International Business Decision Making PDF

SECTION 2 Unit 2: Deciding whether to enter an international market Internationalization of Businesses: Management and Strategies (EUS) Maite Ugalde Enríquez Contents 1. Reasons why a company should start an internationalization process...

SECTION 2 Unit 2: Deciding whether to enter an international market Internationalization of Businesses: Management and Strategies (EUS) Maite Ugalde Enríquez Contents 1. Reasons why a company should start an internationalization process 2. Selecting the product 3. Selecting the geographical markets *Images in these slides have been downloaded from the internet for teaching purposes. They are property of third parties. 2 Contents 1. Reasons why a company should start an internationalization process 2. Selecting the product 3. Selecting the geographical markets 3 1. Reasons why a company should start an internationalization process 4 Internal Factors Source: Dunning, 1979 (Natural) Resources Natural (raw materials) seeking More or less qualified staff Intangible Resources Efficiency search Economies of scale, specialization and scope Disinvestment and relocation of production at international level Strategic assets Strengthening the company's competitive position search Diversification of the business portfolio Strategic synergies Market search Access to local and adjacent markets Substitution of imports 5 Contents 1. Reasons why a company should start an internationalization process 2. Selecting the product 3. Selecting the geographical markets 6 International Product Life Cycle Vernon, 1966 7  2. The Iphone Case 1. Introduction (Domestic - United States): In 2007, Apple launched the iPhone in the United States as an innovative product in the smartphone market. → Initial demand was high, and the iPhone attracted the attention of consumers due to its revolutionary design and capabilities. 2. Domestic Growth (United States): The iPhone experienced rapid growth in the US market. → Unit production costs decreased as Apple achieved economies of scale. 3. Export (Internationalization): Apple began exporting the iPhone to foreign markets, including European and Asian countries. → Initial exports may have been modest, but they showed the product's global potential. 4. 8  2. The Iphone Case 4. Domestic Maturity (United States): After several years in the US market, demand at home began to stabilize. → Apple focused on maintaining market share and improving the features of the iPhone. → 3 and 4 happen in parallel 5. International Growth (Globalization): The iPhone gained acceptance in key international markets (e.g. China, India, and the United Kingdom). 6. International Maturity (Global Expansion): Apple consolidated its presence in key international markets and continued to innovate with new versions of the iPhone. → Demand stabilized in many of these markets. Apple focused on efficiently managing its global supply chain. → Biggest factory in China (Foxconn) 9 2. The Iphone Case 7. International Decline (Market Change) ¿?: In more recent years, the smartphone market has experienced changes and challenges, such as market saturation and intense competition. → Apple has responded by diversifying its product portfolio beyond the iPhone and focusing on services and wearables. Most Popular mobile Phone Brands 1990 - 2024 10  2. Selecting the product Some characteristics of a good candidate: - Sufficiently good acceptance in the market of origin of the product, which usually increases their chances of international success. This is not always the case: Toyota Prius (Japan - US), Fernet Branca (Italy - Argentina) - Situation of the product's life cycle: being in a phase of saturation or decline in the domestic market but in a phase of growth in foreign markets. - The availability wherever necessary of productive elements in a sufficient degree (raw materials, technology, specialized labor, etc.) to meet a growing demand. - The possibility of marketing it abroad in a similar way to how it is done in the domestic market in order to take advantage of synergies and experience or the know-how accumulated by the company in its market origin. 11 2. Selecting the product Main questions about the product 1) Competitiveness of the product in the own market - Is this product competitive in the domestic market? - What are the strengths and weaknesses? 2) Satisfaction of needs in the market - What needs does this product satisfy in the domestic market? - Are there the same needs in foreign markets? - If there are, which products currently satisfy them? - If they are not there, could this product satisfy other needs that exist in foreign markets? 12 2. Selecting the product Main questions about the product 3) Competitiveness of the product abroad - What degree of novelty would this product have in the foreign market? - How much competition is it likely to encounter? - What competitive advantages and disadvantages will this product have in foreign markets? 4) Availability of productive elements outside - Does this product require specific productive elements (raw materials, technology, specialized labor, etc.) for its manufacture? - If so, do these exist abroad to a sufficient degree to meet a growing demand? 13 2. Selecting the product Main questions about the product 5) Terms of use - Does this product have the same conditions of use in foreign markets as in the domestic market? 6) Complementary services - Does this product require after-sales services or other complementary products for its use? - If so, are they available in foreign markets? 14 2. Selecting the product Main questions about the product 7) Adaptation of the product - Does this product have to be adapted to foreign markets in one or more of its attributes? 8) Marketing channel - Can this product be marketed in the same way as in the domestic market? 15 2. Selecting the product Selecting a product for a target market 16 2. Selecting the product Why Starbucks Failed In Australia 17 Contents 1. Reasons why a company should start an internationalization process 2. Selecting the product 3. Selecting the geographical markets 18 3. Selecting the geographical markets It depends on each company! Cultural Distance → Unit 3 19 3. Selecting the geographical markets What defines a multinational company is the fact of operating in diverse national environments and, therefore, facing different ways of doing things and understanding reality. The way the company integrates these differences affects significantly their competitive advantage and their performance. The difference between countries affects: ENTRY STRATEGY (Section II) THE ORGANIZATION OF THE INTERNATIONAL ACTIVITY (Section III) 20 3. Selecting the geographical markets THE ORGANIZATION OF THE ENTRY STRATEGY INTERNATIONAL ACTIVITY The choice of countries in which to internationalize (criteria for choosing The organizational structures market targets) The sequence and process of Integration and conflicts between different international expansion institutional environments (internationalization path or process) The choice of entry mechanisms Parent-subsidiary relationships (largely responsible for the failure) Human resources policies (expatriates, local managers, etc.) 21 3. Selecting the geographical markets "International Management is the management of distance" (Zaheer,Schomaker & Nachum (2012). Distance: it is a metaphorical term to indicate the different degrees of dissimilarity between the different countries. It reflects perceptions of differences between countries (Ambos & Hakanson, 2014). Physical distance: kilometers, time / hours of transport, etc. Political-economic distance: country risk Cultural distance (Unit 3): it is the difference between culture of the company's country of origin (home country) and the culture of the target country where it wants to internationalize (host country). 22 3. Selecting the geographical markets The concept of country risk What does “Country Risk” mean? How can affect businesses? Examples? 23 The concept of Country Risk The investment climate in the destination country is marked by the assessment of the country risk associated with the investment project. "Country risk is defined as the possible negative effect that the political, social and legal situation of a country can have on the value of foreign direct investment located in that economy" (Durán, 2010). Country risk shows the uncertainty of a foreign investor regarding: The stability of the current political-economic system The future actions of the government of the destination country that may cause losses to the investor in the future 24 The concept of Country Risk It includes: 1. Political risk: related to the uncertainty of the continuity of the current political conditions in the country of destination. Includes: - Risk of general instability: uncertainty about the future viability of the country's political system. - Ownership risk: associated with the probability of expropriation or nationalization of the private sector (with or without compensation). e.g. - Transfer risk: uncertainty regarding future government actions that may restrict the repatriation of capital or transfer capital out of the foreign country (e.g. risk of not being able to convert the currency or currency depreciation). 25 Examples: Political risk - Risk of general instability 26 Examples: Political risk - Risk of general instability 27 Examples: Political risk Risk of general instability 28 Examples: Political risk - Ownership risk - Hugo Chávez (Caracas, Venezuela, 2010) → “Expropriates!" http://www.youtube.com/watch?v=jOjvJAfIMSI&feature=related - "Announcement of the YPF expropriation": https://english.elpais.com/elpais/2012/04/16/inenglish/1334595212_305415.ht ml 29 The concept of Country Risk 2. Administrative risk: related to Government legislation that limits the free operation of markets and the mobility of factors. 3. Sovereign risk: the risk assumed by international lenders of credit with the States (implies the economic conditions of the country, for example the impossibility of paying the international debt) 30 Calculation of the Country Risk Index CRIct = ∑Vict Pict CRIct = Risk index in country c at time t. Vict = Value of variable i (economic, administrative, social, political, etc.) in country c at time t. Pict = Weighting assigned to variable V in country c at time t. Variables can be grouped into homogeneous sets and their weights are determined either using multivariate analysis techniques (factor or discriminant analysis) or subjective procedures. 31 Country Risk Index Different organizations (specialized magazines, credit rating agencies, specialized consultants) prepare and publish Country Risk rankings. Each source builds it differently. Bank of America https://www.bankofamerica.com/ → The ability of countries to deal with their external debt, foreign trade evolution, the country's fiscal structure, the level of government indebtedness, per capita income, international trade integration. Business Environment Risk Intelligence (BERI) https://beri.com/ → Political, administrative risk indices, repatriations, etc. Economist Intelligence Unit (EIU) https://www.eiu.com/n/ → Indices of political risk, medium-term debt, trade. Moody's https://www.moodys.com/ Standard and Poor's http://www.standardandpoors.com Fitch Ratings https://www.fitchratings.com 32 33 3. Selecting the geographical markets → First introduced by Uppsala school (Johanson & Vahlne, 1977) 34 Case Study 1. Fluidra: the leading Spanish company in the global pool & wellness industry 35