International Expansion Theories - Literature review Example

International Expansion 1. Compare and contrast the main theories of international expansion by means of examples from global organisations present in your case studies or other sources, highlight the strengths and weaknesses of these theories. According to Richardson (2007), there are four main theories of international trade. These are the Mercantilist Theory, the Theory of Absolute Advantage, the Theory of Comparative Advantage and the Theory of Factor Endowments. Mercantilism is the theory that a nation’s wealth depends upon the balance of its exports over its imports (Mercantilism, 2007). Using a common standard, which was gold in early times, a nation is wealthier if it possesses more gold. It receives gold for the products it imports and pays for its imports with gold. Therefore, the more it exports over those it imports, the more gold it will possess. The problem with this theory is that it excludes the fact that in some cases it is good to import. And if you completely refuse to import, the population would have to do with some consumer items (Richardson, 2007). In terms of business organizations, this theory was used by many companies in Japan after the second world war, to increase exports. Toyota started operations in the 1930s and was supported by the Japanese government during WWII because of the company’s capability to produce trucks for military applications. Because of the scarcity of domestic resources at that time, the Japanese government stopped almost all imports. By 1945, after the allied forces won the war, Toyota was given permission by the US military to start peacetime production. In 1957, Toyota set up a sales office in Hollywood and started selling Toyopets and Land Cruisers (Toyota, n.d.). However, even for Toyota, the purist application of the mercantilist theory was not effective. The design of Japanese cars were not those desired in the new markets they opened up in other countries. Toyota could not force the Americans to buy their Japanese cars, which defeated the purpose of exporting to increase exports versus imports. Instead, what Toyota did was to localize both production and design of its products. By 1967, Toyota had become a well-established automotive company in the United States (Toyota, n.d.). The Theory of Absolute Advantage theorizes that countries should specialize in producing what they are best at (Richardson, 2007). A country has an absolute advantage over another, if it can produce that good using fewer resources than the other (Absolute Advantage, 2008). In the 16th century the Swiss watch and clock industry was very active in Geneva and to this day, the reputation of Swiss watches is the highest worldwide. Geneva itself was already exporting more than 60,000 watches annually by 1790 (Swiss Watch, 2008). Switzerland’s expertise in watch making may be considered as an absolute advantage. One of the most successful Swiss watch companies is Omega, founded in 1848 by Loui Brandt. Four years later, Omega was the largest producer of watches in Switzerland with 240,000 units produced annually (Omega, n.d.). “Today, seven out of ten people throughout the world are familiar with the OMEGA watch brand” (Hamel, n.d.). Omega has been applying the absolute advantage theory in its international expansion drives. Its absolute advantage is the reliably fine quality of its watches which has stood the test of time. However, that absolute advantage may be true for Omega as a brand, in general, but may not be applicable on a product to product basis. This is because other Swiss watch companies, and many other watch companies around the world strive to compete with Omega products to make their own brand the alternative choice. The Theory of Comparative Advantage, on the other hand, is an extension of the range of possible mutually beneficial exchanges. The theory says that it is not necessary to have an absolute advantage to gain from trade, only a comparative advantage. As long as one can produce certain goods at a lower cost, even if other goods are sacrificed, there would be gain from trade (Absolute Advantage, 2008). Starbucks, the coffee company opened its first store in Seattle in 1971. This was to address the thirst for coffee of the people in Seattle. Even at the outset, Starbucks worked on the idea of importing the world’s finest coffee to serve to people in Seattle (Starbucks, 2005). The comparative advantage that Starbucks used was their café service. They did not have absolute advantage because they did not produce the coffee they served. In the 1980’s, when Shultz who had joined Starbucks visited Milan, Italy, he learned about the espresso bars and proceeded to implement lattes and mochas in Seattle which became an instant craze. This is another application of comparative advantage, competing business in Seattle did not have this advantage. When Starbucks expanded worldwide, it used the business principles that had worked in Seattle as the foundation of operations worldwide. It sought to maintain comparative advantage by providing the world’s best coffee coming from three regions – Latin America, Africa/Arabia and Asia-Pacific. Starbucks coffee is processed and served by dedicated staff, who are provided with a great work environment (Starbucks, 2008). Although there are a lot of competition in the arena of the Starbucks concept, from international as well as local brands, Starbucks is able to hold its premier spot in the global industry with the maximization of the comparative advantages it holds. The Theory of Factor Endowments was popularized by Eli Hecksher and Bertil Ohlin and is referred to as the Hecksher-Ohlin Theorem. It states that countries export those commodities, which require, for their production, relatively intensive use of those productive factors found locally in relative abundance (Jones, n.d.). A country should concentrate on exporting products which require factors that are abundant within the country and only import those which require factors that are scarce within the country (Richardson, 2007). Del Monte Foods was founded in San Francisco in 1916. It was the first canner to offer a broad product line of processed food from California to the entire United States (Del Monte, 2007). Del Monte Foods started operations in the Philippines in 1926 and in 1928 started its first commercial planting on more than a thousand acres of agricultural land. In 1930, the first harvest was processed by the cannery. By 1957, pineapple became one of the Philippine’s top 10 agricultural exports (Del Monte Pacific, 2002). The theory on factor endowments was used by Del Monte when it decided to set up operations in the Philippines. Instead of importing raw pineapples to canneries in the USA, it decided to set up complete operations in the Philippines. Pineapple could be grown abundantly in the Philippines. What was exported to the Philippines was Del Monte’s food processing technology which it had expertise on and therefore, abundance in terms of resource. 2. You are a Marketing Manager for a manufacturer of bicycles. You have been given the task of marketing your company’s bicycles abroad. List and explain the main steps you will take to identify and enter 1 (ONE) suitable foreign market for your products. Any specific bicycles category may be used as example. Cover any known International Marketing models. According to Perner (2008), there are several stages in the international involvement of a firm. The first stage is the export stage, where increasing foreign orders are filled with modest effort to market abroad. The next stage is the international stage, when the firm is able to identify certain attractive country markets as more foreign orders originate there. The firm may then decide to enter each country sequentially, with relatively little learning and marketing efforts being shared across countries. The third stage is the multinational stage, where standardizing across a region may be pursued for the sake of efficiencies. The final stage is the global stage, where the focus of decisions is that which will optimize the product’s position across markets and in the entire world market, thus making the home country superfluous. As a Bicycle Manufacturing Company desiring to enter a foreign market, the most logical course of action is to explore the export stage. The first step is to identify which country or countries will be targeted for modest marketing efforts. In doing this, certain considerations must be studied. First is the consideration of the economics of international trade. According to Perner (2008), with regard to trade balances and exchange rates, when exchange rates are allowed to fluctuate, the currency of a country that tends to run a trade deficit will tend to decline over time, since there will be less demand for that currency. So, the ideal choice of foreign market in this instance is a country which will favor imports rather than exports. Many Asian economies fall in this category, so it would not be advisable to export a relatively high-priced product to those countries. The next consideration is political and legal influences prevailing between the country of origin and another country (Perner, 2008). Bicycle products may seem to be apolitical but if the country of origin is disliked in the intended market, there may be a ban on importation of the disliked country’s products. Corollary to this, the company desiring to enter a foreign market must also look into the stability of the political environment. Laws may change with changes in government. Culture is another consideration (Perner, 2008). It would be worthwhile to check if the targeted foreign market consists of bicycle-riding consumers. And if indeed it is, then another aspect of culture may influence the design and construction of the specific type of bicycles that the new market would be most willing to buy. Culture, too would play a role in the manner of how the company will choose to market its products. Traditional marketing strategies, activities and materials in the home country may not be effective in a foreign market. Country-entry decisions and strategies deal with segmentation, targeting and positioning. “Segmentation is the cornerstone of marketing” (Perner, 2008). High-priced bicycles will only have a market in countries with high income levels. Members of a segment should be as similar as possible to each other. If a foreign country is treated as a segment, target consumers should have the same characteristics as each other so that decisions can be made on what strategies will be used to reach the target market. The distribution strategy for the bicycles in a foreign country should consider where consumers will likely buy the products from, whether in shopping malls or stand-alone bicycle shops. The media strategy should consider the country’s media habits, whether TV, billboards or newspaper advertising should be used and what kinds of messages would be most appealing. In terms of positioning, the company may need to make a tradeoff between adapting bicycle designs to the demands of a country market or gaining benefits of standardization such as cost savings. According to Perner (2008), there are a number of methods of entry into a foreign market – exporting; licensing and franchising; contract manufacturing; or direct entry. As previously indicated, exporting bicycles would be a good first choice since it carries the lowest risk However, since the firm would not actually be operating in the foreign market, learnings would be limited which may inhibit growth potential. Another low exposure method is licensing and franchising where the company allows a foreign counterpart to use the trademark and methods of the company. The foreign counterpart takes care of investments and assumes the risk. The problem with this mode is that the company will need to train the counterpart, thereby risking developing a future competitor. Contact manufacturing involves having the foreign counterpart put up a manufacturing plant in the targeted country. This saves the company investment costs but again, the process involves training a future competitor. Direct entry means building a company in the foreign location from scratch. It involves the highest exposure but also provides the greatest opportunities for profit if properly done. When foreign markets have been identified and entry mode and strategies have been chosen, the next task is international promotion. The objectives of promotion are those which the company would want to achieve. An awareness objective lets consumers know that the product exists. This is usually achieved through advertising and point-of-purchase promotions. Introducing a totally unheard of product would involve powerful and high-impact messages and materials that prospective consumers should see numerous times, thus involving big budgets, too. Another promotional objective may be a trial objective. An unknown brand or product may need to conduct this type of promotion if consumers are hesitant to purchase because of their unfamiliarity with the brand or product, especially if the purchase price is a significant amount. Limited trial coupons or a return-if-not satisfied warranty may be the tools for this type of promotion. Another promotional objective is an attitude objective. Bicycles are generally known to be useful conveyances but the company may need to use promotions to highlight its unique features in comparison with existing or more popular brands in order to gain market share. The attitude objective is most easily achieved through advertising. Yet another promotional objective is a sales increase. Quite common for introductory products, an introductory price is often offered on a limited basis. For mature products, promotional discounts also result in temporary sales increase. Works Cited Citizendium, The Citizen’s Compendium. “Mercantilism.” (November 12, 2007). August 12, 2008. http://en.citizendium.org/wiki/Mercantilism Delmonte.com. “Our History.” (2007). August 12, 2008. http://www.delmonte.com/company/default.aspx Del Monte Pacific Limited. “Our Milestones.” (2002). August 12, 2008. http://www.delmontepacific.com/about/history_corporate.htm Federation of the Swiss Watch Industry. “A short tale of history.” (2008). August 12, 2008. http://www.fhs.ch/en/history.php#origines Interwatches.com. “History of Omega.” (n.d.) August 12, 2008. http://www.interwatches.com/index.php?Action=History&Brand=Omega&RBrandId=47 Jones, R.W. “Hecksher-Ohlin Trade Theory” (n.d.). August 12, 2008. http://econ.rochester.edu/Faculty/jones/Palgrave_Jones_on_Heckscher_Ohlin.pdf Leo Hamel & Co. “Omega Watches.” (n.d.) August 12, 2008. http://www.leohamel.com/watches/omega.html Perner, L. “International Marketing.” (2008). August 12, 2008. http://www.consumerpsychologist.com/international.htm Richardson, T. “International Trade Theories.” (October 1, 2007). August 12, 2008. http://www.witiger.com/internationalbusiness/tradetheories.htm Starbucks Coffee Company. “A Brief History of Starbucks.” (2005). August 12, 2008. http://starbucks.co.uk/en-GB/_About+Starbucks/History+of+Starbucks.htm Starbucks.com. “About us.” (2008). August 12, 2008. http://www.starbucks.com/aboutus/ Toyoland. “Toyota Corporate History.” (n.d.). August 12, 2008. http://www.toyoland.com/history.html Wikipedia. “Absolute Advanatge.” (July 22, 2008). August 12, 2008. http://en.wikipedia.org/wiki/Absolute_advantage Read More