies and its marketing mix. The flexibility of the firms will allow it to adapt to the changing market scenario and easily face the competition. In order to increase its overall competitive positioning, it needs to ensure that it is capable of generating value in a holistic manner. This can be achieved by constantly expanding its value proposition and open different prospective opportunities for business development (Dawar and Frost, 1999). Conclusion Liberalization is one of key factors that lead to internationalization of multinational firms in overseas locations such as UK. The internationalization of firms has been facilitated by easing off the trade barriers among nations which as a result initiate the onset of globalization across the world. Suppression of trade barriers leads of entry of several foreign firms, which apparently seems to improve the overall economy of the host nation. However, at the same time it also leads to increased competiveness in the industry. Owing to the technological advancements of the new entrants along with their financial prowess creates a severe challenge to the existing local firms, as they do not have the necessary means to cope up with the sudden onslaught of competitive forces. Therefore, in order to face the competitive forces posed by the foreign firms, the local companies need to adopt certain defensive strategies in order to ensure its survival. The firms need to get a clear idea of the industry in which they are operating and assess the globalization pressure and measure the degree to which its competitive assets are internationally transferable. Depending on these factors, a local firm can devise its defensive strategies and can choose to be an extender, a dodger, a defender or a contender. These strategies involve different ways in which a local firm can survive the steep competition posed by the new entrants. Moreover, in order to ensure its success, the firms also need to ensure that its marketing strategies are flexible in nature so that it can adapt to the existing market environment. Thus it can be stated that in order to face the industry giants entering in an emerging markets, the local firms need to take preemptive approaches to ensure its sustainability. Reference List Ackah, D., Agboyi, M. R. and Gyamfi, L. A., 2015. The Impact of Trade Liberalization on Import Composition. Global Journal of Management Studies and Researches, 1(5), pp. 273-290. Alguacil, M., Cuadros, A., and Orts, V., 2011. Inward FDI and growth: The role of macroeconomic and institutional environment. Journal of Policy Modeling, 33(3), pp. 481-496. Beattie, A., 2014. Foreign Direct Investment: it’s not all good. [online] Available at: [Accessed 18 May 2015] Bianchi, C., Winch, G. W. and Cosenz, F., 2014. Strategic Asset Building and Competitive Strategies for SMEs which Compete with Industry Giants. 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