Chapter 4 Management PDF

Organizations continually seek ways to expand their business through entering new markets or by sourcing new products and services. These entities also endeavor to reduce their costs and increase profits. One of the opportunities to accom-plish these goals is to consider conducting business beyond h...

Organizations continually seek ways to expand their business through entering new markets or by sourcing new products and services. These entities also endeavor to reduce their costs and increase profits. One of the opportunities to accom-plish these goals is to consider conducting business beyond home country borders through international expansion and/or by conducting trade with other, internation-ally based firms. Markets are becoming more global and international markets in turn have become more easily accessible. We will explore in Topic 6.2 why this trend is con-tinuing and some of the benefits and risks of conducting business globally. Is doing business in a particular country a good idea? That depends on many factors that are impacted by the “Political Economy” of a country. We will learn in Topic 6.3 about these factors and how they might influence a decision to do busi-ness in a country. Finally, once a decision is made to expand globally what strategies should an organization use to move forward with this approach? Choosing the right strategies for global expansion may require trade-offs and so it is important to understand the options and factors to consider. We will present in Topic 6.4 the strategic options for international expansion and why a firm may choose a particular strategy while avoiding the alternatives. Managing a global business has some unique factors that must be considered when compared to man-aging a business solely in your home country. First, whether or not you choose to sell your products or services globally, in many cases you are already com-peting against organizations that do market goods and services beyond their own borders or choose to source labor, materials, or other factors of produc-tion from global markets. Globalization of markets is a trend that for many reasons continues to expand in spite of more recent efforts to promote nationalism (e.g., to give favor to items produced in the home country). Choosing which countries to do business in requires careful analysis. It is impor-tant to understand whether doing business in a given country is advantageous, and whether that country is receptive to foreign business activities. Factors such as political policies, economic wealth and stability, and legal protections are important considerations. Once a decision is made to enter another country, an organization must decide whether to standardize its products or to customize them to better conform with local preferences. The organization must also determine which entry strategy it will use for conducting business in that country. Options such as exporting or joint ven-turing with a local company within the country need to be carefully evaluated to determine the best approach. Global expansion is one of many ways to grow a business and can offer attractive benefits when managed properly. at the same time, there are new risks that come with a global approach that need to be understood and carefully addressed. International trade is certainly not a new activity. Early explorers such as Marco Polo in the thirteenth century were active enablers of international commerce by trading goods with the countries they vis-ited. More recently, globalization of mar-kets has increased significantly. Globalization is the trend towards a more integrated and interdependent global economy. so why is Globalization occurring more rapidly now? There are several factors enabling this trend: LG 6-1 1. Declining trade barriers – Tariffs (a tax on imported goods and services often intended to protect jobs in the home country) are being reduced or eliminated by many countries. Economic models consistently show the overall advantages of establishing free trade markets in a country even when it may adversely affect certain established industries within that country. 2. Technology Enablement – Technological advances in air travel, communications, and access to the internet make conducting a global business easier, cheaper, faster, and more effective. Today it is possible to fly from new York to Hong Kong, non-stop in about 16 hours (it took Marco Polo about 4 years to get from Venice to China!). Meetings can be conducted via high quality internet connections that make it seem like a person 6,000 miles away is sitting across the table from you! The internet has made it possible for businesses to be virtually “Born Global” thus being able to do business with international customers from day one Rise of Multinational Enterprises (MNEs) – The increase in the number of organizations successfully conducting business on a global basis has expanded the general knowledge of how to conduct business successfully on a global scale. That knowledge is more readily shared and accessible today than before as workers with global “know-how” are changing jobs more frequently and as MnEs have been more willing to openly share their expertise. 4. Formation of Global Institutions – Organizations such as the World Trade Organization (WTO) and the World Bank provide a governing mechanism for establishing international trade rules, overseeing international commercial activities, resolving disputes, and providing resources to enable developing countries to build necessary infrastructure to participate in global markets. These global institutions provide the support and protections to encourage the conduct of international business. Collectively, these four factors have accelerated the rate of globalization of markets. government and within business entities within the country making it difficult if not impossible for foreign businesses to conduct honest and profitable ventures. understanding and evaluating these political elements is an important step in deciding whether it is attractive to do business in a country. 2. Evaluation of Economic Conditions – Does the country have a sound and stable economy with sufficient wealth to make doing business there beneficial? In some countries, large portions of the population live below the poverty line. This results in a very small market for discretionary goods and services. In other countries, inflation is rampant and makes it difficult to manage the business profitably as prices and costs are constantly rising and impossible to predict. In some countries exchange rates for converting currency are controlled by the government, and some countries’ tax policies discourage taking profits out of the country which may make it difficult or costly to repatriate profits (transfer the funds back to the home country) from a foreign business venture. It would likely be more beneficial for a business to enter countries where the economic conditions are stable and favorable, and the underlying wealth in the country is adequate to enable sufficient demand for the business’s products and services. 3. Evaluation of the Legal System – Do the laws and business norms in a country ensure that contractual agreements can be enforced, and the assets of the business can be protected? If the legal system in a country unjustly favors its citizens rights over those of foreign entities, then this can make it difficult for a foreign business to enforce agreements within that country. Further, in some countries, the assets of the business may not be protected due to high crime rates, deliberate efforts by dishonest parties to steal intellectual property when no laws prohibit these activities, or there is limited assistance from law enforcement to protect those rights even if such laws do exist. understanding whether the legal system is supportive of protecting foreign entities’ rights is an important step in evaluating a country’s business climate. Careful evaluation of these three factors that comprise the “Political Economy” of a country is key to understanding how attractive it is to conduct business in that country. There is a fourth factor that is important to understand before undertaking busi-ness within a country. That factor is Culture. Culture is the norms, beliefs, attitudes, mores, and values that are commonly shared by a large number of the residents of a country It is important to recognize that countries can have multiple cultures that exist within its borders so a business should not assume there is a single cultural model that applies uniformly to all individuals within that country. some cultures may not be supportive of foreign business or certain types of busi-ness. For example, in many parts of India the cow is sacred. It would be offensive, and even illegal in some cases, to open a restaurant in certain regions of India that serves food made from beef cattle. Culture can also influence how business trans-actions should be conducted and how business relationships are to be developed. In many asian cultures, for example, the preference is for business relationships to develop slowly after multiple social encounters. If managers are not careful, and aware of differences in cultural norms, it may be that certain practices common in their home country may be quite offensive to foreign customers, business associates, or employees. language also presents a challenge in conducting business internationally. although English is generally recognized as the international language of business, it is presumptuous to assume that all business people in a country are fluent in English (even in the united states). Translations can be easily misunderstood or even be construed as offensive. understanding the culture, including the language, of a country is an important step to undertake before conducting business there. For important negotiations it may be advisable to have a local adviser/interpreter assist with preparations and translations to avoid potential misunderstandings and embarrassment. Summary: assessing the attractiveness of doing business in a country by evaluating the Politi-cal Economy of that country is an important step for preparing to conduct busi-ness internationally. successful interactions with individuals and businesses within a country requires an understanding and appreciation of the cultural differences, including language, that exist in that country. here are two primary strategic decisions to make when conducting business in international markets. These are: 6.4.1 Determine whether to modify products or services to better conform with local preferences. 6.4.2 Determine the entry strategy that will be used for conducting business in a country. We will examine each of these strategic choices in more detail in this Topic. 6.4.1 Determine whether to modify products or services to better conform with local preferences. LG 6-3 Businesses choosing to conduct business in international markets must decide whether they are generally going to sell the same products and services in every country or modify products and services to better meet the unique requirements of customers in each country. In some cases, some modifica-tions are necessary to meet legal requirements and to address language dif-ferences. Beyond these basic conformances, the more fundamental question is whether to significantly modify products/services to be more responsive to differing local customer requirements. There are three options to consider: Global Standard – all products/services are essentially unchanged in each market. Think of this in terms of a company like Coca Cola choosing to use the same formula for its Coke brand soft drink in each country while only using different packaging to meet local language and labeling requirements. b) Local Customization – Products/services are modified to meet local market differences in preferences in order to increase demand and acceptance. With this strategy, Coca Cola would modify its formula to meet specific taste preferences in each country. c) Combination Strategy – Products/services are customized for some countries where the differences are significant, and the potential demand is large enough, to warrant the customization. Global standard products/ services are sold everywhere else. With this strategy, Coca Cola would modify its formula for some selected countries but keep it the same for all other countries. Why would a business choose a Global Standard strategy? Most businesses who choose this strategy are looking to optimize costs by not having to pro-duce multiple variations of their products. This is especially important where it is critical to realize economies of scale in production (costs per unit go down as volumes produced increase). By standardizing the product, businesses are able to run large production lots of the same product thus reducing their cost per unit. This strategy makes sense if customer demand is not likely to be sig-nificantly increased by offering more customized products. Why would a business choose a Local Customization strategy? When cus-tomers preferences vary greatly in each country the need to customize prod-ucts becomes essential in order to compete against competitors who offer products designed to better meet the specific requirements of the local cus-tomers. The major disadvantage is increased manufacturing costs in order to produce so many different variations of a product. However, with advances in manufacturing technology, it is not as expensive to customize products as it was previously. still, having unique products may increase the risk of excess/ obsolete inventories. Why would a business choose a Combination Strategy? some countries markets are just not large enough, and the customer preferences not sig-nificantly different enough, to make it worthwhile to customize products for that country. at the same time, other countries with large customer demand and unique preferences, make it worthwhile to customize products for those countries. In this situation, businesses choose the Combination strategy to optimize sales while still controlling costs. Determine the Entry Strategy that will be used for conducting business in a country LG 6-4 Once a business has decided whether to modify products to meet local pref-erences in a country the next decision to be made is how the business will enter that country’s market. There are several options: a) Export – Either ship products from another country to the foreign country for sale through a distributor or retailer or sell products/ services directly to customers from another country into the foreign country. b) License – sell the rights to a third party to make and/or sell the business’ products and services in a country or countries. c) Franchise – authorize a business partner to use the trademarks/patents and brands and provide business guidance in how to operate the business successfully in another country or countries. d) Joint Venture—set up a formal arrangement to collaborate with a business partner for conducting business within a specific country. Generally, each member of the joint venture has an ownership position in a new entity created to operate in that specific country e) Strategic Alliance – Establish a less formal arrangement for two distinct businesses to cooperate in pursuing a business opportunity in a specific country or countries. Often this takes the form of one company providing products or technology and the other company providing local manufacturing and/or local sales and marketing support. f) Do it Yourself – This entry strategy is implemented by either the business establishing a new business entity from inception in the target country or acquiring majority ownership of an existing business in that country or countries. The preferred entry strategy for a business depends on many factors including: Management preferences for maintaining more or less control over the business activities in the country. availability of suitable business partners for licensing, franchising, joint venturing, or strategic alliance. The extent of legal requirements/ restrictions/ protections pertaining to the various options. The nature of the products/services and their suitability for a particular entry strategy. For example, it wouldn’t make sense for a restaurant chain to export its products/services to a foreign country. The availability of suitable and desirable acquisition targets and the legal restrictions on foreign businesses acquiring ownership positions of businesses based within that country. The time required and challenges involved in undertaking the development of a business from inception in a country. Determining whether a business should customize its products to make them more suitable for sale in a foreign country and determining the entry strategy the busi-ness will use for conducting business in a foreign country are two critical decisions managers must make if they are to be successful operating businesses in interna-tional markets. Conducting business outside of the home country is not restricted to the sale of a business’s products and/or services. In many cases, businesses also choose to manufacture products in foreign countries to take advantage of lower costs of labor, materials, and facilities. Businesses may also decide to locate manufacturing facili-ties closer to foreign markets where they sell their products in order to reduce dis-tribution costs. In some cases, a business may source technology or expertise from another country or seek to gain access to rare natural resources. It is important to understand that globalization of markets is not just about the sale of goods by a business in another country but also about accessing goods, services, factors of production, and knowledge/expertise as well. “netflix’s global growth is a big factor in the company’s success. By 2017 it was operating in over 190 countries, and today close to 73 million of its some 130 mil-lion subscribers are outside the u.s. In the second quarter of 2018, its international streaming revenues exceeded domestic streaming revenues for the first time. This is a remarkable achievement for a company that was only in the u.s. before 2010, and in only 50 countries by 2015. Other u.s. internet companies have scaled internationally, of course (Facebook and Google are two obvious examples). But netflix’s globalization strategy, and many of the challenges it’s had to overcome, are unique. netflix must secure content deals region by region, and sometimes country by country. It also must face a diverse set of national regulatory restrictions, such as those that limit what content can be made available in local markets. International subscribers, many of whom are not fluent in English, often prefer local-language programming. and many potential subscribers, accustomed to free content, remain hesitant to pay for streaming services at all. Furthermore, strong competition in streaming already exists in many countries. In France and India, for example, homegrown leaders offer local-language video con-tent, thus depriving netflix of first-mover advantage. In some countries, like Germany and India, rivals such as amazon Prime were already established. Yet the majority of Prime subscribers are in the u.s., and netflix has managed to make inroads into even those markets where Prime arrived first. now netflix, with its global reach, has more subscribers worldwide than all other pure streaming services combined...” Source: From “How netflix Expanded to 190 Countries in 7 Years” by louis Brennan. hbr.org, Oct 12. 2018.